Power-to-gas in electricity markets dominated by renewables

Abstract This paper analyses the feasibility of power-to-gas in electricity markets dominated by renewables. The business case of a power-to-gas plant that is producing hydrogen is evaluated by determining the willingness to pay for electricity and by comparing this to the level and volatility of electricity prices in a number of European day-ahead markets. The short-term willingness to pay for electricity depends on the marginal costs and revenues of the plant while the long-term willingness to pay for electricity also takes into account investment and yearly fixed operational costs and therefore depends on the expected number of operating hours. The latter ultimately determines whether or not large-scale investments in the power-to-gas technology will take place. We find that power-to-gas plants are not profitable under current market conditions: even under the most optimistic assumptions for the cost and revenue parameters, power-to-gas plants need to run for many hours during the year at very low prices (i.e. the long-term willingness to pay for electricity is very low) that do not currently exist in Europe. In an optimistic future scenario regarding investment costs, efficiency and revenues of power-to-gas, however, the long-term willingness to pay for electricity is higher than the lowest recently observed day-ahead electricity prices. When prices remain at this low level, investments in power-to-gas can thus become profitable.