Hydrogen for a Low-Carbon Economy

A study by Gunther Glenk (TUM School of Management) and Stefan Reichelstein (Stanford University and University of Mannheim) shows that hydrogen produced from renewable electricity becomes competitive with fossil-based alternatives to economically reduce carbon emissions in many applications.

In the search for alternatives to carbon-intensive fossil fuels, hydrogen has considerable potential as it effectively presents a platform for a range of applications including fuel for transportation, feedstock in chemical and processing industries, or energy storage for heat and power generation. While hydrogen can be obtained through multiple processes, its production from renewable electricity via Power-to-Gas bears the advantage of complementing the intermittent power supply from wind and solar energy installations. However, such electrolytic production of hydrogen, whereby electricity instantly splits water molecules into oxygen and hydrogen, has so far been regarded as too expensive. The recent precipitous decline in the cost of renewable power suggests that the economic fundamentals of Power-to-Gas facilities are about to change.

Mr. Glenk and Prof. Reichelstein examine the economics of converting renewable power to hydrogen through a Power-to-Gas process. Their numerical evaluations find that hydrogen produced from wind energy is already cost competitive with small- and medium-scale hydrogen supply produced from fossil fuels but not yet with the lower prices paid for large-scale industrial sales. However, if recent cost declines for Power-to-Gas facilities and wind turbines continue, the calculations project that renewable hydrogen will also become competitive with large-scale applications in the coming years. The study examines the case of hydrogen production in Germany and Texas, which both have exhibited a rapid growth of renewables in recent years.

The primary driver for the promising economic position of renewable hydrogen is that the production is optimized for both the relative sizes of the renewable and Power-to-Gas capacity and the real-time operation of the combined energy system. The optimality in capacity sizes is a dominant factor to maximize the utilization of invested capacity that contributes a large share of overall costs. The operating flexibility to either sell electricity at the current market price or convert it to hydrogen is valuable, as electricity prices and renewable power generation fluctuate over time.

The study develops a generic framework to assess combined renewable energy and Power-to-Gas facilities in specific cases shaped by the resources available in a jurisdiction. The framework can also be used to estimate the impact of supportive policy measures. In Germany, for instance, the study shows that by waiving the requirement that renewable energy be fed into the grid in order to be eligible for the subsidy, policymakers would lend critical support to the economic viability of hydrogen produced from renewable sources.

The paper has just been published in Nature Energy and can be found here.

About the authors

Gunther Glenk is a doctoral candidate at the Chair of Management Accounting and the Center for Energy Markets of Technical University of Munich. His research resides at the intersection of business economics and sustainable energy systems. Recent work has focused on the economics of energy storage, in particular, of Power-to-Gas.

Stefan Reichelstein is a Professor at Graduate School of Business of Stanford University and the University of Mannheim. He is internationally renowned for his research in management accounting and economics. Much of his work dealt with issues of cost and profitability analysis, decentralization, internal pricing and performance measurement. He has recently studied the cost competitiveness of low-carbon energy solutions with a particular focus on photovoltaic solar energy and carbon capture from fossil power plants. Last year, Stefan Reichelstein was awarded TUM Distinguished Affiliate Professor.

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