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India takes initials steps towards hydrogen economy by cutting production costs

04 March 2022 Max Tingyao Lin

India has started to flesh out its national blueprint to create a hydrogen economy with a series of policy incentives that industry pundits believe can help lower production costs in the coming decade.

Last month, India's Ministry of Power unveiled a national target of producing 5 million metric tons (mt)/year of hydrogen from biomass or renewable electricity by 2030 as part of the country's decarbonization efforts.

Producers will be able to enjoy lower electricity costs as well as better access to land and logistics infrastructure, according to the ministry's Green Hydrogen Policy. The incentives will also apply to plants that convert green hydrogen into ammonia.

Deepak Yadav, a program associate at Delhi-based thinktank Council on Energy, Environment and Water (CEEW), estimated some measures related to transmission charges alone can reduce the production cost of green hydrogen in Uttar Pradesh—India's most populous state—from $4.10/kg to $3.20/kg, compared with $1.50/kg for gray hydrogen.

"The incentives offered by the Power Ministry are the first steps in the right direction," Yadav told Net-Zero Business Daily by S&P Global Commodity Insights.

State-owned Indian Oil Corp. believes that green hydrogen's production cost could fall from $5/kg now to below $2/kg over the next five to six years, presenting an even more optimistic view due to the government's policy.

Modi's push

India, the world's third-largest GHG emitter, has been seeking to hike green hydrogen output in its fight against climate change.

In the Union Budget for fiscal year 2021-2022, India's central government allocated Rs 25 crore ($3.29 million) for the research and development of hydrogen energy to kickstart a shift to the low-emissions fuel.

Indian Prime Minister announced the National Hydrogen Mission on the Independence Day last August, stating the country's ambition to become a green hydrogen hub.

During the COP26 summit in Glasgow last November, Modi said India will aim to achieve net-zero emissions by 2070 and raised the target share for renewables in the country's power mix from 40% to 50% by 2030. The government wants to have 500 GW of installed non-fossil generation capacity by 2030, some of which can be used for green hydrogen production and some for meeting the energy needs of a growing population.

The recently announced Green Hydrogen Policy centered around the power market: Producers will receive a 25-year waiver for interstate transmission charges, be granted priority when seeking connection to the grid, and get open access within 15 days of an application to the most competitive renewable power on offer.

Analysts said these measures could allow more hydrogen producers to tap into expanding renewable energy supply.

"Waiver of interstate transmission charges would allow states with lower renewable potential or progress to build green hydrogen production facilities and power them with low-cost renewable power through long-term power purchase agreements," said Kashish Shah, an energy analyst at the Institute for Energy Economics and Financial Analysis (IEEFA).

"The power cost is roughly one-fourth of the overall cost of green hydrogen production. Low-cost renewable power will be key to bringing down the production cost of green hydrogen," he added.

Moreover, power distributors and green hydrogen producers can count the usage of renewable energy towards their renewable purchase obligations. And producers would be allowed to bank unconsumed electricity for up to 30 days.

Producers will also have access to land in industrial parks for renewables and can set up logistics facilities at ports for potential export opportunities. India's Ministry of New and Renewable Energy will establish a single clearance window for the production, storage, transportation, and distribution of green hydrogen and ammonia.

Domestic capacity

Meanwhile, Indian energy firms are investing in electrolyzers powered by renewables to produce green hydrogen.

ACME Solar, the first mover, has commissioned a 3.5-MW pilot electrolysis project in Rajasthan. Indian Oil and NTPC, another state-owned player, both plan to build electrolyzers in the coming years.

In the private sector, Adani and JSW both said they will enter the fledgling sector. Separately, Reliance Industries has provided arguably the most detailed proposal: India's largest publicly traded company by market capitalization wants to build 100 GW of solar capacity by 2030 and plans to invest Rs 595,500 crore ($80 billion) in renewable projects including hydrogen and manufacturing capacity for electrolyzers in Gujarat.

Some experts believe the government should promote local manufacturing of renewable equipment and electrolyzers as part of its Atmanirbhar Bharat (Self-reliant India) strategy, which has so far been applied to the solar sector.

According to CEEW's analysis, India will need at least 40 GW of electrolyzers and 100 GW in renewable generation capacity by 2030 to meet the production target of 5 million mt/year. Yadav estimates this would require $103 billion in investments at today's prices.

"If these electrolyzers are made indigenously…[and] all components of the solar panels and wind turbines are made in India, then the entire economic value can materialize in India," he said.

"The green hydrogen economy is still at a very early stage of development, and India could partake in the global race for green hydrogen by developing a local manufacturing and production value chain to strengthen its energy security," Shah added.

Demand triggers

With the current hydrogen development framework focusing on the producers, analysts widely expect the government to design more policy instruments to promote green hydrogen demand later on.

This could come as a carrot-and-stick approach as green hydrogen is expected to be more expensive than gray hydrogen initially: Some industries could be required to use green hydrogen while receiving subsidies for their consumption, analysts said.

"The policies and incentives need to evolve rapidly to support demand creation for green hydrogen via stricter mandates and cost reduction by providing capital incentives," said S&P Global Commodity Insight's Ashish Singla, ENR's associate director for climate and sustainability.

According to ENR estimates, demand for hydrogen in India is about 6 mt/year and comes mainly from industrial sectors such as fertilizers and refineries. Singla said these two sectors are likely to see the highest growth in consumption as green hydrogen policy gets implemented.

Yadav suggested the government could initially impose mandates on blending green hydrogen in refineries, fertilizer plants, and natural gas pipeline. This could offer demand visibility for producers, which are in turn expected to expand output and reduce prices.

"As the cost of hydrogen decreases, steel mills and the transport sector could also see some demand pickup," he said. "In addition to these, green hydrogen can be further processed to produce derivatives like ammonia for marine applications and sustainable aviation fuel."

Yadav sees the hydrogen development as part of Modi's ambition in transforming India into an energy-independent nation by 2047.

"In the short-to-medium terms, there would be a marginal increase in the price of commodities… However, in the long-run this would gradually decrease our imports dependency and go a long way in making us energy-independent," he said.

Posted 04 March 2022 by Max Tingyao Lin, Principal Journalist, Climate and Sustainability

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.


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