Brauer, J.*, Villavicencio M. “The value of avoided curtailments – Increasing welfare through the involvement of TSOs in the operation of power-to-hydrogen units”

The paper “The value of avoided curtailments – Increasing welfare through the involvement of TSOs in the operation of power-to-hydrogen units”  (Brauer, J.*, Villavicencio M.) will be presented at the 9th Conference on the Regulation of Infrastructures (25-26 June, 2020).

ABSTRACT

‘Sector coupling’ technologies such as power-to-hydrogen (PtH2) offer opportunities to reduce the increasing trend of renewable curtailments due to grid congestions. However, various studies show that the operation of PtH2 units entirely based-on electricity prices is not yet profitable. When considering the value, that it might bring to other regulated services which fall under the responsibility of the system operators, such as priority dispatch of VREs, system balancing, congestion management, etc., might change its economics. Transmission system operators (TSOs) have complete information about grid flows and balancing needs not accessible to market participants. Therefore, combining both market-based and system-oriented operations might improve the business case of PtH2 facilities and lead to an increase in social welfare. However, this cannot be achieved under current unbundling rules.

We consider the case where TSOs have full operating rights of PtH2 facilities, representing the extreme case were no regulatory barrier exists, risk is fully mitigated and the utilization factors of electrolysers are the highest, thus leading to the lowest cost of H2 produced. We calculate welfare gains resulting from this ideal setup and we assess the competitiveness of the produced hydrogen against other energy carriers. Moreover, we discuss on the regulatory implications of such a business model in terms of the ideal ownership structure (merchant, regulated or hybrid) and on the alternative mechanisms for sharing operating rights to make it compatible with current unbundling rules.

In the analyzed case of Germany a key policy recommendation is that a relaxation of the vertical unbundling rules for the case of “sector coupling” technologies in the best case, or an allocation mechanism of operating rights between market participants and the TSO in the worst case, might prove a valuable alternative to improve economic efficiency, to avoid VRE curtailment costs, and to decarbonize sectors that are harder-to-abate.

ABOUT THE AUTHOR

Johannes Brauer holds a master’s degree in electrical engineering from INP Grenoble. During the international master’s programme he had research stays at ETH Zurich and TU Eindhoven. After a few years in the industry where he worked on different renewable energy projects as well as projects related to e-mobility, he joined the Centre of Industrial Economics (CERNA) at Mines ParisTech in Paris in October 2018. Within the research group he is part of the energy economics team. His research interest is on economic and regulatory questions related to sector coupling and low-carbon gases.

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