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The welfare and price effects of sector coupling with power-to-gas

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  • Roach, Martin
  • Meeus, Leonardo

Abstract

Electricity markets with high installed capacities of Variable Renewable Energy Sources (VRES) experience periods of supply and demand mismatch, resulting in near-zero and even negative prices, or energy spilling due to surplus. The participation of emerging Power-to-X solutions in a sector coupling paradigm, such as Power-to-Gas (PTG), has been envisioned to provide a source of demand flexibility to the power sector and decarbonize the gas sector. We advance a long-run equilibrium model to study the PTG investment decision from the point of view of a perfectly competitive electricity and gas system where each sector's market is cleared separately but coupled by PTG. Under scenarios combining PTG technology costs and electricity RES targets, we study whether or not there is a convergence in the optimal deployment of PTG capacity and what is the welfare distribution across both sectors. We observe that PTG can play an important price-setting role in the electricity market, but PTG revenues from arbitrage opportunities erodes as more PTG capacity is installed. We find that the electricity and gas sector have aligned incentives to cooperate around PTG, and instead find an issue of misaligned incentives related to the PTG actor. Although not the focus of our analysis, in some scenarios we find that the welfare optimal PTG capacity results in a loss for the PTG actor, which reveals some intuition that subsidizing PTG can make sense to reduce the cost of RES subsidies. Sensitivity analyses are conducted to contextualize these findings for system specificities.

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  • Roach, Martin & Meeus, Leonardo, 2020. "The welfare and price effects of sector coupling with power-to-gas," Energy Economics, Elsevier, vol. 86(C).
    • Handle: RePEc:eee:eneeco:v:86:y:2020:i:c:s0140988320300475
    DOI: 10.1016/j.eneco.2020.104708
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    Cited by:

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    6. Bucksteeg, Michael & Mikurda, Jennifer & Weber, Christoph, 2021. "Market integration of power-to-gas during the energy transition—Assessing the role of carbon pricing," EconStor Preprints 242982, ZBW - Leibniz Information Centre for Economics.
    7. Fahimeh Asgari & Seyedeh Gol Ara Ghoreishi & Matin Khajavi & Ali Foozoni & Ali Ala & Ahmad Gholizadeh Lonbar, 2024. "Data Analysis of Decision Support for Sustainable Welfare in The Presence of GDP Threshold Effects: A Case Study of Interactive Data Exploration," Papers 2407.09711, arXiv.org, revised Aug 2024.
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    10. Johannes Brauer & Manuel Villavicencio & Johannes Trüby, 2022. "Green hydrogen – How grey can it be?," RSCAS Working Papers 2022/44, European University Institute.
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    13. Ruhnau, Oliver, 2022. "How flexible electricity demand stabilizes wind and solar market values: The case of hydrogen electrolyzers," Applied Energy, Elsevier, vol. 307(C).
    14. Bucksteeg, Michael & Mikurda, Jennifer & Weber, Christoph, 2023. "Integration of power-to-gas into electricity markets during the ramp-up phase—Assessing the role of carbon pricing," Energy Economics, Elsevier, vol. 124(C).
    15. Forero-Quintero, Jose-Fernando & Villafáfila-Robles, Roberto & Barja-Martinez, Sara & Munné-Collado, Ingrid & Olivella-Rosell, Pol & Montesinos-Miracle, Daniel, 2022. "Profitability analysis on demand-side flexibility: A review," Renewable and Sustainable Energy Reviews, Elsevier, vol. 169(C).
    16. Christoph Loschan & Daniel Schwabeneder & Matthias Maldet & Georg Lettner & Hans Auer, 2023. "Hydrogen as Short-Term Flexibility and Seasonal Storage in a Sector-Coupled Electricity Market," Energies, MDPI, vol. 16(14), pages 1-35, July.
    17. Lan, Liuhan & Zhang, Youzhong & Zhang, Xingping & Zhang, Xinyue, 2024. "Price effect of multi-energy system with CCS and P2G and its impact on carbon-gas-electricity sectors," Applied Energy, Elsevier, vol. 359(C).
    18. Skov, Iva Ridjan & Schneider, Noémi, 2022. "Incentive structures for power-to-X and e-fuel pathways for transport in EU and member states," Energy Policy, Elsevier, vol. 168(C).
    19. Roach, Martin & Meeus, Leonardo, 2023. "An energy system model to study the impact of combining carbon pricing with direct support for renewable gases," Ecological Economics, Elsevier, vol. 210(C).
    20. Schlund, David & Theile, Philipp, 2021. "Simultaneity of green energy and hydrogen production: Analysing the dispatch of a grid-connected electrolyser," EWI Working Papers 2021-10, Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI).
    21. Egerer, Jonas & Grimm, Veronika & Grübel, Julia & Zöttl, Gregor, 2022. "Long-run market equilibria in coupled energy sectors: A study of uniqueness," European Journal of Operational Research, Elsevier, vol. 303(3), pages 1335-1354.
    22. Schlund, David & Theile, Philipp, 2022. "Simultaneity of green energy and hydrogen production: Analysing the dispatch of a grid-connected electrolyser," Energy Policy, Elsevier, vol. 166(C).
    23. Sina Heidari, 2020. "How Strategic Behavior of Natural Gas Exporters Can Affect the Sectors of Electricity, Heating, and Emission Trading during the European Energy Transition," Energies, MDPI, vol. 13(19), pages 1-20, September.
    24. Ruhnau, Oliver, 2020. "Market-based renewables: How flexible hydrogen electrolyzers stabilize wind and solar market values," EconStor Preprints 227075, ZBW - Leibniz Information Centre for Economics.

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