Importance of Renewable PPAs in European RFNBO Production: Requirement or Temporary Necessity?

Renewable power purchase agreements (PPAs) have become an established feature of European power markets, supporting the development of renewable generation while providing consumers with greater certainty over long-term power costs.

The emergence of renewable fuels of non-biological origin (RFNBOs), such as a-hydrogen, e-diesel and e-SAF, has established a new role for renewable PPAs. Under current regulations, one of the criteria to classify a fuel as an RFNBO is that it must have a greenhouse gas (GHG) intensity of less than 28 gCO₂e/MJ . Reaching this threshold can be difficult when sourcing electricity from grids that contain some proportion of fossil-based generation, particularly as the GHG intensity calculation includes emissions from the entire value chain (such as from raw material import and delivery to customer). As a result, for projects where the GHG intensity approaches the threshold, a combination of grid electricity and renewable PPAs can be used to achieve compliance , as shown in Figure 1.1. This article focuses on such cases.

Figure 1.1        Illustrative power sourcing mix required for RFNBO-compliant production

Source: FGE NexantECA

Furthermore, under the delegated acts supporting RED III, RFNBO compliance depends not only on the renewable origin of electricity but also on how that electricity is sourced. In bidding zones where renewable electricity accounts for more than 90% of the electricity mix, grid electricity can be counted as fully renewable for the purposes of RFNBO production, within certain operating limits.

Electricity systems are decarbonising at very different rates across Europe, creating significant regional differences. Figure 1.2 highlights the wide range of renewable energy share levels and grid carbon intensities across the continent.

Figure 1.2        Top 10 European countries by renewables power generation as a factor of gross power consumption, 2024 (Figures in bars: Grid intensity, gCO2e/kWh, 2023)

Source: Eurostat; Association of Issuing Bodies; International Renewable Energy Agency, EEA

While some countries remain materially below RFNBO compliance thresholds, several are already approaching or exceeding renewable generation levels that would allow for grid electricity to be solely used for compliant production.

FGE NexantECA's analysis, shown in Figure 1.3, indicates that several European power systems could reach very high levels of renewable electricity penetration during the next decade, supported by continued growth in wind and solar generation, coal phase-out programmes and increasing cross-border power trade.

Figure 1.3        Renewables share of a European country approaching the 90% power grid threshold, for the purpose of RFNBO compliance

Source: FGE NexantECA

Do PPAs remain relevant as grids approach the 90% renewable threshold?

As grids hit the 90% renewable threshold, the compliance burden associated with power sourcing becomes lifted in the context of RFNBO production. However, FGE NexantECA does not expect this will eliminate the need for PPAs . Rather, it will change the source of their value. Project developers are likely to place greater emphasis on the commercial, financing, risk mitigation, and operational benefits that PPAs provide:

• Compliance and regulatory risk mitigation: Renewable PPAs can provide a safeguard against slower-than-expected grid decarbonisation caused by delays to renewable capacity additions, grid expansion or fossil generation phase-out programmes.

• Cost certainty: Electricity remains one of the largest operating costs for renewable hydrogen and e-fuels production. Long-term power procurement arrangements can provide visibility over future electricity costs, helping to manage power price volatility and reduce uncertainty for lenders, ultimately supporting project bankability.

• Operational optimisation: Operational considerations are also likely to become more important as renewable penetration increases. Developers may place greater emphasis on generation profiles, flexibility requirements and exposure to short-term electricity market movements.

Conclusion

The role of renewable PPAs is continuously evolving since their early use as power procurement and risk-management tools. Sustainability objectives have expanded their role, and the development of RFNBOs has introduced a further compliance dimension.

In Europe, regional differences in electricity market development and renewable penetration are expected to shape the function of PPAs further. While RFNBO producers in some markets will continue to rely heavily on renewable PPAs to support compliance, others are expected to transition to placing greater emphasis on the commercial, financing and operational benefits that PPAs provide.

FGE NexantECA has supported numerous commercial and technical assessments of renewable hydrogen and e-fuels projects across various regions, helping developers and lenders evaluate the technology, feedstock sourcing strategies, compliance pathways and long-term market competitiveness. If you would like to discuss the topics covered in this article, please get in touch.

Author...

Polina Abrosimova, Senior Analyst

About Us - FGE NexantECA is the leading advisor to the energy, refining, and chemical industries. Our clientele ranges from major oil and chemical companies, governments, investors, and financial institutions to regulators, development agencies, and law firms.  Using a combination of business and technical expertise, with deep and broad understanding of markets, technologies, and economics, FGE NexantECA provides solutions that our clients have relied upon for over 50 years.