[Paper Review] Integrating Hydrogen in Single-Price Electricity Systems: The Effects of Spatial Economic Signals

Frederik vom Scheidt, Jingyi Qu+3 more|arXiv (Cornell University)|May 1, 2021

Electric Vehicles and Infrastructure4 citations

TL;DR

This study integrates an electrolytic hydrogen supply chain model with a nodal electricity dispatch model for Germany in 2030, demonstrating that spatially differentiated electricity prices reduce congestion management costs by up to 20% compared to uniform pricing, while shifting hydrogen production to low-cost, renewable-rich grid nodes. The findings show that spatial economic signals significantly improve system efficiency and reduce the need for costly grid interventions.

ABSTRACT

Hydrogen can contribute substantially to the reduction of carbon emissions in industry and transportation. However, the production of hydrogen through electrolysis creates interdependencies between hydrogen supply chains and electricity systems. Therefore, as governments worldwide are planning considerable financial subsidies and new regulation to promote hydrogen infrastructure investments in the next years, energy policy research is needed to guide such policies with holistic analyses. In this study, we link a electrolytic hydrogen supply chain model with an electricity system dispatch model, for a cross-sectoral case study of Germany in 2030. We find that hydrogen infrastructure investments and their effects on the electricity system are strongly influenced by electricity prices. Given current uniform prices, hydrogen production increases congestion costs in the electricity grid by 17%. In contrast, passing spatially resolved electricity price signals leads to electrolyzers being placed at low-cost grid nodes and further away from consumption centers. This causes lower end-use costs for hydrogen. Moreover, congestion management costs decrease substantially, by up to 20% compared to the benchmark case without hydrogen. These savings could be transferred into according subsidies for hydrogen production. Thus, our study demonstrates the benefits of differentiating economic signals for hydrogen production based on spatial criteria.

Motivation & Objective

• To analyze the interdependencies between hydrogen production via electrolysis and electricity system operation in a single-price market.
• To evaluate how spatially resolved electricity prices influence the optimal location of hydrogen production and transport infrastructure.
• To quantify the impact of hydrogen integration on electricity system congestion management costs under different pricing regimes.
• To provide policy-relevant insights on how to design efficient, cost-effective subsidies for hydrogen infrastructure within existing single-price electricity markets.

Proposed method

• A coupled modeling framework links a nodal electricity dispatch model with a hydrogen supply chain optimization model, both with high spatial resolution.
• The electricity model simulates uniform and nodal pricing scenarios, capturing network congestion and redispatch costs.
• The hydrogen model determines cost-minimal production and transport configurations based on electricity prices, capital, and operating costs.
• The models are iteratively coupled: electricity prices from the dispatch model inform hydrogen investment decisions, and resulting loads are fed back into the electricity model.
• The analysis uses a case study of Germany in 2030, with detailed data on hydrogen demand, grid infrastructure, and renewable generation.
• Sensitivity analyses compare uniform vs. nodal pricing and flat vs. real-time tariffs to isolate the effects of spatial and temporal price resolution.

Experimental results

Research questions

• RQ1 How does the integration of hydrogen production affect congestion management costs in a single-price electricity market?
• RQ2 What is the impact of spatially differentiated electricity prices on the optimal location of electrolyzers in the hydrogen supply chain?
• RQ3 To what extent can nodal pricing reduce the need for costly redispatch measures in the electricity system due to hydrogen demand?
• RQ4 Can spatially differentiated subsidies in a single-price market replicate the benefits of nodal pricing for hydrogen infrastructure?
• RQ5 How do temporal price signals (flat vs. real-time) compare to spatial signals in reducing system-wide costs?

Key findings

• Under uniform electricity pricing, hydrogen production increases congestion management costs by 17%, or approximately €1 billion annually, due to inefficient placement near consumption centers.
• With nodal pricing, electrolyzers are relocated to low-cost, renewable-rich grid nodes further from demand centers, reducing end-use hydrogen costs.
• Congestion management costs decrease by up to 20% (€1.1 billion annually) under nodal pricing compared to the benchmark without hydrogen, primarily due to reduced redispatch requirements.
• The largest cost reduction is achieved when both spatial and temporal price signals are used, highlighting the superiority of nodal real-time pricing.
• Spatial price differentiation yields significantly greater benefits than temporal price resolution, indicating that location-based signals are more effective than time-based signals alone.
• The avoided congestion costs from nodal pricing could fully cover the cost of spatially differentiated subsidies, making such policies both efficient and fiscally sustainable.