Integration of power-to-gas into electricity markets during the ramp-up phase—Assessing the role of carbon pricing

The expansion of wind and solar energy has so far primarily led to the decarbonization of the electricity sector. Against this background, power-to-gas (PtG) is seen as a solution supporting the decarbonization of other sectors, such as heating or transport. As the generation mix will transitionally be based on fossil-fired generation technologies, the upcoming integration of PtG into electricity markets comes with several challenges. While the current debate focuses on sustainability criteria and support mechanisms, integration of PtG into electricity markets requires a further development of the market design. Notably, the design of electricity markets and carbon pricing should create efficient incentives for utilizing PtG, reflecting the value of the CO2 emissions avoided by electrolytic hydrogen or methane. General effects are analyzed to study the role of carbon pricing in integrating PtG. Moreover, a detailed bottom-up market model is extended by the PtG technology and competing flexibilities, such as storage or demand-side management. Several scenarios are developed regarding levels of CO2 price, techno-economic parameters of flexibilities and shares of variable renewable energy sources for 2025. The results reveal that carbon pricing has to reflect both the avoided and the induced CO2 emissions related to electrolytic hydrogen or methane to support the market integration of PtG during the ramp-up phase. On the contrary, too low CO2 prices might lead to adverse effects. Subsequently, implications for energy policy are discussed.