Competition Between Green and Blue Hydrogen and Indirect Network Effects

Whereas hydrogen is currently a marginal energy carrier, the aim of the EU is to trigger low-carbon hydrogen production that covers around 10 percent of EU’s energy needs by 2050. If this comes true, it will be an energy revolution. We study competition between green and blue hydrogen by proposing a Salop model that encompasses the value chains for hydrogen and CCS. For blue hydrogen, we distinguish between central production—natural gas is transformed to hydrogen close to the extraction site and hydrogen is then transported over a long distance via terminals to the hydrogen consumers—and local production—natural gas is transformed to hydrogen at terminals located near the hydrogen consumers. We find that mark-ups are highest under central blue hydrogen production, which implies that total production of hydrogen, supply of blue hydrogen, and share of plants investing in carbon capture facilities are lower under central production than under local production of blue hydrogen. We provide numerical simulations of the alternative market outcomes and also the corresponding social outcomes, and calculate the magnitude of policy instruments that should be used in order to obtain the social outcomes under central and local blue hydrogen production.