Abstract
This paper analyzes the economic potential of Power-to-Gas (PtG) as a source of flexibility in electricity markets with both high shares of renewables and high external demand for hydrogen. The contribution of this paper is that it develops and applies a short-term (hourly) partial equilibrium model of integrated electricity and hydrogen markets, including markets for green certificates, while using a welfare-economic framework to assess the market outcomes. We find that strongly increasing the share of renewable electricity makes electricity prices much more volatile, while the presence of PtG reduces this price volatility. However, a large demand for hydrogen from outside the electricity sector reduces the impact of PtG on the volatility of electricity prices. In a scenario with a high external hydrogen demand, PtG can deliver positive benefits for some groups as it can provide hydrogen at lower costs than Steam Methane Reforming (SMR) during hours when electricity prices are low, but these positive welfare effects are outweighed by the fixed costs of PtG assets plus the costs of replacing a less expensive energy carrier (natural gas) with a more expensive one (hydrogen). Investments in PtG are profitable from a social-welfare perspective when the induced reduction in carbon emissions is valued at 150–750 euro/ton. Hence, at lower carbon prices, PtG can only become a valuable provider of flexibility when installation costs are significantly reduced and conversion efficiencies of electrolysers increased.
Highlights
In order to reduce the carbon emissions resulting from electricity systems, governments are promoting the share of Variable Renewable Energy sources (VREs)
We analyze the contribution of PtG as a provider of flexibility to the electricity market by assuming that hydrogen produced through electrolysis can only be used as a fuel for generating electricity, which is the scenario of zero industrial hydrogen demand
It is expected that PtG will become more important in future electricity markets which are characterised by higher shares of renewable generation
Summary
In order to reduce the carbon emissions resulting from electricity systems, governments are promoting the share of Variable Renewable Energy sources (VREs). Hydrogen can be stored for a shorter or longer period which enables producers of hydrogen to adapt the timing of electricity use to the situation in the electricity market, while the produced hydrogen does not need to be immediately supplied to users This type of flexibility is called the time flexibility. Hydrogen can transfer renewable energy to other sectors that need energy in a liquid or gaseous form instead of electricity, which is called the end-use flexibility This type of flexibility enhances the sector coupling between electricity and gas/hydrogen markets, as gas is used to generate electricity, but electricity is used to produce a gas that can be used in, for instance, heating, transport or industrial sectors. Technically speaking, PtG has a wide potential to offer flexibility to the power system
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