Green Hydrogen Investments: Investigating the Option to Wait

Abstract

Green hydrogen has the potential to play an important role in decarbonising energy systems globally, yet its deployment remains low. In order to achieve greater roll-out of green hydrogen projects its value should be determined and used to advise industry and policy-makers. Real options (RO) analysis is an increasingly popular method for assessing the value of projects, particularly under uncertain conditions, since it allows for flexible decision making. This work applies an RO method to analyse the value of waiting before investing in a polymer electrolyte membrane electrolyser for hydrogen generation at a wind farm. It is found that for wind power purchase agreements (PPAs) greater than £0.03/kWh, RO adds great value to the investment and reduces the chance of a negative investment compared with investing immediately. For PPAs equal to or below £0.03/kWh the investment is already worthwhile across a range of stochastically generated price scenarios. We also consider exogenous uncertainties due to future predictions of electrolyser CAPEX and efficiency and present a distribution of suitable thresholds (cost conditions which trigger investment) as a function of time. These can advise potential investors as to the optimal threshold(s) to satisfy, and average time to wait before making an investment.

Keywords: Green hydrogen, Real options, Wind farm, economics analysis, flexible decision making