Turning the wind into hydrogen:Long run impact on prices and capacity

Nicholas Vasilakos (with R. Green and H. Hu)

Department of EconomicsUniversity of Birmingham

Background and motivation

• EU renewables target by 2020: 20%• For UK:

– 15% renewable energy– c. 40% renewable electricity…– …great part of which is likely to be wind.

• But wind output is intermittent – issue of storage Vs high backup capacity building– Hydro plants and interconnectors– Hydrogen production and storage

Outline of questions and main results

• Hydrogen can be produced when prices are low (i.e. high winds) and stored.

• What will be the impact of large scale electrolyser capacity on prices and investment (capacity mix)?– Increased average price of electricity– More baseload capacity and less mid-merit capacity– But effect on price of hydrogen may not be as steep

as previously thought, if capacity mix is allowed to adjust

Literature overview• Troncoso and Newborough (2007)• Korpas and Greiner (2008)

– Hydrogen as a tool to ease pressure on grids

• Aguado et al (2009) – A wind farm can smooth its power sales through hydrogen

storage– Only economical if prices are high enough

• Floch et al (2007)– Shows how hydrogen production varies with maximum price

paid by operators (using Powernext prices).– They derive an optimal load factor of 64% - corresponding to a

maximum willingness to pay of 48 euros/MWh.

Methodology and data

• We derive the optimal capacity mix using a cost-minimisation approach

• Recent cost data for 5 types of plants is taken from Mott MacdDonald (2010) –“n”th of a kind.

• Demand data and wind output taken from Green and Vasilakos (2010b)

• Electrolyser cost estimates are taken from Ramsden (2008a,b)

Finding the equilibrium: electricity market (for a given capacity of electrolysers)

1) Select operating plants using screening curve2) Choose max price electrolysers are willing to pay3) Choose total capacity so that peakers make zero profits4) Adjust peakers’ capacity so that 2nd most expensive

plants make zero profits5) continue till everyone makes zero profits

Electricity market is now at equilibrium (for a given amount of hydrogen capacity and a given marginal willingness to pay for hydrogen plants)

Finding the equilibrium: both markets

6) Using the estimated capacity mix, find AC for electrolysers- if AC>MC, increase marginal willingness to pay and find a new set of generating capacities

7) Continue until AC=MC and then this is the price that clears both markets.- will give optimal capacity mix for this price.

both markets are now at equilibrium.

Generation Cost Screening Curves£/kW-year

Load factor

Main assumptions

• carbon price of £50/tonne and all carbon permits are auctioned

• Fuel price: £27/MWh for gas (+7% in winter, -7% in summer) and £6/MWh for coal.

• 30GW of wind capacity, spread across the UK• 5GW reserve capacity• We follow Pouret et al (2009) in assuming

minimum load factor for nuclear plants of 60% of their capacity.

• Hydrogen plants are price-takers

GW

Hours

(excluding electricity used for hydrogen production)

Simulation results: Summer load-duration curve (demand slope -2)

GW

Hours

(excluding electricity used for hydrogen production)

Simulation results: Winter load-duration curve (demand slope -2)

How hydrogen affects the capacity mixGW

Hydrogen electrolyser capacity, GW

Hydrogen supply curve: base case£/kg

Milliontonnes p.a.

Fixed generation capacity

Equilibrium generation capacity

Supply curves for hydrogen (higher electrolyser costs)

£/kg

Milliontonnes p.a.

Fixed generation capacity

Equilibrium generation capacity

Marginal cost with fixed generation and electrolyser capacity

Hydrogen supply curve: sensitivity fuel prices£/kg

Milliontonnes p.a.

2009 fuel prices

Base case

2005 electrolysers

Generation capacity mix fixed at pre-

wind levels

Conclusions

• Integration of electrolysers has a long-term impact on capacity mix– Ignoring this impact can lead to overestimates for the

price impact of hydrogen.– Fairly flat supply curve, once long-term adjustments in

capacity mix are accounted for.

• Still an expensive way to produce hydrogen – our baseload estimate of £4/kgr compares to

conventional methods yielding about £2/kgr using current gas prices

Thank you!