Energy

3 6 INSIGHTS EXPOSURE TO THE INTERMITTENCY OF RENEWABLE ENERGY RED II does not allow an RFNBO project to use electricity from a grid connection and simply certify it as renewable using guarantees of origin. Instead, there are detailed sustainable criteria in relation to the generation of the renewable electricity used by the electrolyzer. In practice, this means that the electrolyzer can only operate when there is sufficient renewable energy being generated by the relevant power source, exposing the project to the intermittency of the renewable energy source. This is a unique risk in the context of large-scale industrial projects and ties the commercial viability of a green hydrogen project to the reliability of the renewable electricity sources constructed to power it. The power components of a green hydrogen project will therefore need to be over-designed, having sufficient redundant capacity and/or storage facilities to mitigate this variability issue. Thereby significantly increasing development costs and the potential for wasted power generation through curtailment. USE OF EXCESS ELECTRICITY AT TIMES OF PEAK SUPPLY To optimize the economics of a project, developers might consider whether excess power could be sold into the market at times of peak generation. However, any such strategy will need to be carefully calibrated with the requirement to show that the electricity used comes from "additional" renewable energy capacity. The European Commission does not currently have an established methodology for carrying out an additionality assessment. However, RED II requires the European Commission to develop criteria to assess additionality in the transport sector. In simple terms, the additionality requirement means that the renewable energy capacity would not have come on-line were it not for the demand from the green hydrogen production project. However, there is an ongoing debate whether the additionality requirement would be satisfied if renewable electricity is sold to the grid during periods of excess supply. One argument is that selling excess electricity to the market (especially if the economics of the project depend on this additional revenue) indicates that there was a demand for renewable electricity which would have been met by equivalent capacity even without the green hydrogen project. This would undermine an argument that the renewable electricity capacity was truly additional, unless the market dynamics were such that increased demand was not satisfied by an increase in fossil fuel generation capacity. Innovative solutions to deal with the potential inefficiencies of having such redundant renewable energy generation capacity will be needed (e.g., hydrogen- to-power projects could be developed as peaking power plants converting otherwise curtailed electricity into stored hydrogen, which will then be used to generate electricity at times of peak demand). In all cases, satisfying the additionality requirement is likely to require a complex counterfactual analysis based on the project economics and the dynamics of the electricity market. This latter element will change over time as renewable generation capacity increases. This evolution demands innovative arguments for proving additionality and the other sustainability criteria for the electricity used in green hydrogen projects in the transport sector. 06 Structuring and Financing a Green Hydrogen Project on the Back of the Anticipated Regulatory Environment in Europe

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