Investment in flexible hydrogen production from local wind power: Optimising timing, capacity and plant operations of an investment under uncertainty

Abstract

Hydrogen produced from renewable energy can be used as an zero emission fuel. While hydrogen has applications across several industries its largest potential is seen as a fuel for hydrogen vehicles. Widespread adoption of hydrogen technologies therefore has the potential to facilitate significant emission reductions and contribute towards climate change goals. Most of the technologies are still in the early stages of commercialisation and high costs have historically constrained the adoption. However, with technological developments and government support the demand for hydrogen is expected to grow substantially. In this thesis we consider a price taking Norwegian energy producer who considers to become a supplier of hydrogen in the future. The company holds the option to invest in hydrogen production from electrolysis by extending an existing wind farm. The hydrogen production is assumed to be flexible, and the investor needs to decide how to operate the hydrogen plant optimally to maximise his profits. In order to find optimal timing, capacity and plant operation of the investment under uncertainty, we apply a real options approach. We develop a multi-factor model using dynamic programming that is solved using least square Monte Carlo.