Operational Volatility and Synergistic Value in Vertically Integrated Energy Systems

We examine the magnitude of synergistic effects in vertically integrated energy systems that arise when the external market for an intermediate input (electricity) is imperfect and the two subsystems are subject to operational volatility in terms of price and output fluctuations. The front part of our analysis develops a model for identifying when a vertically integrated energy system exhibits synergistic value. Specifically, we provide necessary and sufficient conditions for the value (NPV) of the integrated system to exceed the sum of the maximized values of the two subsystems on their own. We then apply this framework to current settings in Germany and Texas for systems that combine wind energy with Power-to-Gas (PtG) facilities that produce hydrogen. Depending on the attainable market prices for hydrogen attainable in particular segments, we find that synergistic values emerge in select scenarios. In the context of Texas, it turns out that neither electricity production from wind power nor hydrogen production from PtG facilities will be profitable on its own in the current market environment. Yet, provided the capacity of the two subsystems is sized optimally in relative terms, the attendant synergistic gain from a vertically integrated system more than compensates for the stand-alone losses of the subsystems.