D2.2 Hydrogen in the energy system: value for energy transport infrastructure and its users

This report explores the implications of clean hydrogen developments for energy transport and storage infrastructure, focusing on maximizing the value for infrastructure users and owners. Four key research questions are addressed:

1. The value of electrolysers when electricity grid reinforcements are delayed.
2. How grid operators can influence the business case and operational strategy of decentralized hydrogen production to reduce grid congestion.
3. The impact of different customer combinations on future hydrogen distribution tariffs.
4. How different customer combinations can increase the earnings of large-scale hydrogen storage capacity.

The first two research questions mainly focussed on the value of electrolysis for dealing with electricity grid congestion.

From our analysis related to the first question, we can conclude that, if electrolysers are operated based on electricity and hydrogen market spot prices alone, they will not be able to fully replace electricity grid reinforcements. This happens because the production profile of the electrolysers driven by market prices does not correlate completely with the peak load moments of the electricity cables. Moreover, locations that are suitable for electrolysis are not necessarily the locations where congestion management has most value. This has been evaluated for two cases: landfall of offshore wind and onshore combined wind and solar generation locations. Electrolysers can and do contribute to resolving congestion, but incentives of electrolysis investors and system operators do not fully align. Hence, additional price incentives at specific moments and/or locations are needed to unlock the value of electrolysers during potential periods of delayed electricity grid reinforcements.

An additional analysis was performed to assess what financial incentives could influence the business case and operational strategy of decentral electrolysis such that electricity grid congestion can be reduced. The existing GOPACS mechanism provides intraday orders which can provide attractive additional revenues for the local electrolyser business case. However, the more effective the electrolyser is in solving the local congestion by simply being active on spot markets, the less income it receives from the GOPACS orders, because there is less residual congestion. Hence, it is not expected that this congestion management mechanism will sufficiently incentivize decentral electrolyser investments. Grid operators could take a more active role to steer the locations of electrolysers, through financial or non-financial instruments. Financial instruments could include incentives that reduce grid connection costs, allow cable pooling or valorise by-products. Not all of these are compatible with the current regulatory frameworks in The Netherlands.

The second two research questions focus on the impact of different customer combinations on the hydrogen infrastructure earnings, and thereby also affecting the tariffs customers will have to pay.

It was seen that the number of connections is a major factor that impacts future gas distribution grid tariffs, because the fixed depreciation costs of the existing assets and potential grid removal costs have to be paid by less customers. Since small connections represent 98% of the connections and 85% of the allowed income of the regulated grid operators, the impact whether these type of connections (mainly represented by the built environment) will stay or leave the gas distribution grid is the biggest. Moreover, future gas distribution grid tariffs are impacted by three (interrelated) political issues: who will be burdened with the grid removal costs?; will future methane and potential hydrogen distribution grid tariffs be separate or combined?; and how fast will the existing grid value be depreciated?

Similar to revenues of large scale underground natural gas storage facilities, revenues of hydrogen storage facilities could differ greatly over the years by external market factors and perceived uncertainty in the economy. However, the fourth research activity resulted in three effects by which also customer combinations can impact the revenues of the hydrogen storage operator as well:

1. The demand for storage (capacity and volume) in the energy system relative to the available capacity, which will increase the tariffs asked for working gas volume (WGV), injection and withdrawal capacity reservations.
2. A similar timing in fixed reservations for injection and withdrawal capacity, by which more injection and withdrawal capacity can be sold and operational costs can be saved.
3. Complementary profiles that maximize the reserved and utilized WGV capacity during the year.

By reducing the need for storage and balancing portfolios with complementary variable profiles, storage operators will be able to increase their asset utilization and the impact of the storage tariffs can be reduced.