ARTICLE IN PRESS

Energy Policy 32 (2004) 1603–1614

Harvesting and redistributing renewable energy: on the role of gas

and electricity grids to overcome intermittency through the generation
and storage of hydrogen
Dennis Anderson*, Matthew Leach
Imperial College London, Centre for Energy Policy and Technology, Prince Consort Road, London SW7 2BP, UK

Abstract

If intermittent renewable energy technologies such as those based on solar, wind, wave and tidal resources are eventually to supply
significant shares of total energy supplies, it is crucial that the energy storage problem is solved. There are several (long-recognised)
possibilities ahead including compressed air, pumped storage, further developments in batteries, regenerable fuel cells, ‘super-
capacitors’ and so forth. But one that is being revisited extensively by industry and research establishments is the production and
storage of hydrogen from electricity at off-peak times, and in times when there would be a surplus of renewable energy, for reuse in
the electricity, gas and transport markets; short-term and even seasonal and longer-term storage is technically feasible with this
option. This paper looks at the costs of the option both in the near-term and the long-term relative to the current costs of electricity
and natural gas supplies. While the costs of hydrogen would necessarily be greater than those of natural gas (though not disruptively
so), when used in conjunction with emerging technologies for decentralised generation and combined heat and power there is scope
for appreciable economies in electricity supply. A lot will depend on innovation at the systems level, and on how we operate our
electricity and gas grids and regulate our electricity and gas industries. We have also suggested that we now need to experiment
more, at the commercial level, and in the laboratories, with the hydrogen option.
r 2003 Elsevier Ltd. All rights reserved.

Keywords: Intermittent renewable energy; Hydrogen production and storage; Electricity and gas grids

1. Introduction supply, the development of storage systems would

The outputs of several of the most promising renew-
able energy technologies such as those from solar power,
wind and wave energy, are intermittent, and often do
not match the energy demands of consumers. Unlike
energy from coal, oil and gas the energy they produce
cannot be ‘dispatched’ or called upon as and when
needed. Exceptions are energy from biomass and
geothermal energy.
For the electricity industry, ‘intermittency’ is not a
serious technical constraint so long as the energy sources
are diverse and amount to a small share of total supply
(Milborrow, 2002). However, at high levels of market
penetration the effects are more pronounced and some
form of backup or storage becomes a technological and
economic necessity. Even for lower shares in total
*Corresponding author. Tel.: +44-207-594-6776; fax: +44-207-594-
9334.
E-mail address: dennis.anderson@ic.ac.uk (D. Anderson).
improve the economic returns to—and the range of
applications of—renewable energy.
The advantages of storage have long been recognised
in the electricity industry, and are not confined to
renewable energy, since it is a means of improving the
utilisation of and the economic returns to investments in
fossil fuels and nuclear power. In the case of pumped
storage, there is an improvement in the dynamic
response of the system to changes in load or unplanned
plant outages elsewhere, and a means of providing
reactive power compensation. Decentralised storage
systems may also reduce losses, reduce the need for
reinforcements of the electricity transmission and
distribution systems, and facilitate voltage control.
Historically, the main storage technologies of interest
have been pumped storage, batteries and thermal
devices. The production of and storage of hydrogen
has also long been recognised as having immense
technical potential (see, for example, Justi, 1987; Ogden,
1999), and at one time it was taken as a matter of course

