Electrolysis Ramp-Up: Economically Viable and Grid-Beneficial

The regulatory framework for the ramp-up of the hydrogen market is complex. An analysis of existing and potential instruments shows that they differ significantly in terms of economic efficiency and system benefits. “In principle, the expansion of electrolysers should be as cost-effective and beneficial to the system as possible,” says Ann-Kathrin Klaas, Head of Research Area at EWI. In particular, an adjustment of the so-called RFNBO criteria and Section 13k of the EnWG — “utilization instead of curtailment” — as well as the planned tenders for system-beneficial electrolysers under Section 96 of the Wind Energy Act (WindSeeG) could, if designed appropriately, ensure the economic viability of electrolyser projects in the short and medium term while simultaneously reducing system costs. At the same time, there is a high degree of uncertainty regarding the future design of many instruments.

In the EWI report “The Ramp-Up of Electrolysis Between Economic Viability and System Service,” a team from the Institute of Energy Economics (EWI) at the University of Cologne, working on behalf of the ENERGY HUB Port of Wilhelmshaven, discusses the potential effects of supply- and demand-side policy instruments on an economically viable and system-friendly market ramp-up of electrolysers in Germany. The focus is on the impact of these instruments on production costs as well as on the selection of locations and the operation of electrolysers. System serviceability is evaluated primarily in terms of grid serviceability. This encompasses the use of surplus electricity and the avoidance of grid bottlenecks, which occur on a large scale, particularly in the north, when there is high wind power feed-in.

Electrolysers caught between economic viability and system benefits

Domestic electrolysis capacity is a key component in achieving climate goals and reducing Germany’s reliance on imports. However, the ramp-up is currently facing major challenges: production costs exceed what the market is willing to pay. There is also a tension between economic viability and system utility: While companies primarily select locations based on their private-sector investment costs (land, logistics) and align their operations with profit-driven objectives, efficient grid expansion requires locating facilities in areas with surplus renewable energy generation and operating them in a way that aligns with that availability. This includes, for example, locating facilities in regions with high wind power feed-in. There, the surplus electricity can be used directly on-site without placing an additional burden on the power grid. Without targeted control, electrolysers could even increase the grid load.

Cost-effective regulatory instruments can reduce hydrogen costs (LCOH) from a business perspective and electricity system costs from an economic perspective. However, there are significant uncertainties regarding their effectiveness in both areas, for example due to interdependencies between the instruments and general market developments. “There is currently no instrument that fundamentally improves the economic viability of electrolysers in Germany while simultaneously guaranteeing integration that benefits the power grid,” says Dr. Ann-Kathrin Klaas, Head of Research Area at EWI, who authored the report together with Michaele Diehl, Martin Lange, Tobias Leibfritz, Felix Schäfer, and Carina Schmidt.

RFNBO criteria and Section 13k of the EnWG with significant economic implications

The economic feasibility assessment in the report is based on the potential impact of the policy instruments on the LCOH. To this end, various scenarios for the design of these instruments were compared with a reference case. The economic feasibility analysis is based on the EWI’s proprietary SOPHIAA model. The results show that two instruments in particular could significantly reduce the LCOH. The RFNBO criteria (Renewable Fuels of Non-Biological Origin) define the conditions under which hydrogen is considered green. Section 13k of the Energy Industry Act (EnWG), “Utilization Instead of Curtailment,” on the other hand, opens up the option to purchase surplus electricity at a reduced price. Thus, simply relaxing the RFNBO criteria reduces the modeled LCOH by around 10 percent; additional use of Section 13k could further reduce the LCOH by around 8 percent. On the other hand, the introduction of grid access fees or taxes and levies on electrolysis could result in a significant cost increase of 10 percent or more.

The assessment of grid-friendly operation in the context of the electricity grid is conducted in the report based on an analysis of the existing body of research. In this regard, the funding calls for proposals under Section 96 of the WindSeeG represent the only instrument that already explicitly aims to promote the grid-friendly expansion and operation of electrolysers. However, the tenders have not yet taken place, and there is considerable uncertainty regarding their future design. Section 13k of the Energy Industry Act (EnWG), “utilization instead of curtailment,” could also serve as a local instrument to provide incentives for the siting and operation of systems-supporting facilities. However, its impact has so far been limited by various obstacles. For instance, in the first 14 months since the instrument’s introduction, no electrolyzer has utilized it.

Uncertainty about the future shape of regulation is hampering investment

An analysis of supply-side instruments shows that many measures are subject to significant uncertainty regarding their future implementation. This applies in particular to exemptions from electricity grid fees and surcharges, which, as of now, could be phased out for new installations starting in 2029 and 2030, respectively. Furthermore, a tightening of the RFNBO criteria is planned for 2028 (additionality, affecting new plants) and 2030 (simultaneity, also affecting existing plants), with a review of the criteria for 2028 announced. Further uncertainties arise regarding the design of construction cost subsidies, the electricity bidding zone, and capacity and flexibility markets.

An analysis of supply-side instruments shows that the potential reduction in hydrogen costs may not be sufficient to bridge the gap to willingness to pay. Demand-side instruments therefore remain necessary. In a subsequent chapter, the report therefore examines selected demand-side instruments, such as single-sided or double auctions, or climate protection contracts. The focus is on where the instrument takes effect and what influence it has on consumers’ willingness to pay. “The ramp-up of hydrogen can be made possible through a clever combination of instruments. However, it remains a challenge to combine consistent and long-term incentives with low complexity,” says Klaas.