Professor of Energy Economics Machiel Mulder was appointed as a member of the Scientific Climate Council by the Dutch Ministry of Economic Affairs and Climate Policy earlier this year. As experts in relevant fields, Mulder and his fellow council members will advise the government on climate policy. We talked to Mulder about his research on the economics of the energy transition, in particular the economic value of hydrogen, hydrogen’s potential role in the energy transition and the importance of accelerating this transition. 

What kind of research do you do at the Faculty of Economics and Business?

“In a number of projects, my colleagues and I have recently explored the economic value of hydrogen. This energy carrier is increasingly seen as key for the energy transition and the realization of climate-policy objectives. That is because the use of hydrogen does not result in any carbon emissions, yet it has high technical potential: to fuel engines in transport, as a fuel in boilers for heating buildings, and as a feedstock (i.e. as molecules for chemical reactions) in the industry. Additionally, it can be used to store energy in electricity systems. Despite all these potential applications, the economic value of hydrogen is still problematic. This is related to the fact that hydrogen has to be produced from other energy carriers, in particular electricity, which implies that the costs of hydrogen depend on the price of electricity. In turn, the price of electricity depends on, amongst others, the price of carbon. This implies that higher carbon prices may worsen the business case of hydrogen projects. Hence, these two tools to foster climate-policy objectives (the price of carbon allowances and the usage of hydrogen) may hinder each other. 

In addition, we have found that using hydrogen for industrial purposes reduces the economic feasibility of using hydrogen to provide flexibility in electricity markets. A higher demand for hydrogen in, for instance, the chemical industry raises the price of hydrogen. This makes it too expensive to store hydrogen for later use, in times when the electricity prices are high. Hence, this result proves the economic saying that there is no such thing as a free lunch.”

Can you describe the societal relevance of your research?

“The societal relevance of analyzing the economics of energy systems overall is clear: we need to reduce the risk of further climate change and for this it is absolutely necessary to quickly reduce the consumption of fossil energy. The speed of this transition depends on the costs of alternatives and the value renewable carriers can realize in markets. The lower the costs and the more value can be attached to such carriers, like hydrogen, the faster the energy transition can be realized.

Our recent findings imply that hydrogen will likely not be used to provide flexibility in electricity markets. It is more efficient to use other options to do this, such as demand response. The latter means that electricity users adapt their electricity consumption depending on the price level of electricity. This already occurs in the industry, but now we also see that residential consumers are increasingly able to do this. Retailers are offering residential consumers so-called dynamic contracts, which means that their energy prices fluctuate from day to day, or even hour to hour, in response to the changing prices in the (international) wholesale markets. The more people are interested in this type of energy contracts, the better electricity systems will be able to deal with higher shares of electricity generated by weather-dependent techniques (i.e. wind turbines and solar PV). 

Our results also imply that, from a societal point of view, it is not efficient to provide subsidies for hydrogen production in order to have more flexibility in electricity markets, as this would reduce the willingness of energy users to adapt their behavior.”

  What about the value of hydrogen for our electricity distribution networks?

“We also analyzed the value of hydrogen produced through electrolysis in providing flexibility to electricity grids. As we can read almost daily in the news, grid operators are increasingly facing bottlenecks in their grids. This is due to the boost in renewable generation, such as through solar panels on the roofs of houses, and the strong increase in the use of electricity, for instance for heat pumps and charging electric cars. As power grids have a limited capacity, the operators need to find solutions to deal with the growth in requests for grid usage. 

In the long term, extending the capacity of grids is the most efficient solution, but in the short-term other smart solutions are explored. Dynamic and locational grid tariffs are an example of one of these solutions, this means that the tariffs for using a grid depend on the presence of congestion at particular places within the grid. My colleagues and I have modeled a distribution electricity grid with increasing volumes of renewable generation and consumption in combination with such dynamic and locational tariffs. We found that investments in electrolysis plants to provide flexibility to such grids can be profitable when there is a high share of renewables. Other  technical options to provide flexibility, such as district heating systems, are not yet well developed. This result shows that, in principle, hydrogen production through electrolysis can contribute to solving the problems of grid congestion, but this turns out to be a profitable strategy only in particular circumstances.”

What are your plans for future research?

“My projects cover various parts of energy supply chains, such as the residential end-users, the regulation of grid operators, the design of environmental policy measures, in particular the emissions trading and support schemes, and the design of electricity markets. The recent crisis in European energy markets has strongly triggered the debate on the three key objectives of energy policy: affordability, security of supply and sustainability. With our research, my colleagues and I hope to contribute to this debate by providing state-of-the art economic analyses of energy systems, markets and policy.”

The Dutch Scientific Climate Council

The Scientific Climate Council (Wetenschappelijke Klimaatraad) is a multidisciplinary board consisting of ten members with diverse backgrounds, including Machiel Mulder and two other University of Groningen professors: Linda Steg (Faculty of Behavioural and Social Sciences) and Wouter Peters (Faculty of Science and Engineering). The council will advise the government on climate policy. Its members were announced by the Dutch Ministry of Economic Affairs and Climate Policy in April 2023. 

Key publications

Ghaemi, S., Li, X. & Mulder, M. (2023). Economic feasibility of green hydrogen in providing flexibility to medium-voltage distribution grids in the presence of local-heat systems, Applied Energy. 331, 18 p., 120408.

Perey, P. & Mulder, M. (2023). International competitiveness of low-carbon hydrogen supply to the Northwest European market, International Journal of Hydrogen Energy. 48, 4, p. 1241-1254 14 p.

Li, X. & Mulder, M. (2021). Value of power-to-gas as a flexibility option in integrated electricity and hydrogen markets. Applied Energy. 304, 117863.