0301-4215/04/$ - see front matter r 2003 Elsevier Ltd. All rights reserved.
doi:10.1016/S0301-4215(03)00131-9
 ARTICLE IN PRESS
1604 D. Anderson, M. Leach / Energy Policy 32 (2004) 1603–1614
that it would be produced by nuclear power when fossil
fuels became scarce. On a small scale, and mostly for
short-term purposes, hydrogen can be stored in com-
pressed or liquefied form and in metal hydrides. On a
large scale, and for both short- and long-term (seasonal
or longer) purposes, it can be stored in salt caverns, deep
saline aquifers, and depleted natural gas reservoirs.
However, the abundance of natural gas and the low
costs of gas turbines for peak-load service undermined
the case. Three developments require us to revisit the
case: (a) the decline in the costs and long-term potential
of renewable energy, which may make it attractive to
store energy from this medium. (b) Concerns about
climate change and the need to develop low-carbon
energy options. (c) Developments in the fuel cell, which
with hydrogen as a fuel offers the prospect of a low-
pollution source of power for both electricity generation
and transport.
While much effort is now being expended on the
development of particular technologies, it is also
suggested here that we need innovations at the systems
level. Historically, electricity and gas grids have evolved
to serve five functions:
* to distribute energy, their primary function;
* to pool reserve capacity and enhance security of
supply;
* to exploit economies of scale in generation;
* to improve capacity utilisation by taking advantage
of regional diversities in the timing of peak demands;
and
* to transmit energy in bulk from low-cost, fuel-rich
areas.
The additional possibility we consider below is the
‘harvesting’ of renewable energy from diverse and
widely distributed sources, storage in the form of
hydrogen, and redistribution of hydrogen for use by
large- and or small-scale generators—and also by
industry and transport.
Section 1 summarises the technical and economic
issues raised by the intermittent nature of renewable
sources of energy, Section 2 lists the various possibilities
addressing the ‘intermittency problem’ through the
development of storage technologies, and comments
on the economic aspects of introducing them on
electricity grids. Section 3 explores the harvesting
concept in more detail. The costs are compared with
those of a system based wholly on natural gas and with
the costs of energy supplies today.
2. Technical and economic issues associated with the use
of intermittent generation on large electricity systems
To begin, it is useful to keep in mind the difference
between ‘predictability’ and ‘intermittency’. Some re-
newables, for example tidal, are intermittent but
predictable (Hartnell, 2000). Predictability avoids some
of the negative impacts of intermittency, but by no
means all.
In some cases, predictable sources offer greater
challenges, due to the great depth of their output cycle.
For example, in the case of tidal energy, output cycles
down to zero at each change of tidal direction. This
means that backup capacity equivalent to the full output
of the plant is required to be used for the trough of the
cycle (assuming the plant is operating in base load).
Conversely, whilst unpredictable sources require the
same degree of backup capacity to be available, full use
of that capacity is less common.
2.1. Capacity credit and fuel saving
It is simplest to regard output from variable sources
as a negative electricity load. Loads typically vary by a
factor of two in a day. Dispersed wind, for example,
varies less rapidly and tidal more rapidly than this. A
simulation study by Holt et al. (1991) showed that while
the output of a 1000 MW wind farm might fluctuate
between 0 and 1000 MW in a day, the output from
1000 MW distributed over 12 sites would fluctuate fairly
smoothly between 200 and 500 MW. Grubb (1991)
estimates the likely effect of subtracting the output of
25 GW of wind capacity (c.f. the capacity of the grid,
which is about 70 GW) and four tidal barrages from a
monthly load profile for the UK in January. The
resulting net load curve shows a strong shift downwards
on average, a slight reduction in the typical level of the
peak, and a strong shift down in the minimum load
level, with occasional times when net load would be
negative such that the energy would have to be
discarded or stored.
New capacity of any sort is valued for its contribution
in terms of capacity and of fuel savings made in the
existing plant. The capacity savings or ‘credit’ for a new
plant equals the marginal cost of ensuring that the
available capacity is sufficient to meet peak demands.
The fuel savings for a variable, renewable source equals
the marginal costs of reducing output in thermal plant.
The capacity credit is calculated by determining the
reduction of installed capacity of thermal power plant
that is possible without increasing the probability of loss
of load at winter peaks (i.e. how much thermal power
plant could be ‘replaced’ by wind power, without
making the system less reliable). For low levels of
penetration of wind power into the grid, the capacity
credit of wind energy is about the same as the installed
capacity multiplied by the capacity factor (typically 20–
35% for wind).
However, as the level of wind penetration rises, the
capacity credit begins to tail off as shown in Fig. 1
(British Wind Energy Association, BWEA, 2001):
 ARTICLE IN PRESS
D. Anderson, M. Leach / Energy Policy 32 (2004) 1603–1614
Fig. 1. Capacity credit by wind installed capacity.
successive increments are correlated with those already
on the system. Grubb (1991) presents a similar curve
based on his own modelling.
For low penetrations, variable plant simply ‘shaves
the edge’ of the load duration curve as it can be treated
as a reduction in load. High penetrations have a
stronger effect on the shape of the load duration curve:
the peak is not much lower, but is much sharper (and
hence use of peaking fuels is lower). The lower end of
the load duration curve will typically go into negative
values reflecting power which must be shed (however,
statistically this is rare for even very large shares of
variable sources).
Denmark aims to have 50% of electricity generation
accounted for by renewable sources by 2030, of which
biomass will make up 18%. Problems of intermittency
of supply are not thought to pose a problem because of
Denmark’s links into international electricity networks
and markets, notably Nordpool. This provides a large
pool of backup capacity and in particular a large
resource of hydro-electric power from Norway. Local
combined heat and power plants can also be used as
back up capacity to ensure stability of supply (Royal
Commission on Environmental Pollution, RCEP, 1999).
These observations are reinforced by material below
relating to the statistical influence of variability and
unpredictability, and the benefits of ‘sharing out’ that
uncertainty across large loads and generation. However,
high penetrations give rise to additional complexities in
the operation of conventional power plant, in the form
of cycling losses and reserve costs.
2.2. Cycling losses
Increased startups and shutdowns of conventional
plant affected and/or any plant ‘dedicated’ as backup to
intermittent sources incurs additional fuel use, personnel
and servicing costs and service life losses. It can take
d50,000 to start a 1000 MW coal station from cold, if
wear and tear is included. Treating variable sources as a
reduction in demand, the total variability seen by
conventional power plant is a combination of the load
variability and variability of the renewable generators. A
1605
rough estimate of the relationship is a ‘sum of squares’,
such that the overall variability seen is:
qffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
load variability2 þ renewable variability2 :
The variance of the renewable energy can be large if
the sources are highly covariant, but can be reduced
significantly if the sites are chosen such that the
covariances are reduced, e.g. through geographic
dispersal or through use of a diverse range of resources
such as wind, tidal, wave, biomass and solar.
2.3. Reserve costs
Greater variability affects operating reserve levels.
The benefits of geographic and technical diversity in
improving the reliability of overall output from renew-
able resources act to reduce additional reserve needs.
But the remaining uncertainty in output will have a
fairly strong effect: beyond a minimum level of active
