Green hydrogen projects could find it difficult to source additional renewable electricity supply owing to growing competition for power purchase agreements (PPAs). Rather than adding to the investment case for new subsidy-free renewables projects, green hydrogen and other power-to-X projects may struggle to prove creditworthiness in comparison to large corporates and utilities.

“Renewables in general are already in a post-subsidy world,” says Rommero Carrillo, business development director at PPA software and advisory firm Pexapark. “In a lot of mature markets, projects are coming off without subsidies and with just PPAs. In more developed markets, we are even seeing merchant assets coming off,” he adds, noting that contract tenors have shifted from a minimum of ten years to between five and ten years.

“At the end of the day, power-to-X is in competition with corporates and utilities, which are putting huge pressure on PPA prices,” he says.

“At the end of the day, power-to-X is in competition with corporates and utilities” Carrillo, Pexapark

Corporates “have seen the level of volatility in the market, so are looking to sign PPAs to provide a hedge” against potential price spikes. “The higher the power price, the higher the green premium becomes,” Carrillo notes.

Pexapark has worked with sellers that are investigating PPA structures with power-to-X buyers that would provide “additional value” despite complexity compared to corporate or utility PPAs, as well as the inclusion of power-to-X companies in tenders. But to date, this interest has not translated into contracts.

“Looking at last year, we saw no PPAs signed for power-to-X in Europe that were publicly announced,” Carrillo says. He notes that Pexapark’s data indicates 80pc of publicly disclosed PPA buyers last year were corporates, with the rest utilities and 1pc undisclosed. “That 1pc could be a power-to-X project, but it is very unlikely, since a company that signed the first PPA for a power-to-X project would definitely be pushing that out into the market.”

While European developers have been reluctant to sign PPAs with green hydrogen and ammonia projects, there has been greater traction elsewhere in the world. Indian utility NTPC has recently signed a 1.3GW PPA with fellow Indian firm Greenko to power its planned Kakinada green ammonia facility, due to start up in 2027. Greenko announced last month it is negotiating with Germany’s Uniper for a 250,000t/yr offtake agreement for the project.

Beyond growing competition for contracts, a lack of FIDs or firm offtake agreements presents a major hurdle for green hydrogen projects to clear in order to secure a PPA.

“The number one reason for a PPA is to make a renewables project bankable. If a bank does not deem the counterparty creditworthy or investment-grade, that just cannot happen. There is a lot of uncertainty with power-to-X projects—they are all new, the technology is new, the scale we are building them at is new,” Carrillo cautions, adding that additional guarantees will be required in contracts for lenders to view these projects as credible counterparties in a renewable PPA.

While current market trends mean power-to-X projects are unable to compete with corporates and utilities for PPAs, this could change over this decade as more renewable electricity comes online. “The reason you can do five-year contracts is prices are so high right now. But if prices normalise, we will not see as many short-tenor contracts, we will see more ten-year contracts—and power-to-X projects are well-suited to capitalise on that,” Carrillo says.

He notes that while few bidding zones in Europe have the over 90pc renewables mix needed to circumvent additionality rules, this is likely to change as countries approach interim climate targets for renewables-dominated electricity supply. “There are long lead times for power-to-X projects, with most coming online in the late-2020s, early-2030s. The expectation is, by that time, a lot of the places these projects are put will meet that threshold… So there is not a lot of concern, but it does kick the can down the road for when they need to sign a PPA.”

The European Council and European Parliament have recently agreed a provisional deal raising the EU’s binding target renewables share of overall energy consumption to 42.5pc by 2030, with an ambition to reach 45pc by that year. The European Commission estimates that more than 1.2TW of renewable energy capacity would need to come online by 2030 to meet the 45pc target.

As more wind and solar projects come online, this can result in the ‘cannibalisation effect’, wherein the same type of renewables projects sited in the same market to take advantage of the same resource generate electricity simultaneously, driving down prices.

“At the moment, there is a risk premium, a discount to fair value that accounts for this effect”, but power-to-X projects are “well-positioned to onboard that cannibalisation risk” based on asset flexibility, Carrillo says.

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Author: Polly Martin