Locational Marginal Pricing of Energy in Pipeline Transport of Natural Gas and Hydrogen with Carbon Offset Incentives

Abstract: We propose an optimization formulation for locational pricing of energy transported through a pipeline network that carries mixtures of natural gas and hydrogen from distributed sources to consumers. The objective includes the economic value provided by the pipeline to consumers of energy and suppliers of natural gas and green hydrogen, as well as incentives to lower carbon emissions by consuming the latter instead of the former. The optimization is subject to the physics of gas flow and mixing in the pipeline network as well as engineering limits. In addition to formulating this mathematical program, we synthesize the Lagrangian and derive analytical expressions for the dual variables. We propose that the dual solution can be used to derive locational marginal prices of natural gas, hydrogen, and energy, as well as the decarbonization premium paid by consumers that receive hydrogen. We derive several properties of solutions obtained using the proposed market mechanism, and demonstrate them using case studies for standard 8-node and 40-node pipeline test networks. Finally, we show that optimization-based analysis of the type proposed here is critical for making sound decisions about economic policy and infrastructure expansion for blending green hydrogen into existing natural gas pipelines.