reserve needed to meet a failure in the single largest
plant or in-feed connected to the system, additional
reserve is needed to account for error in predicting the
net load on the generating system. This can be
approximated as for cycling losses above, with variable
plant netted off from load, giving rise to an error in
predicting net load which is:
qffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
error in predicting demand2 þ error in predicting variable output2 :
In this case, demand prediction is at an advanced
stage and errors are usually low. Hence, errors in
forecasting output from variable sources could come to
dominate quickly. This highlights the need to improve
predictive capabilities. Grubb (1991) points out that
variable sources are connected to an integrated system,
and thus operating reserve should be allocated to the
system as a whole, and not to backup any particular
source (this will clearly ensure better utilisation of the
reserve capacity).
2.4. Power shedding
As the capacity of a variable source increases, there
will be times of low demand when the available power
cannot be used and the energy will be shed and lost. This
will occur long before penetration of renewables reaches
the minimum demand level, as there will need to be a
certain level of firm capacity generating on the system to
maintain operating reserve and system control. Shed-
ding power is mainly a system management problem.
With high renewables penetration, baseload thermal
plant could be partly loaded to avoid the shedding from
renewables, and kept available to provide backup and
other system services. Experience shows that most large
units can be run down to 50% without great difficulty,
and to 30% with increased wear.
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1606 D. Anderson, M. Leach / Energy Policy 32 (2004) 1603–1614
One of the factors limiting the exploitation of
Europe’s wind resource is the weak state of the
transmission and distribution networks in many of the
areas which are otherwise most attractive for installation
of wind turbines (European Wind Energy Association,
EWEA, 1999). This is primarily an economic problem
resulting from technical effects since a large development
on a good site may justify grid reinforcement. There are
also (resolvable) technical problems arising from voltage
changes on turbine startup; voltage unbalance between
the three phases of the distribution system, causing
overheating of the wind-turbine induction machines; and
negative effects on ‘power quality’, including voltage
flicker, harmonics and other related issues.
2.5. Rate of change of output
According to Hartnell (2000), ‘‘The overall output of
wind rarely changes rapidly enough to cause a problem
for a system that must be able to cope with sudden and
substantial losses of power, as described above. The rate
of change in wind output is much smaller than installed
capacity, and very small indeed over a short time scale.
German data derived from 1500 turbines totalling
around 350 MW showed that the mean hourly gradient
was plus or minus 1% of the installed capacity. The
maximum changes observed in 1 h were a 23% decrease
and a 14% increase. Over 4 h intervals the maximum
changes were larger, at plus or minus 50%. Similar results
were obtained from a study of six wind farms in Northern
Ireland. Over half-hourly intervals the magnitude of wind
power fluctuation was shown to be mostly within the
0–10% range and very unlikely to exceed 20%.’’
2.6. Diversity in generation types and locations
Geographic diversity improves the predictability and
reliability of renewable output markedly. Grubb (1991)
shows statistically the effects for a large network of wind
turbines. The effect of aggregating the output from
dispersed generators is to flatten the distribution of
output level seen for individual machines, hence redu-
cing the variance of the output around the average
capacity factor.
Diversity in renewable sources used for generation
can have a similar effect. If the source outputs can be
treated as independent then their capacity contributions
are additive. Even more favourable is if sources are
directly complementary: for example, wind and solar
show a degree of this inverse correlation, with high
winds typically on overcast days.
2.7. Correlation of output with demand
There is no certainty that many variable sources will
be available at times of peak demand. Some sources
exhibit some correlation with demand. For example,
high windspeeds lead to a marginal increase in demand
through greater building thermal losses: but the
correlation is weak. There is also a good seasonal
correlation between windspeeds and energy demands in
the UK, which are higher in the windier regions in the
winter, when electricity demands are highest. In sunny
regions, especially the tropics, there are good correla-
tions between the incident solar energy and peak
demands for space cooling.
2.8. Conclusions on intermittent capacity
With increasing capacity, the marginal value of
intermittent renewable energy on the system falls when
* capacity credits decline,
* variations in prediction errors overtake demand
forecasting errors, and
* power shedding increases.
Diversity in resources and sites is beneficial in
increasing predictability—and is inherent in very high
penetration scenarios. Taking advantage of beneficial
correlations (where they exist) and avoiding negative
ones is worthwhile. Nevertheless, intermittency will
impose serious constraints on and reduce the value of
renewable energy on the system in the long run. Further
discussions can be found in Grubb (1988, 1991).
3. Mitigating the effects of intermittency and improving
the economic returns to the system through storage
Stored energy has been used by the electric utility
industry for over a century in the central energy supply
system, primarily for load levelling, i.e. to store low-cost
or low-priced electricity for use when the electricity
generation cost or purchase price is high. This led to
better asset utilization for peaking and intermediate-
duty cycle generating plants. However, the use of energy
storage has not expanded significantly beyond these
applications for three reasons. (1) Continuous improve-
ments in generation equipment, in particular of gas
turbines, have led to declining costs for peak-load
electricity capacity, and limited the benefits of storing
energy. (2) The difficulties of finding low cost and
abundant means of storage, beyond the limited oppor-
tunities for pumped storage. (3) In several countries, the
approach to reducing peak-load fluctuations has been
through demand management, e.g. by incorporating
peak-load pricing into the tariff structure; or directly,
through remote switching of appliances by utilities and/
or energy service companies. Aside from improving
demand management, peak-load pricing also provides
the ideal incentive for the development of storage
technologies in a liberalised electricity market.
 ARTICLE IN PRESS
D. Anderson, M. Leach / Energy Policy 32 (2004) 1603–1614
3.1. A list of storage options
It has been suggested that utility planners have
been slow to develop and use novel energy storage
strategies (Schoenung et al., 1996). Yet among
the already familiar and widely used storage
technologies there are others that have attracted
much intellectual interest (if relatively little research
funding) in the R&D community (President’s
Committee of Advisers on Science and Technology,
PCAST, 1999):
Pumped hydro: Suitable for short-term storage for
medium- to large-scale applications. Utilises the poten-
tial energy of a body of water at a relatively high
elevation by linking of an upper and lower reservoir.
Outputs range from 20 to 2100 MW (Schoenung
et al., 1996).
Batteries (electrochemical storage): Small to medium
scale, short to medium term. Outputs range from milli-
Watts up to 20 MW—Puerto Rico Electric Power
Authority (Schoenung et al., 1996). Much progress has
been made on battery storage. However, even advanced
batteries only store as much energy per 50–100 kg of
weight as is contained in roughly 1 kg of oil, which
restricts their use to special purpose applications,
emergency backup supplies and (with inverters) peak-
load supplementation in capacity-constrained distribu-
tion networks.
Superconducting magnetic energy storage: Medium
scale, short term. DC current is circulated through a
superconducting coil with energy stored in a magnetic
field. Outputs range from 1.4 to 30 MW—Anchorage
