Build more and regret less: Oversizing H2 and CCS pipeline systems under uncertainty

Abstract

The large-scale deployments of Carbon Capture and Storage (CCS) and hydrogen (H2) require the installation of costly carbon dioxide (CO2) and H2 pipeline infrastructures. As the future demands for CO2 and H2 pipeline transportation are expected to increase substantially, this paper examines the economics of installing adequately oversized infrastructures. We analytically show that the underlying engineering equations de facto define Cobb-Douglas production functions for both fluids. We then use these production functions to determine the cost-minimizing decisions of a pipeline operator and infer the optimal ratio of oversizing. From a policymaking perspective, this ratio indicates whether the level of oversizing envisioned by the operator is consistent with its expectations of future demand (and thus, by contrast, whether it is attempting to overcapitalize and exploit a regulatory flaw). As the anticipations of the operator may fail to materialize, we opt for a minimax regret perspective and compare the performances of the operator's investment decisions under alternative demand trajectories. Our study shows that the conservative recommendation to build for the proven demand only is systematically regret-maximizing. Consequently, an infrastructure push would likely contribute to overcoming the chicken and egg problem and thus support the large-scale deployment of these emerging technologies.