Understanding the fundamentals of hydrogen price formation and its relationship with electricity prices - Insights for the future energy system

Within the transition to climate-neutral energy systems, hydrogen has the potential to support decarbonization of multiple sectors. Just like in electricity markets, volatility in hydrogen supply and process-specific demand may lead to volatile prices in a hydrogen market. This volatility may affect the interplay of hydrogen and electricity markets, which remains insufficiently explored. This study investigates fundamental price formation mechanisms for hydrogen and electricity, emphasizing their mutual dependencies, volatility, and the impact of short-term system conditions such as weather and demand variability. Additionally, it explores how these dynamics respond to variations in system conőgurations. Using the European energy system model DIMENSION, enhanced to incorporate detailed hydrogen supply and demand options including storage, cross-border trade, and updated import cost data, this study derives shadow prices as the basis for the subsequent statistical analysis. Results show that hydrogen and electricity prices are governed by short-term interactions. While electricity price formation can be well explained by renewable generation and demand, hydrogen prices emerge to be more structurally driven. Storage dynamics and cross-border trade moderate hydrogen price formation next to electrolysis. Strong price coupling between the hydrogen and electricity market likely occurs under low residual load conditions dominated by electrolysis, whereas decoupling arises during high residual load situations dominated by storage discharge. The electricity-to-hydrogen price ratio averages 0.56, lower than previous estimates, primarily due to the consideration of inflexible hydrogen imports and infrastructure constraints. Furthermore, the analysis indicates that short-term price signals alone may be insufficient for investment recovery, highlighting the need for complementary market mechanisms to develop a liquid hydrogen market.