Municipal Light and Power system (Schoenung
et al., 1996).
Compressed air energy storage: Large scale, short
to medium term. Power is used to compress air
that is stored underground, commonly in a rock or
salt cavern. The air is released either directly
through a turbine to generate electricity or more
efficiently into a combustion chamber with fuel,
where it is ignited and expanded through the turbine.
Outputs range from 110 MW—McIntosh, Alabama,
USA to 290 MW—Huntorf, Germany (Schoenung
et al., 1996).
Flywheel energy storage: Small to large scale, short
term. Recent developments have involved using mag-
netic bearings and vacuum containment to minimise
frictional losses and noise. Outputs range from
1 kW (Hockney and Driscoll, 1997) to 100 MW
(Bornemann, 1997).
Capacitors: Small scale, short term. Long used to
store a relatively small amount of electrical energy in
electronic circuitry. More high-powered capacitors have
been developed increasing potential uses in power
electronics. Capacities range up to 10 MJ (Schoenung
et al., 1996).
1607
Electrochemical: Medium to large scale, short to
medium term. The most promising example is the
regenerable fuel-cell system pioneered by Innogy (the
‘Regenesys’ system), comprising an electrochemical
reaction involving two salt solutions (liquid electro-
lytes). The reversible process converts electrical energy
into chemical potential energy. Outputs range from 5 to
500 MW (Innogy, 2001).
Thermal storage: Small to medium scale, short term.
Used commonly for off-peak tariff nighttime storage
heaters or coolers.
Thermochemical storage: Medium scale, short to
medium term. The use of high-temperature solar
energy from concentrators to create a synthesis gas
based on methane and CO2, which can be desynthesised
to give up the stored solar energy; pioneered by the
Weizmann Institute in Israel; only suitable for high-
temperature solar concentrator systems in very sunny
climates.
Hydrogen production and storage: Small to large scale,
medium to long term. This is undoubtedly the most
promising long-term option, long sought after by
engineers and scientists. There are several options being
explored internationally:
* Seasonal storage in depleted natural gas and oil
reservoirs and deep saline aquifers. Hydrogen can
also be injected into natural gas systems, including
gas reservoirs—the ‘hythane’ option.
* Medium-term storage in a liquid form (the boiling
point is very low, however, about minus 250 C), as a
gas in pressure cylinders or storage tanks, in metal
hydrides, through adsorption in metallic compounds,
or through the chemical formation of synthetic
hydrogen compounds.
Section 3 discusses the hydrogen option further.
3.2. The financial value of electricity storage
There are two revenue sources available to the
operator of an electricity storage facility1 in the UK
and other liberalised electricity markets. Firstly, the
operator can take advantage of the fluctuating pool (or
other market) price by charging the facility when prices
are low and selling the stored electricity when prices are
high. Secondly, payments are available for the provision
of ancillary services.
3.2.1. Revenue from electricity sales
An indicative estimate can be made using the average
UK electricity pool purchase prices before the New
Electricity Trading Arrangements (NETA) were intro-
1
Adapted from Aplin et al. (2001).
 ARTICLE IN PRESS
1608 D. Anderson, M. Leach / Energy Policy 32 (2004) 1603–1614
duced. In 1998/1999, the p/kWh figures were as follows
(Department of Trade and Industry, DTI, 1990):
Weekdays 2.80
Weekends days 1.69
Nighttime 1.50
Summer 1.89
Winter 3.20
From these, some approximate ‘‘storage margins’’, in
p/kWh, can be calculated:
Night to day 1.30
Weekend to weekday 1.11
Summer to winter 1.31
Therefore, any storage facility which had an effective
cost of 1 p/kWh or less would have been commercially
viable (this takes into account the grid maintenance
uplift of o0.1 p/kWh). These margins are based on
average prices, sometimes referred to as blocked
averages, and understate the actual variability in costs
and prices with time of day and season. In fact, pool
prices were set for half-hourly periods and studies have
shown that the actual returns for a storage system will
be between 70% and 120% more than that calculated
using the blocked averages (Graves et al., 1999), i.e.
around 2 p/kWh. The same study compared revenue
from storage in various deregulating markets with
hourly pricing. The UK was found to offer the highest
returns at around $80/kW/yr, and Norway, with its
predominance of hydro generation, the lowest at around
$2/kW/yr.
On 7 September 2000 there were a number of planned
and unplanned plant outages in the UK. Demand
peaked at 94% of the 41 GW of available capacity whilst
some 12 GW of capacity was unavailable (OFGEM,
2000). The pool price reached a peak of 21.9 p/kWh
whilst the off-peak price was barely one-tenth of this
(Electricity Pool, 2000), a margin of around 20 p/kWh.
Clearly this was an exceptional situation but it further
illustrates the potentially high value of storage in
electricity systems.
All such estimates are based on the idea of central
generation and central storage, and neglect the benefits
of storage in the distribution networks. The average UK
industrial electricity price in 1999 was 4 p/kWh, and the
average domestic electricity price 8 p/kWh (DTI, 2000),
the former being twice and the latter four times the
average pool price, the differences being attributable to
the costs of transmission, sub-transmission and distribu-
tion. But with the development of smaller-scale devices
discussed below, it becomes possible to insert them in
the distribution networks and save on network reinfor-
cement. Since the capital costs of extending and
reinforcing distribution networks are appreciably higher
than those of peak-load generating plant, there is
potentially a very high marginal value of storage at
these points in the networks.
The analysis presented here is based on a static view
of the electricity market. In reality, significant applica-
tion of energy storage to ‘shift’ electricity generation
from times of low prices to times of peak prices would
necessarily affect those prices, and the underlying
operational dispatch of plant. Such effects could be
usefully investigated through the application of an
energy system model.
3.2.2. Income from the provision of ancillary services
The National Grid Company purchases ancillary
services from generators and some consumers, the
services purchased include (OFGEM, 2000):
* frequency response,
* reactive power,
* reserve: scheduled (rapid response); standing (20 min
response); and contingency (5–24 h response), and
* black start.
The estimated purchase cost of these services under
the NETA in the UK is d472,000 per day, or about
d172 m/yr (OFGEM, 2000). The total generating
capacity in the UK grid is around 66 GW (DTI, 2000).
Contracts for ancillary services are agreed with approxi-
mately 40% of the market (OFGEM, 2000) or 26 GW of
capacity, giving an average rate for ancillary services of
d4.50/kW/yr—this figure is clearly artificial and simply
illustrative of some average value of ancillary services:
values will vary geographically with the network and
demand structure, giving higher returns in some areas
than others. In the Californian electricity market the
value of ancillary services has been estimated as $20/
kW/yr (d13/kW/yr) (Graves et al., 1999).
3.2.3. Financial appraisal
Table 1 sets out in summary a financial comparison of
electricity storage using Pumped Hydro (RECP, 2000),
Flywheels (Bornemann, 1997) and Regenesys (Innogy,
2001). The three storage systems reviewed here are able
to provide all the services mentioned (some additional
capital expenditure may be incurred to give black start
capability). With their minimal startup costs and
flexibility, they are likely to be able to submit
competitive bids and secure contracts for provision of
ancillary services. The approximate financial calcula-
tions set out below assume revenue from ancillary
services of d4.50/kW/yr.
Such financial appraisals contrast markedly with the
situation in the real world where pumped storage has
been operating for many years, two Regenesys systems
have been ordered and large-scale high-speed flywheels
have found only niche applications. The IRR of 3.9%
for pumped hydro is unlikely to be acceptable to a
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D. Anderson, M. Leach / Energy Policy 32 (2004) 1603–1614 1609

