European Renewable Hydrogen Regulation and Subsidies: Economic and Environmental Impacts of Distorted Electrolyser Flexibility Incentives

As the share of renewable power generation increases, the task of power system operators to match supply and demand necessitates mobilising new flexibility sources. Among these are electrolysers, which the EU's Hydrogen Strategy for a Climate Neutral Europe envisions as power system flexibility providers. Such flexibility provision in coupled electricity-hydrogen systems has been modelled, with benefits ranging from easing RES integration [1], [2] to reaching energy transition targets at lower costs [3]. This literature however usually considers that electrolysis acts in a perfectly flexible way to minimise total system costs, usually encompassing operational costs or operational and investment costs of all multi-energy system technologies. Such flexible behaviours are idealistic, whereas electrolysers' primary goal is maximisation of their profit. Price signals are considered suitable incentives to make this happen concurrently to maximising social welfare, but this might not hold when several, conflicting incentives apply, e.g., in presence of regulation or subsidies. Hydrogen regulation has been the focus of a recent literature strand, focusing on electrolysis regulation following European and American "three pillar" typologies, enforcing the criteria of additionality, temporal correlation and geographical correlation [4]. In particular, the temporal correlation criterion for EU renewable hydrogen states that in each time period, the electrolyser plant cannot consume more electricity than its portfolio of renewable power capacities generates. These studies illustrate how such regulations affect energy system costs and emissions using a central planner modelling approach, which does not account for distorted incentives of subsidised and regulated electrolysis. Conversely, recent work illustrates how subsidies impact hydrogen dispatch decisions, and consequently energy system costs and emissions [5], without considering operation constraints from EU regulation. A case study implementing both facets illustrates the potentially strong impacts of high electrolysis subsidisation even under strict temporal correlation, but produced hydrogen quantities are endogenous and not related to an identified hydrogen demand [6]. We fill these gaps by modelling the impacts of EU renewable hydrogen support and regulation on electrolyser flexibility incentives in the planned EU 2040 energy system, and the consequence this has for power system supply-demand matching.