Regardless of the power purchase agreement (PPA) contract structure for the procurement of renewable electricity, for each MWh generated, producers can claim green energy certificates. In Europe, they are the so-called Guarantees of Origin (GOOs). These digital tokens prove that the generated MWh are from a renewable power plant. Typically, they are transferred to an offtaker of electricity, so that consumers can claim to have procured a certain amount of green electricity over a certain period, most often a year.
For the actual contracting of power delivery through the public grid, two possibilities exist: virtual or physical PPA agreements. In a virtual PPA, the two parties agree on a predefined price for the electricity and set up a financial contract for difference. The seller markets the renewable generation on their domestic spot market, while the buyer buys electricity from their domestic market.
When the average market price the generator attains differs from the contracted PPA strike price, the two parties exchange the difference accordingly (higher price, the generator pays to offtaker; lower price, vice versa). Both parties end up with the contracted strike price they agreed on in the PPA. By signing a virtual PPA, offtakers thus finance the construction of new renewable energy projects, which represents a stronger commitment than the procurement of green certificates alone.
Cross-border contracts
Through financial agreements, offtakers can procure electricity from renewable energy projects outside their market or grid. This is why such models were initially used in countries with different sub-markets or grid areas, such as the U.S. or Australia. Recently, offtakers in Europe have started applying a similar approach to cross-border PPAs. Meaning they can source green energy Europe-wide without confronting interconnector bottlenecks between single power markets.
Under a virtual PPA, the generation and the consumption of electricity from the PPA is not necessarily taking place at the same time, but the amount of contracted GOOs and/or the total annual production output commercially matches the annual consumption volumes on a balance sheet.
A physical PPA counters this shortcoming. As all consumers and generators in Europe are part of the balancing group system, which allows for demand and supply to be balanced in time windows of 15 or 30 minutes (market-dependent), the generated electricity in a physical PPA agreement can be scheduled for the balancing group of the buyer on a much finer time step granularity. That means that within a physical PPA agreement, generation and consumption can both be tracked and can thus be concurrent, at least on a time window basis.
Case for hydrogen
In many jurisdictions, the procurement of GOOs, with or without a virtual PPA, is enough to claim procurement of green electricity. However, with the advent of increased sector coupling and thus additional, potentially flexible consumers to the grid (e.g., electrolyzers), the simultaneous generation and consumption of green electricity becomes more important.
Simultaneity will help to balance the grid, but it will also help renewables integrate into the market, as additional demand in hours of high wind and solar feed-in increases the market price and thus revenues that such technologies can obtain in their production hours.
This is why the development of green hydrogen is a big opportunity for creating more flexible power markets fostering a faster or more market-integrated renewable energy expansion. To exploit this opportunity, however, regulators need to ensure that electrolyzers (and in the future, other sector coupling technologies) exploit their technical flexibility by setting the right incentives.
Optional coupling
Green hydrogen classifications are currently being drafted in the European Union, while the German government has already adopted its own. So far, both approaches offer the possibility for electrolyzer operators to directly source renewable energy from on-site systems, as well as from systems installed in market areas with grid connections. For public grid deliveries, similar conditions are prescribed when it comes to classifying the hydrogen as “green.”
Germany requires that a minimum of 85% of consumed electricity used for “green” hydrogen must stem from subsidy-free renewable energy suppliers located in the same market area. This is guaranteed by the “optional coupling” mechanism for German GOOs, i.e., the corresponding electricity from which the GOOs stem needs to be delivered into the balancing group of the electrolyzer. Similar mechanisms are yet to be developed on the EU level. The EU draft contains similar conditions, but the major difference to the German approach affects power plants that are now subsidy-free but have been receiving feed-in tariffs in the past. In the German regulation, these plants are eligible to provide electricity to produce green hydrogen, but in the EU draft they are not.
Irrespective of this detail, the prescribed balancing group condition allows for simultaneity between generation and consumption in both cases, reducing the risk of new grid congestion as well.
From a PPA perspective, only physical pay-as-produced PPAs provide proof of green hydrogen classification. Thus, for the first time in Europe, regulations differ between different qualities of green power deliveries. The development of green hydrogen regulations, however, may only mark the start of a focus shift in green certification policies from mere renewable capacity addition toward incentivizing synchronized supply and demand. In the coming years, regulations on other sector coupling technologies could follow this pathway (e.g., Power-to-Heat).
About the authors
Michael Claußner studied international business (B.Sc.) and integrated natural resource management (M.Sc.). He wrote his master’s thesis on portfolio strategies for renewable energy. He began his professional career at Energy Brainpool, with a focus on energy policy. He works on consulting projects for the public and private sector and is an expert in risk management and sales options for renewable energy, especially PPAs.
Simon Göß studied environmental resource management (B.Sc.) and sustainable energy technology (M.Sc. honors). He started his professional career as a research associate at the SCUT/TU-Delft Research Centre on Urban Systems and Environment. Since 2016, he has worked with Energy Brainpool. He handles consultancy projects and writes scientific articles on blockchain and its impact on the energy sector, energy market design, the economics of innovative business models in the energy transition, and price effects on European and international energy markets.
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