Missing Risk Markets and Capacity Remuneration Mechanisms in Electricity-Hydrogen Systems

Abstract

Hydrogen and derived fuels may act as long-term energy storage in climate-neutral energy systems. However, riskaverse investors will not invest in sufficient renewable electricity, back-up, electrolyzer and storage capacity if they are only remunerated for the hydrogen or electricity produced and markets for risk are missing. We develop a stochastic equilibrium model to study whether capacity markets can limit costs to consumers by restoring investments risk-neutral levels. Our results show that the efficacy of capacity markets depends on complementary instruments to ensure the availability of renewables. If riskaversion and missing markets for risk reduce renewable buildout, capacity markets in the electricity and hydrogen sectors are needed to restore the overall capacity mix and limit consumer costs. If complementary instruments lift investments in renewables, a capacity market in the electricity sector suffices. In this situation, an additional capacity market in the hydrogen sector triggers a bias toward hydrogen-fired backup capacity. This illustrates that an integrated systems perspective is required to design future energy markets.