The momentum that got underway in Q4 is set to increase as EU regulations now require green hydrogen producers to source renewable electricity through power purchase agreements. Under the European rules, eligible facilities must be no older than 36 months, and government aid cannot be used to subsidise the facility.
The milestone news is tempered somewhat by ongoing renewable project permitting and grid connection challenges that continue to affect European markets. Spain, for example, risked losing more than 40 GW of renewable electric generating capacity because of permit application backlogs. To ease the jam, the government extended application deadlines. The UK also is struggling with grid connection delays, with average wait times of 5-7 years.
Renewable hydrogen production across the continent remains relatively costly (5-8 euros per kg 5-8; 150-240 euros per MWh), leaving project developers walking a tightrope. Developers need to comply with EU rules while they also navigate wind and solar availability, hydrogen offtake requirements, and hydrogen production and delivery system specs.
Support mechanisms are emerging to address these challenges. For example, the EU Hydrogen Bank made available some 800 million euros through an auction to help subsidise operating expenses. A second auction, pegged at 3 billion euros, is slated for Q2 2024.
Together, these moves could spur competition for power purchase agreements if European hydrogen producers successfully manage the economic and technical obstacles to deploy renewable hydrogen production facilities.
Across Europe, stricter requirements also are coming into effect for corporations seeking to make renewable energy claims. RE100 guidance will see significant changes for members that have committed to achieving 100 percent renewable electricity.
Updated corporate sustainability reporting rules also will be extended to around 50,000 firms in the EU beginning in FY 2024. Guidance for small and medium-sized companies is expected in 2026. The revisions are designed to limit corporate greenwashing claims.
Corporate buyers during Q4 continued to show strong interest in power purchase agreements, as looming renewable energy and sustainability goals drove demand. Renewable energy developers in response offered a number of pricing options and offtake structures, along with tenor flexibility. Developers also began to offer bundled products such as wind and solar or battery and solar to better manage production risk.
European GO (guarantee of origin) pricing cooled through the second half of 2023, while 2024 and 2025 vintages maintained price premiums over 2023. GO pricing for most vintage years converged in Q4 at just over 3.5 euros per MWh. Meanwhile, GO prices for 2024 and 2025 vintages were trading at a premium of 1-2 euros per MWh above vintage 2023.
Future-year price premiums are being driven both by changes to RE100 rules and EU sustainability reporting. Price increases may also indicate greater demand in coming years as corporations gear up to meet 2025 goals.
In the UK, meanwhile, renewable energy guarantee of origin (REGO) green certificates notched a record high of £16/MWh for 2023 Vintage Year in October. The record was driven in part by the April 2023 termination of EU GOs in the UK and in part by rising demand. Prices cooled following their autumn peak, and settled near £10-12/MWh by the end of the year.
Power purchase agreement (PPA) pricing continued to fall in Q4 across most markets. Polish and Italian median price levels decreased by 16 percent and 12 percent, respectively, compared to Q3, on the heels of a decline in commodity and power prices. In Germany and Spain, Q4 PPA prices were relatively unchanged from Q3, with a shift of around 2 euros per MWh, and, as expected, median prices in Germany, Italy, Spain, and Poland fell when compared to Q4 2022, as volatility eased.
Spain held onto its position as Europe’s leading PPA market. Corporate offtakers there can find attractive solar projects at a median price of 46 euros per MWh for a fixed product. Wind projects are also being offered at an attractive rate; however, wind project availability is much lower than solar.
As the market matures, risk-mitigated structures are emerging. Some embed a PPA into a traditional supply contract, and also cater to a lower offtake and/or shorter tenor. These retail-delivered products offer buyers a variety of customized products to meet renewable goals while allowing them to stay true to internal mandates.
One way to minimise volatility makes use of a deal structure that follows the market, such as Discount to Market with Floor, where upside and downside risks are diminished when compared to a Fixed Price structure.
One growing concern for European buyers during Q4 was maintaining flexibility in volume adjustments. For example, European aluminum production is off by as much as one-third, and other industries such as chemical production have recorded similar challenges because of high energy costs. Global competitiveness fears are compounded by recession concerns and persistent inflationary and high interest rates.
As a result, buyers increasingly seek to preserve flexibility to account for adjustments in volume, with retail-delivered products providing a potential alternative to a long-term PPA transaction.
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