Investment in wind-based hydrogen production under economic and physical uncertainties

Abstract

This paper evaluates the economic viability of a combined wind-based green-hydrogen facility from an investor’s viewpoint. The paper introduces a theoretical model and demonstrates it by example. The valuation model assumes that both the spot price of electricity and wind capacity factor evolve stochastically over time; these state variables can in principle be correlated. Besides, it explicitly considers the possibility to use curtailed wind energy for producing hydrogen. The model derives the investment project’s net present value (NPV) as a function of hydrogen price and conversion capacity. Thus, the NPV is computed for a given price and a range of capacities. The one that leads to the maximum NPV is the ‘optimal’ capacity (for the given price). Next, the authors estimate the parameters underlying the two stochastic processes from Spanish hourly data. These numerical estimates allow simulate hourly paths of both variables over the facility’s expected useful lifetime (30 years). According to the results, green hydrogen production starts becoming economically viable above 3 €/kg. Besides, it takes a hydrogen price of 4.7 €/kg to reach an optimal conversion capacity half the capacity of the wind park. The authors develop sensitivity analyses with respect to wind capacity factor, curtailment rate, and discount rate.