Table 1 storage scheme is significantly increased (as peak prices

Comparative costs of and returns to three types of storage systems are typically higher) and thus there may already exist
Pumped hydro Flywheel Regenesys viable markets for the current technology. Thirdly, they
can be inserted in the sub-transmission and distribution
Charge and 1800 MW 100 MW 15 MW
generate networks such that, if widely deployed, they would lead
capacity to savings in the capital costs of transmission and
Storage 9000 MWh 5 MWh 120 MWh distribution, in the costs of peak-load generation; in
capacity addition, they would reduce losses in transmission and
Power/storage 0.2 W/Wh 20 W/Wh 0.13 W/Wh
distribution.
ratio
Efficiency 75% 92% 98%
Design life 35 years 15 years 20 years 3.2.4. Storage in the liberalized market
Capital cost d1,000,000,000 d23,000,000 d12,000,000 ‘‘Bulk storage brokers are envisioned as a key element
Annual d250,000 d100,000 d60,000
running costs
of a deregulated electricity marketplace. Hedging is the
Annual storage d45,000,000 d3,100,000 d435,000 primary application for storage; it is physical insurance
revenue to enable energy availability so as to meet contractual
Ancillary d8,100,000 d450,000 d67,500 power or energy commitments. Hedging also allows
services greater risk tolerance during negotiations about power
revenue
Annual d53,100,000 d3,550,000 d502,500
prices. Storage technology, such as compressed air and
revenue pumped hydro (especially with the addition of adjus-
Revenue d/ d29.50 d35.50 d37.50 table speed drives), is available to meet this need. Other
kW/yr technology options can also meet this need, albeit for
NPV @10% d490,300,000 d3,200,000 d7,700,000 smaller storage sizes. The key to extensive use of storage
discount
Internal rate of 3.9% 12.4% 1.6%
for hedging is cost and flexibility. The competition may
return well come from financial instruments for hedging rather
Required d58/kW/yr d31/kW/yr d98/kW/yr than from other technologies’’ (Schoenung et al., 1996).
revenue for
NPV=0
3.3. Comparing large-scale, long-term hydrogen storage
with shorter-term options

