Strategies for harnessing surplus energy from small-scale hydropower in local energy communities: evidence from northern Italy

In the context of increasing renewable energy penetration and the growing challenge of managing non- programmable sources, hydropower remains a strategic asset for the energy transition. However, in decentralised systems such as local energy communities (LECs) or energy islands, surplus electricity cannot always be injected into the grid profitably or consumed immediately on-site, depending on the mix of local end-users. This study investigates a strategy for valorising surplus electricity through on- site green hydrogen production via water electrolysis, using the excess generation from a small-scale hydropower plant in northern Italy. A techno-economic methodology is applied, combining high- resolution energy analysis, the design of a proton exchange membrane (PEM) electrolyser system, levelized cost of hydrogen (LCOH) estimation, and net present value assessment under different feed- in tariff scenarios. Results indicate that the optimal PEM electrolyser capacity for the case study is 95 kW, requiring an additional 1 kW for hydrogen compression. This configuration produces 14,932 kg of green hydrogen annually, achieving an LCOH of €1.71/kg. The opportunity cost of electricity is excluded, as the energy used for electrolysis comes from surplus production with a marginal operational cost of €10/MWh, considered instead of the full market price. The analysis shows that a break-even feed-in tariff of €7.72/kg is needed to match revenues from electricity sales, while an incentive of only €4.20/kg is sufficient when hydrogen is sold at €5.00/kg. These thresholds are significantly lower than current equivalent incentives, highlighting the economic feasibility of the approach. The findings provide policymakers, LECs and energy islands with a practical decision- making framework to support the deployment of distributed green hydrogen systems, thereby enhancing renewable energy integration and utilisation.