A Real Options Approach for Valuing Storage Contracts of Hydrogen–Methane Gas Blends

Abstract

[Abstract]: Decarbonization and growth of variable renewable generation have increased interest in hydrogen as a low-carbon energy carrier. Underground hydrogen storage in geological formations is one of the few scalable options for large-capacity energy storage, and retrofitting existing natural gas infrastructure to store methane–hydrogen blends offers a practical transition pathway. Yet valuing such storage contracts is difficult because hydrogen markets remain immature. This paper develops a real-options framework for methane–hydrogen storage contracts with a prescribed hydrogen energy fraction. Extending the Hamilton–Jacobi–Bellman approach used for natural gas storage, the model incorporates stochastic hydrogen prices and blend-specific operational constraints, including reduced effective energy capacity. Contract values and optimal operating policies are computed by solving a multi-factor HJB equation with a semi-implicit finite-difference scheme. The framework is verified against natural gas benchmarks and assessed by Monte Carlo cash-flow evaluation. Results show how value and policies depend on blend ratio, volatility, capacity, and contract duration.