Flexible Use of Green Hydrogen: An Application of the Option to Switch Between Hydrogen and Ammonia in Brazil's Renewable Energy

Air pollution and global warming pose urgent challenges that require the decarbonization of key sectors of the economy. Brazil, a leader in electricity production from renewable sources, can use part of this energy to produce green hydrogen, offering an innovative solution to environmental problems. This study uses a real option approach to evaluate a hypothetical investment in an electrolyser and an ammonia synthesis plant to exploit the flexibility of hydrogen in being able to be used in different ways by different sectors. In particular, the analysis considers a switch option which gives to the investor the possibility to choose, period by period, when to produce green hydrogen and to which sector to sell it, and when to convert it into green ammonia, with the aim of maximizing the final cash flows. The value of the option is calculated comparing the net present value of the investment with the base case of selling electricity on the free market, subject to high price volatility and therefore high probability of loss. Preliminary results, obtained with a simplified model, indicate that the switch option increases return of the investment, allowing to choose what to produce and sell based on market conditions.