National Hydrogen Strategy Issues Papers

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Julian Lawrence

Issue 7: Hydrogen to support electricity systems

1. How can hydrogen production best be integrated with current electricity systems (for instance, should large-scale hydrogen production be connected to current electricity systems)? Are there barriers or risks to integration that need be addressed in the Strategy?

How can hydrogen production best be integrated with current electricity systems (for instance, should large-scale hydrogen production be connected to current electricity systems)? Are there barriers or risks to integration that need be addressed in the Strategy?
See answer to Q3.

Large-scale hydrogen production should be considered an integral, and essential, part of the integrated electricity supply chain.

The significant barrier is the enormous paradigm shift required to operate differently a network that has evolved over 100 years to operate as it does now.

2. What, if any, future legislative, regulatory and market reforms are needed to ensure hydrogen supports, rather than hinders, electricity system operation and delivers benefits for consumers (for example by reducing demand during high price events)? What is the timeframe, and priority, for these changes?

What, if any, future legislative, regulatory and market reforms are needed to ensure hydrogen supports, rather than hinders, electricity system operation and delivers benefits for consumers (for example by reducing demand during high price events)? What is the timeframe, and priority, for these changes?
See answer to Q3.

Perhaps missing from the questions is "what future operating reforms are required?.

I believe AEMO will need to change their systems to provide for inventory management (currently managed partly as time) and to change from "pull" to "push".

3. Do current market frameworks incentivise the potential value of hydrogen to support electricity systems? What initiatives or changes required?

Do current market frameworks incentivise the potential value of hydrogen to support electricity systems? What initiatives or changes required?
The current market is based on matching supply to demand. In conventional supply chain terms it is a "pull" system. Current rule changes under consideration allow demand reduction to be rewarded during peak demand which may exceed available supply.

The marginal cost of generation from fossil fuels is the cost of providing the fuel to the generator.

The marginal cost of generation from renewables is approximately zero. Wind and solar (raw material) if not utilised today are lost, but there is more tomorrow, they are renewable. These two factors create an incentive to always operate renewables generators.

At present available renewables are approximately fully utilised within the limits of forecasting. Renewables are variable and intermittent. The variation in renewables supply and general demand is balanced by fossil generation.

As the proportion of renewables in the network increases there is a need for inventory (storage) and variable/intermittent demand.

This has been identified in the Issues Paper.

When the grid reaches near 100% (of annual energy demand) renewables supply the true effect of renewables, the imperative to always operate when sun and wind are available, will be felt.

It is conceivable that the natural "push" which this creates will invert the operation of the grid. The electricity supply chain will become a "push" system.

In simple terms renewables generators will operate at 100% utilisation of available wind and solar. Grid operational priority then becomes:-
1:- satisfy conventional demand
2:- fill available storage space (inventory)
3:- operate variable and intermittent demand (hydrogen, desalination, etc) to consume remaining available supply

Patently more complex than that, for example the use of inventory to satisfy both conventional demand and variable/intermittent demand when there is insufficient supply.

In any supply chain there is a bottleneck. The bottleneck, by definition, operates at 100% utilisation. At present the bottleneck is demand which is 100% (nearly) satisfied. We have unutilised generating capacity.

In a "push" system with 100% renewables the bottleneck is renewables which are always fully utilised. This means that the variable/intermittent demand (hydrogen, desalination, etc) will have unutilised production capacity. By design.

The effect of near zero marginal cost of electrical energy on the whole economy is potentially profound. The immediate effect is in energy productivity (in dollar terms) which is currently stalled and hostage to fossil fuels. Beyond that is the potential for sustainable economic growth without population growth.

To attempt to operate the electrical grid of the future using existing paradigms will probably lose many of the potential benefits of renewables and hydrogen.

A word of warning. While the terms "pull" and "push" are used they are elusive. Not least because regardless of which approach is used supply and demand are always equal over time. Probably what most changes is the bottleneck and unutilised capacity.

4. Do current market frameworks allow for sector coupling and interactions between different markets that may result from hydrogen production (such as the interplay between gas, electricity, and transport sectors)? If not, what changes are required?

Do current market frameworks allow for sector coupling and interactions between different markets that may result from hydrogen production (such as the interplay between gas, electricity, and transport sectors)? If not, what changes are required?
Following from the response to Question 3.

There are more than a few fundamental market issues, this list is not exhaustive:-
1:- how to avoid a marginal cost recovery only market with 100% renewables
2:- how to avoid subsidisation and arbitrage between conventional demand and variable/intermittent demand
3:- how to reward variable/intermittent demand for less than 100% utilisation
4:- how to build renewables supply, inventory (storage) and variable/intermittent demand in some synchronised approach.
5:- how to reward the holding of inventory, particularly safety stock which is essential but may never be utilised. The equivalent of rewarding a generator for unutilised but available generation.
6:- a minor issue is to decouple storage from inventory. Self-storage for electricity, I own the storage you own the electricity stored. Tolling storage.

The electricity supply chain has traditionally held inventory as fossil fuel in front of generators. The effect of inventory (storage) between generator supply and demand also creates a need for changes to the market.

The sequence of events for market redesign is to establish the operating approach for the network then design the market to support them.

While existing network design includes many redundant technical requirements, which create a barrier to renewables introduction, it is correct to perceive a technically neutral network and market design. However, it will probably be necessary to establish some operating rules prior to commencing market redesign.