This paper explores various policies to support climate-neutral hydrogen production, focusing on their interaction with energy markets and cap-and-trade systems such as the EU emission trading scheme. We develop and deploy a state-of-the-art equilibrium model to examine the effect of hydrogen support policies on the interactions between hydrogen, electricity and emission markets. Our analysis shows that mechanisms remunerating hydrogen production can distort spot prices of electricity and hydrogen more strongly than mechanisms that remunerate hydrogen production capacity. Hydrogen support mechanisms furthermore promote renewable electricity production and deter investment in conventional generation assets. The associated decrease in emissions in the power sector leads to an increase of emissions in the industrial and hydrogen sector due to the waterbed effect in the EU emission trading scheme. Our case study on an emission-capped area inspired by the EU shows that the operational distortions that production-based mechanisms exhibit, typically increase costs more than the investment distortions that capacity-based mechanisms entail.

Exposing residential consumers to real-time pricing (RTP) can yield significant efficiency gains, but may also pose challenges due to the inherent complexity. Using an extensive spectrum of temporal granularities for retail electricity pricing, we analyze to what extent these capture the benefits of RTP while concurrently considering the influence of three distribution tariff types in distorting the pricing signal. Via a mixed complementarity model, we consider both operational and investment decisions at retail as well as wholesale levels, accounting for their interdependencies. Our analysis reveals three key findings. Firstly, we find that decreasing temporal granularity of retail electricity prices increases total system cost due to an increasingly inefficient generation mix, however, three-hourly or six-hourly pricing can approximate RTP benefits. Secondly, decreasing temporal granularity of retail electricity prices raises average offtake and lowers average injection prices for consumers due to changes in wholesale market prices as well as consumption patterns of consumers. Thirdly, capacity-based tariffs reduce system offtake peaks and associated price increases by incentivizing battery discharge during peak consumption while volumetric tariffs, over-incentivizing solar PV investments, result in highest offtake prices and injection peaks.