Auctions to reveal consumers’ willingness to pay for low-carbon hydrogen projects: combining lessons from renewables and natural-gas industries

Abstract

Low-carbon hydrogen is expected to play a key role in realizing net-zero and sustainable development plans. Nonetheless, there is a gap between the cost of producing low-carbon hydrogen and its potential users’ willingness to pay for such hydrogen. To implement support for the development of the industry, we propose using low-carbon hydrogen long-term agreements allocated through auction mechanisms. The objectives are 2-fold: (i) matching supply and demand volumes considering the time horizon and geographical delivery point specification and (ii) allocating the subsidy. This perspective article innovates by proposing a reference price indexed to liquid to natural-gas prices, which is the main product that low-carbon hydrogen aims to substitute. The premium and the production cost are defined through a double-sided auction. This aims to minimize the public policy funds required to incentivize the low-carbon hydrogen market while facilitating long-term agreements and mitigating price risks that may hinder investment.