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, risk-averse 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 risk-aversion and missing markets for risk reduce renewable build-out, capacity markets in the electricity and hydrogen sectors are needed to restore the overall capacity mix and limit costs for consumers. 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.