A Sequential Real Options Analysis for Renewable Power-to-Hydrogen Plants in Germany and California

The novelty of large-scale green hydrogen technology with its numerous applications, and the competition with conventional technologies, still makes it difficult to operate renewable power-to-hydrogen (RP2Hy) plants profitably. In this study, sequential investments in the RP2Hy plant’s components are investigated. Based on a Real Options approach, we tackle the question of what is the optimal timing of sequential investments in RP2Hy modules that enable hydrogen feed-in into the gas grid in Germany and California, both pioneering the energy transition. Choosing this approach, the uncertain and largely irreversible character of the investments in this new technological field is dealt with. Since the focus is on substituting natural gas by adding green hydrogen to the gas grid, the underlying asset considered as stochastic is the price of natural gas. It is modeled applying a geometric Brownian motion process. In the analysis conducted, we find for both California and Germany that polymer electrolyte membrane (PEM) electrolyzer systems are uneconomical in the foreseeable future. The required natural gas price level that would enable economic viability of gas grid feed-in exceeds the level of today's natural gas prices many times over. Without subsidies or an increased willingness to pay for green fuel on the customers’ side, it is unlikely that the required price level will be achieved in the foreseeable future.