Considering hydrogen policies with a focus on incentive compatibility towards electricity grids

A lot of countries have recently published updated hydrogen strategies with many of them increasing and renewing their commitment. In parallel, corresponding policy mechanisms are increasingly coming into focus with the first ones already having awarded funding contracts to projects and construction being underway. However, these policies are usually translated from renewable energy policy without considering the specific risks and uncertainties, spillovers, and positive externality of operating grid-conducive electrolyzers in electricity grids which are increasingly subjected to electricity supply volatility from renewables. This article details how different aspects of a dedicated hydrogen policy can address the technology’s specific issues from an economic perspective, namely funding provision, market and technology risk mitigation, and the complex relationship with further actors in electricity markets. Results show that, compared to renewable energy policy, mechanisms need to emphasize the input side more strongly as price risks and intermittency from electricity markets are more prominent than from hydrogen markets. Also, it proposes a targeted mechanism to capture the positive externality of mitigating excess electricity in the grid while keeping investment security high. Economic policy should consider such approaches before scaling support and avoiding the design shortcomings experienced with early RE policy. • Hydrogen exhibits significant market and electricity price risks. • Policies often aim at reducing this exposure but introduce false incentives. • Targeted mechanisms can raise efficiency by being permeable to price signals. • A policy to reduce risks, promote market elements, and secure volumes is proposed. • Such a policy can aid the grid integration of renewables and foster sector coupling.