Integrating Variable Renewable Energy and Storage for Green Hydrogen Production

System-level design that integrates hydrogen production with the electricity system may improve market uptake and enable green hydrogen to contribute significantly to a sustainable energy future. Government policies, incentives, and funding opportunities provide the necessary support and financial backing to foster technological advancements.In this paper, we develop a decision-making model to simultaneously optimize capacity investments and system operations in electricity generation and hydrogen production. We investigate the optimal deployment and operation of electrolyzers to produce green hydrogen using grid-connected sources of electricity, an off-grid system that couples variable renewable energy (VRE) resources with long duration energy storage (LDES), or a mix of both. We assess the economic and environmental performance of the hydrogen production system under carbon pricing and various tax incentive policy We evaluate scenarios accounting for the Section 48 Energy Credit, known as the Investment Tax Credit (ITC), of the Internal Revenue Code (IRC), as well as the Section 45V Clean Hydrogen Production Tax Credit (PTC). We note that Section 48 was expanded under the IRA of 2022. Previously, the ITC applied to energy storage only when it was installed in connection with a solar generation facility. The IRA has broadened this to include stand-alone energy storage projects, making them eligible for a tax credit of up to 30 percent of investment cost (Shah et al. 2024; IRS 2024). The ITC is available for renewable energy technologies even if they are not grid-connected. The ITC can be claimed for off-grid renewable energy systems, such as solar photovoltaic (PV) systems, wind turbines, and other qualifying technologies, as long as they meet the eligibility criteria set by the IRS (DOE 2024). scenarios—in particular, the Section 45V Production Tax Credit (PTC) for green hydrogen and the Section 48 Investment Tax Credit (ITC) for VRE and LDES—along with sensitivity analysis on LDES capital costs.Eleven scenarios showcase the model’s capability and highlight the complexity of interactions between system components. We calculate the unit net cost of hydrogen production for each scenario and decompose the unit cost into four components: electricity cost, capital investment, social cost of carbon dioxide emissions, and tax revenue. We find, for example, that the ITC and PTC could potentially reduce unit hydrogen production cost from $10.62 per kilogram in a no-policy scenario to $0.96 per kilogram. This model provides a foundation for further investigation of the full integration of hydrogen infrastructure within the electricity system.