In the 1970s there was some pessimism that the

private investment but might be regarded as acceptable
for a public project. The IRR of 12.4% for flywheel
storage indicates that it might be a viable project for
private investment. With a discount rate of 10% only
the flywheel scheme returns a positive net present value.
However, it has a very low storage capacity in relation
to power capacity.
There are three reasons that may explain the decision
to construct pumped storage plants in the UK. Firstly,
the three pumped storage schemes in the UK were
constructed under public ownership, implying use of a
discount rate lower than the 10% used in this appraisal.
Secondly, they were constructed at a time when the
available source of peaking plant—oil-fuelled open cycle
gas turbine—was extremely expensive to operate,
implying effective storage revenues higher than exist at
present. Thirdly, the price assumptions underestimate
the differences in marginal costs between meeting peak
and off-peak demands.
There are a number of possible explanations for the
construction of the two Regenesys schemes against the
apparently poor financial prospects presented here.
Firstly, these are the first commercial plant, and costs
will decline significantly from the levels assumed here.
Secondly, in systems (as in California) where peak
demand is close to available capacity, the value of a
problem of long-term energy storage could not be solved
economically, because the economic case rested on the
frequency of the charge–discharge cycle.2 Thus, seasonal
storage and annual storage would not pay since the
facility might only be charged and drawn down once a
year. The issue was seen as follows. Let S be the storage
capacity of the device in question—a battery, flywheel,
capacitor, a cavern for compressed air, a reservoir for
pumped storage, and so forth. If n is the number of
charge–discharge cycles each year and (to simplify) we
assume that the storage is to full capacity on each cycle,
then the annual costs, C; of storage are given by
C ¼ aS þ bnS; ð1Þ
where a is the annuity rate times the capital costs per
unit of storage capacity (d/kWh say) and b is the fuel
and operating cost of putting energy into storage,
adjusted for round trip losses. The average cost per
kWh of the energy stored over the year is this quantity
divided by the total quantity (V) stored and discharged
over the year, V ¼ nS; i.e.
Average cost per kWh ¼ C=V ¼ a=nþb: ð2Þ
2
We should like to thank Jake Chapman for drawing the issue now
discussed to our attention.
 ARTICLE IN PRESS
1610 D. Anderson, M. Leach / Energy Policy 32 (2004) 1603–1614
The average cost thus declines directly with the
frequency of the charge discharge cycle, and only for
emergency supplies does investment make sense for
cases when n is small. This relationship applies to all of
the short-term storage technologies discussed earlier.
However, for the long-term (seasonal or longer)
storage of hydrogen in depleted gas reservoirs or deep
aquifers, the capital costs do not rise directly with the
storage capacity but only with the volume put into
storage. Some reservoirs are extra-ordinarily large—
sufficient for several years of storage—and the main
costs would be those of generating the hydrogen,
compression and of the pipelines incurred in accessing
the reservoir. So the average and total yearly costs
would be given by the product Vh; where h denotes the
average cost per unit volume of generating the hydrogen
and putting it into storage. In this case, the average cost
of storage per kWh is given by
C=V ¼ h
and is independent of the frequency of the charge–
discharge cycle.
While, with geological storage, the frequency of the
charge discharge cycle is not the critical variable, it is
evident that, so long as natural gas is abundant, it will
be difficult for the ‘hydrogen option’ to compete. The
pre-tax prices of natural gas in EU countries vary
roughly between 0.7 and 1.0 p/kWh for industrial
consumers.3 The costs of intermittent renewable energy
are currently 3 p/kWh, but are expected to decline to
around 2 p/kWh with investment. To this we need to
add the costs of electrolysis and compression, which in
the following section we estimate might be 1 p/kWh once
the industry is established, giving a total cost of 3 p/
kWh, which is three or more times the cost of natural
gas. Once again we can see that a storage technology
would be out-competed by the costs of fossil fuels, all
else constant.
4. The hydrogen option and new roles for electricity and
gas grids
Notwithstanding such calculations, there are several
reasons for revisiting the option of storing renewable
energy in the form of hydrogen. The first is the possible
emergence of the fuel cell as an economically promising
decentralised source of combined heat and power, for
which hydrogen would be the ideal fuel; it also offers
economies by eliminating the need for a reformer, saving
perhaps 30% on capital costs. Hydrogen is also
potentially an excellent fuel for combined-cycle power
stations, gas turbines and micro-turbines.
3
See Digest of UK Energy Statistics (2000).
The second is that deep cuts in carbon emissions
might be needed to address the problem of climate
change. The recent report of the Royal Commission
on Environmental Pollution (2000), for example, sug-
gested that the UK might need to reduce its carbon
emissions by 60% by 2050, relative to carbon emissions
in 1990. If this were to be the case, a resolution of the
intermittency problem would be crucial if renewable
energy were to make a major contribution to the
abatement of carbon emissions. Hydrogen production
from renewable energy would be among the most
important options.
A third reason might be energy security, since yearly
and even longer-term storage is technically feasible.
Fourth, innovations in hydrogen production such as
photo-electrolysis, may change relative costs of hydro-
gen and natural gas. Fifth, low-cost paths to hydrogen
production exist via the steam reforming of fossil fuels
and biomass. They have aroused much interest. In the
case of coal, the process yields a mix of hydrogen
and CO2 gases, from which the CO2 could be extracted
and used for enhanced coal-bed methane and oil
recovery on a non-net-CO2 emitting cycle.4 The
options of photo-electrolysis and coal-bed methane
production are beyond the scope of this paper, but they
do suggest that the cost estimates of the renewable-
energy hydrogen option, to which we now turn, present
an upper bounds estimate of the costs of the possibilities
ahead.
Hydrogen storage in depleted oil or gas reservoirs or
deep saline aquifers would also open up the possibility
of the seasonal storage of renewable energy—e.g. from
solar and other resources, when it is most abundant—
for use as and when needed year round. In this way,
electricity and gas grids would move from their present
function of
* energy distribution, to
* energy distribution, the harvesting of surpluses in
times when the energy is abundant, storage and
redistribution.
The other historical functions of the grids—to pool
reserve capacity, to transmit energy from regions where
it is most economically generated, to improve security of
supply, and to provide opportunities for scale economies
in energy supply—would of course remain in tact.
Table 2 provides estimates of the costs of electricity
and hydrogen gas supplies for a system based wholly on
renewable energy. With respect to electricity supplies, it
is assumed that renewable energy supplies approxi-
mately 50% of the energy demand directly; the
remaining demand, including all peak demand, is by
4
See Socolow (1997) for a review, and the recent reports of the IEA
greenhouse gas abatement programme: e.g IEA (2001) and ICCEPT
(2001).
 ARTICLE IN PRESS
D. Anderson, M. Leach / Energy Policy 32 (2004) 1603–1614 1611

Table 2
Prospective costs of electricity and hydrogen from a renewable energy-based system compared with costs of an energy system based wholly on natural gas

Component of cost Costs (p/kWh) Costs (p/kWh) of Remarks

comparator
Current Prospective

Average costs of intermittent renewable energy 3.0 2.0

Electrolysisa 1.0 0.5

Compression and storage in reservoirsb 1.5 0.5

Average costs of distributing hydrogenc:

Industrial consumers 0.3 0.3
Residential consumers 1.8 1.8

1. Total average costs of hydrogen Natural gas

Industrial consumers 5.8 3.3 0.7
Residential consumers 7.3 4.8 1.7

2. Marginal costs of electricityd: Hydrogen as fuel NG as fuel Combined cycle for off-
peak, gas turbines at peak
for NG and H fuels
HV supplies at peak 31.5 24.2 16.9
HV supplies at off-peak 8.3 5.0 1.3
LV supplies at peak 41.8 34.1 26.4
LV supplies at off-peak 9.8 6.3 3.4

3. Average costs of electricityd:

HV supplies 10.5 6.8 2.8
LV supplies 15.4 8.9 5.6

4. Current average costs of electricity in the UKe: Current UK fuel mix

HV supplies 3.6
LV supplies 8.5

5. Average costs of electricity if fuel cells were Hydrogen as fuel NG as fuel

used for distributed generationf:
In industry (current FC price of d2000/kW) 14.7 6.7 Future fuel cells incl. use
for CHP
In homes (current FC price) 17.5 8.5
In industry (future FC price of d500/kW) 5.8 2.4
In homes (future FC price) 7.9 3.8

