This paper examines the value that can potentially be created by a vertically integrating energysystem. Integration entails operational gains that must be traded off against the requisite cost ofcapacity investments. In the context of our model, the operational gains are subject to inherentvolatility in both the price and the output of the intermediate product transferred within thevertically integrated structure. Our model framework provides necessary and sufficient conditionsfor the value (NPV) of an integrated system to exceed the sum of two optimized subsystems on theirown. We then calibrate the model in Germany and Texas for systems that combine wind energywith Power-to-Gas (PtG) facilities which produce carbon-free hydrogen. Depending on the pricesattainable for hydrogen in different market segments, we find that a synergistic investment valueemerges in certain settings. In the context of Texas, for instance, neither electricity generationfrom wind power nor hydrogen production from PtG is profitable on its own in the current marketenvironment. Yet, provided both subsystems are sized optimally in relative terms, the attendantoperational gains from vertical integration more than compensate for the stand-alone losses of thetwo subsystems.
Keywords:operational volatility, vertical integration, renewable energy, power-to-gas
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