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 industry's development, we propose using low carbon hydrogen long-term agreements allocated through auction mechanisms. The objectives are twofold: i) matching supply and demand volume considering 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.