Tightening the geographical correlation of renewable hydrogen production via electrolysis? Validation through a case study in Germany

Policymakers consider renewable hydrogen an essential pillar for defossilizing hard-to-electrify sectors. To provide legal certainty for renewable hydrogen, the European Union (EU) has defined electricity procurement criteria with the Renewable Energy Directive, including a geographical correlation constraint that requires electrolyzers and Renewable Energy Sources (RES) to be located within the same electricity bidding zone. Especially in large bidding zones, though, the ramp-up of electrolysis capacities can substantially drive electricity system costs if electrolyzers and RES are geographically dispersed across the zone. To provide actionable decision support for energy policymakers in the EU, we analyze how applying the EU regulation's leeway to tighten the geographical correlation affects the operational decisions of electrolyzer operators and, consequently, the tradeoff between the costs of renewable hydrogen production and the costs of the electricity system. Our results for a case study in Germany, a country with a single large bidding zone and ambitious electrolysis expansion targets, and 30 potential specifications of a tightened geographical correlation indicate that corresponding policy measures can effectively reduce the electricity system costs associated with electrolyzer integration compared to the single-bidding-zone geographical correlation. However, the electricity system costs strongly hinge on the tightened specification and might also increase. At the same time, higher renewable hydrogen production costs due to restricted RES access outweigh electricity system cost savings under all specifications we examine. Tightening the geographical correlation also leads electrolyzer operators to secure electricity procurement portfolios whose peak output can significantly exceed the electrolyzers' capacities, amplifying resale risks of surplus electricity.