Spatial Incentives for Power-to-hydrogen through Market Splitting

Marco Sebastian Breder (), Felix Meurer (), Michael Bucksteeg () and Christoph Weber ()
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Christoph Weber: Chair for Management Sciences and Energy Economics, University of Duisburg-Essen

No 2203, EWL Working Papers from University of Duisburg-Essen, Chair for Management Science and Energy Economics

Abstract: In the context of the energy transition and ambitious decarbonization goals, hydrogen is becoming essential both as a storage option for renewable energy surplus and a green fuel for multiple usages. The European Commission already foresees 40 GW of electrolyzer capacity by 2030, yet their locations will strongly affect the European transmission system. With a view to the ramp-up of power-to-hydrogen, zonal electricity markets with large market zones may fail to provide efficient locational investment incentives. Consequently, the electricity consumption of electrolyzers can reduce grid congestion but can also exacerbate it. Research has recently discussed potential market splits as a mid-term solution to improve congestion management, recognizing that the first-best solution of nodal prices is controversial. Using the example of Germany, this study investigates the impacts of market splitting on the operation and investment in electrolyzers. The optimization approach includes endogenous investment decisions linked to a detailed scheduling model. The results reveal that market splitting supports the efficient integration of electrolyzers into electricity markets, reducing internal congestion and grid expansion needs. Moreover, missing spatial incentives imply a considerable unused potential for the market ramp-up of electrolyzers. From a political perspective, market splitting benefits the system regarding (integration) costs and reduces subsidy requirements for reaching 2030 targets.

Keywords: Hydrogen; German Energy Transition; Electricity Market; Operations Research; Market Split (search for similar items in EconPapers)
Pages: 20
Date: 2022-07, Revised 2022-07
New Economics Papers: this item is included in nep-ene, nep-env and nep-reg
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Citations: View citations in EconPapers (2)

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