An exchange rate of $1.5/d has been used when the source of cost data is quoted in dollars.
a
Electrolyser costs of d400/kW (today’s prices) and d200/kW (prospective prices), 80% efficiency, and 70% utilisation. From Joan Ogden (1999).
b
Electrolyser costs of d400/kW (today’s prices) and d200/kW (prospective prices), 80% efficiency, and 70% utilisation. Ogden quotes costs of $2–
6/GJ (0.5–2.0 p/kWh), although adds that for seasonal storage the costs are higher.
c
The costs of hydrogen transmission and distribution are taken to be 1.5 times the costs of distributing natural gas, based on discussions with
industry. The costs of distributing natural gas are taken to be approximately equal to the average prices paid for natural gas in the UK (1.7 and 0.7 p/
kWh for domestic and industrial consumers, respectively, shown in the second column of the following set of rows) less the costs of exploration,
production and transmission to the gas grid entry points, which from IEA data on border prices appear to average around 0.5 p/kWh. The UK price
data are taken from the DTI Digest of UK Energy Statistics (2000).
d
Electricity marginal costs assume d280/kW for a gas turbine generating at 36% efficiency (Source: Gas Turbine World, Vol. 19, 1999), plus losses
in T&D of 5% for HV distribution and 10% for LV distribution, and efficiency of 55% for a combined cycle power plant. T&D costs for HV supplies
are assumed to be d300/kW and d600/kW for T&D for LV supplies. A 10% discount rate is used. Peak load period is assumed to be spiky—500 h/
yr—and a capacity margin of 15% has been included in the costs of the peaking plant (raising the capital costs/kW at peak to d325/kW) to allow for
outages and demand uncertainties. The average costs are based on 500 h of peak load and 4760 h of off-peak load (60% load factor). The average
marginal costs at off-peak assume that roughly 2000 h of the generation comes directly from renewables, at a marginal cost shown in the first row,
and 2760 from hydrogen, at a cost corresponding to the costs of hydrogen shown in the two row groups 1. For natural gas the same assumptions are
made for the capital costs of generation, transmission and distribution, for power station efficiencies, for peak and off-peak hours, and for electrical
losses in transmission and distribution.
e
DTI Digest of UK Energy Statistics (2000).
f
Assuming a conversion efficiency of 55% in the near term and 70% in the long term, after making allowances for the efficiency gains possible in
some applications in home and industry for CHP The calculation is based on the costs of hydrogen supplies shown in the earlier rows, plus the
annualised costs of the fuel cell and taking the load factor to be 60%. We have added 30% to the capital costs of the fuel cell system when natural gas
is used, to allow for the costs of the reformer.
 ARTICLE IN PRESS
1612 D. Anderson, M. Leach / Energy Policy 32 (2004) 1603–1614
assumption met by hydrogen-fuelled power plant.5 For
comparison the costs of supplies from an electricity
system fuelled wholly by natural gas using ‘best
available technologies’ are also estimated; they provide
a lower bounds estimate of the costs of the fossil fuel
alternative with which the renewable energy-hydrogen
system would have to compete. Also shown for
comparison are the current average prices for electricity
and gas in the UK. The use of the first decimal place is
not intended to imply accuracy but to avoid the
accumulation of rounding errors; and we quote the first
decimal place in table and in the following remarks for
ease of reference and to reduce rounding errors, not to
imply precision. The calculations are approximate and
intended to be indicative only; they are readily reworked
under alternative assumptions.6
Let us begin with the estimates of prospective costs,
shown in the second and third columns. The main points
to emerge are the following:
1. The costs of hydrogen versus natural gas: Not
surprisingly, the costs of producing hydrogen from
renewable energy, putting it into storage, and
redistributing it on demand through a gas distribu-
tion system adapted to hydrogen would be appreci-
ably higher than the current prices of natural gas. The
costs would be roughly 4.5 times as high for
industrial consumers (3.2 versus 0.7 p/kWh of energy
delivered), and 2.5 times higher for domestic con-
sumers (4.2 versus 1.7 p/kWh). Against this, we
would have a fully secure energy system in which
the gas (hydrogen) supplies could be regenerated in
perpetuity.
2. The marginal and average costs of electricity from a
renewable energy-hydrogen system, as compared with a
natural gas system: The marginal costs of electricity at
both peak and off-peak and thus the average costs
would also all be higher in the renewable energy/
hydrogen system. In relative terms, however, the
effects are less, since the main component of cost is
not that of hydrogen, but the capital cost of
generation, transmission and distribution, which
account for over half of the total supply cost in the
case of the renewable energy-hydrogen system, and
three quarters in the case of the natural gas-fuelled
system. The average costs of supply would be 2.4
5
The percentage of demand that could be met directly by renewables
may be higher or lower than this, depending on the seasonal patterns
of the energy incident on the renewable generators, the mix of
generation (solar, wind and offshore devices, etc.) and the seasonal
patterns of demand. Repeating the calculations under alternative
assumptions shows that, as would expect, the higher the share of
renewable energy output that needs to be stored, the higher the average
costs of supply.
6
We have made the spreadsheet available on the ICCEPT website
for those who wish to explore alternative assumptions—see www.
iccept.ic.ac.uk.
times higher (6.8 versus 2.8 p/kWh in the above
calculations) for industrial consumers, and 1.6 times
higher (8.9 versus 5.6 p/kWh), assuming that future
natural gas prices will remain at today’s levels.
3. The future average costs of electricity from a renew-
able energy-hydrogen system compared with today’s
electricity prices: As noted, the costing for the natural
gas-fuelled electricity system is hypothetical, intended
to give a lower bounds indication of the costs with
which the renewable energy-hydrogen system would
have to compete. Today’s electricity prices are
significantly higher. For low-voltage (domestic) con-
sumers they would be comparable using central
generation technologies—around 8.9 p/kWh as com-
pared with today’s average tariffs of 8.5 p/kWh. For
industry the disparity would be greater. (See Row
groups 3 and 4.) However, further economies would
be achievable using fuel cells.7
4. The future average costs of electricity from a renew-
able energy-hydrogen system compared with today’s
electricity prices—but using fuel cells for distributed
