The impact of ancillary services in green hydrogen investment valuation

• Hydrogen investment is accelerated by revenues from ancillary services • Ancillary market revenues act as an operational hedge reducing revenue volatility • Operational hedging outweighs traditional delay value in real options analysis As the share of intermittent renewable energy sources increases, there is a growing need for flexible resources to maintain grid stability. Green hydrogen, produced by electrolysis, is recognized as a key flexible resource because of its easily adjustable production process. However, previous studies often deem investments in green hydrogen production unprofitable, largely because they tend to overlook the potential revenue from ancillary services. This paper addresses this gap by examining the impact of integrating ancillary services into the investment strategy for a green hydrogen production plant. We link a stochastic price model with an hourly resolution optimization and a real options valuation to quantify the benefits of co-optimizing hydrogen production and ancillary service participation for hydrogen plants in Norway and Germany. Our results show that optimizing the electrolyzer’s daily production to include participation in ancillary services markets substantially raises the project’s NPV and eliminates the value of delaying investment. In contrast, without ancillary services, spot-price volatility creates an incentive to delay investment. This effect is stronger in Germany than in Norway due to more volatile spot prices. This highlights the complementary role of real-options valuation and participation in the ancillary services markets, where ancillary service revenues act as an operational hedge, smoothing cash flows and reducing price volatility, thereby reducing the incentive to postpone investment.