combined heat and power systems: There are four
reasons why the use of fuel cells for distributed CHP
would reduce the prospective costs of electricity from
a renewable energy-hydrogen system. (a) The possi-
bilities for reductions in the capital costs of fuel cells
arising from progress in materials sciences, system
design and batch production.8 (b) The inherently high
efficiency of the fuel cell, particularly when operated
in the CHP mode. (c) The avoidance of electricity
losses in electricity transmission and distribution. (d)
Reduction or avoidance of the capital costs of
electricity transmission and distribution. While both
(c) and (d) would be offset somewhat—by roughly a
quarter based on the estimates available to us—by
the costs of and losses entailed in hydrogen transmis-
sion and distribution. The upshot would probably be
an electricity supply system whose costs of supply are
not far removed from those of today, possibly less.
(See row group 5, which also show the economic
potential if gas were the primary fuel. One can see
from such calculations why there is now significant
commercial interest in the prospects for decentralised
CHP based on the fuel cell.) The discussion above
focuses on stationary power uses of hydrogen and
7
Other forms of decentralised CHP such as micro-turbines would
likely yield similar economies, though have not been costed here.
8
The recent survey of learning curve coefficients for energy
technologies by McDonald and Shrattenholzer (2001) found that
learning rates—the percentage reduction in costs for each doubling of
the cumulative volume of production—average around 20% for
renewable energy technologies, 25% for the offshore oil and gas
industry, and were as high as 35% for the electricity industry
historically, over the period 1926–1970. Engineering analysis of the
technologies discussed above similarly consistently points to the
prospects for appreciable reductions in costs from today’s levels
(Ogden, 1999).
 ARTICLE IN PRESS
D. Anderson, M. Leach / Energy Policy 32 (2004) 1603–1614
fuel cells alone. There is much interest in parallel
applications for transport—which represents a very
large additional market—and this would serve to
strengthen the downward pressure on costs.
5. Conclusions
On the basis of cost data and experience so far, a
transition to a renewable energy-hydrogen system would
mean higher costs of gas (hydrogen) as a fuel source
compared with natural gas, but would be associated
with an electricity system having costs comparable to or
below those obtaining today. At the same time, it would
provide a solution to the ‘intermittency problem’ of
renewable energy and open up the possibility of a zero
carbon energy economy, should the need for this arise.
The implications for policy require a separate
analysis, but there are three aspects to policy that seem
to us merit investigation. First is the need for R&D and
demonstration projects. The options discussed above
have the advantage that they can be explored and
demonstrated on a relatively small scale. We would
emphasise the importance of the following:
* Experiments on the injection of hydrogen into gas
reservoirs, in which the hydrogen content of the
reservoirs and in the gas outflows would be mon-
itored over time to assess the retention capacity of the
reservoirs. The purpose of these experiments would
be to validate (or otherwise) the underlying hypoth-
esis on the prospects for seasonal and yearly storage
of hydrogen on a large scale.
* An R&D programme on hydrogen production,
distribution and use. This should include research
into novel methods of hydrogen production, such as
photo-electrolysis, which could fundamentally alter
the economic calculations discussed above, in favour
of the option we have been analysing.
* A series of commercial scale projects, in the range 10–
100 MW, in which hydrogen is generated from renew-
able energy sources, stored in a suitable small-scale
depleted gas field or other reservoir, and used for
electricity generation in say a combined-cycle, hydro-
gen-fired power plant. It is remarkable that, if we add
up the estimated capital costs of the component
technologies of the system described above—the costs
of renewable energy plant, electrolysis, compression
and storage, and electricity generation from hydro-
gen—per kW of ‘firm’ installed capacity they are less
than those of Sizewell B (the most recent nuclear
reactor installed in the UK). The running costs would
be appreciably lower. We are thus quite close to finding
an economic solution to the intermittency problem.
Second, it would be desirable to revisit current policies
with respect to energy and the environment, and the
1613
regulation of energy systems, to assess whether they
provide the optimal incentives for the new technologies
outlined above to be developed and used. Among other
things, this requires the development of stochastic simula-
tion models (to allow for the stochastic nature of demand
and supplies, and uncertainties in cost parameters) such
that we can better understand how such systems can be
optimally developed and regulated.9 Possibilities men-
tioned but not developed above is the production of
hydrogen from coal-bed methane and biomass, which are
appreciably less expensive than through electrolysis, and as
many have argued may offer a low-cost path for the
development of hydrogen infrastructure.
Third, and related to this, we need a system of tax
incentives to support the development of new technol-
ogies with prospects of yielding significant positive
externalities, and which encourages the exploration of
options.10 The introduction of carbon taxes or tradable
carbon permits would, as many have argued, provide a
necessary incentive for the development of low-carbon
technologies. But they need to be complemented by a
system of direct support for innovation through tax
credits, and public procurement and R&D programmes.
The preceding analyses are at this stage partial, as
application of a systems model to explore feedbacks (for
example, between storage activity and electricity prices)
and other dynamic effects are needed to better explore
the prospects for the developments discussed. We see
this as an exciting area for future model development
and application.
Acknowledgements
This paper is the outcome of two background papers
we wrote for the Cabinet Office (PIU) during the
preparation of the UK Energy Review. We should like
to thank Rob Gross for suggesting these papers and
discussing the topic with us, David Hart for discussions
of the hydrogen option, and Givanildo de Almeida for
several comments.
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Current methods of analysis based on the load duration curve are
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We discussed this topic in a recent series of Workshops on
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