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To jumpstart hydrogen economy, China needs more than subsidies for fuel-cell vehicles

29 November 2021 Max Tingyao Lin

China is seeking to kickstart its hydrogen economy by subsidizing fuel-cell vehicles and their infrastructure in three major city clusters. But industry experts said Beijing has to refine policy instruments and stimulate more investment to put the country on a sustainable decarbonization pathway.

To reach an official target of carbon neutrality by 2060, the world's largest GHG-emitting nation has been aiming to replace fossil fuels with hydrogen in parts of its economy.

In September 2020, Chinese policymakers said they would provide subsidies for the value chains of automobiles powered by hydrogen fuel cells around eligible city clusters. Three metropolitan areas were selected earlier this year: Beijing, Shanghai, and Guangdong.

Each of them can receive up to ¥1.5 billion ($235 million) for fuel-cell vehicles and ¥200 million for hydrogen supply during a four-year demonstration period. Shanghai unveiled a detailed grant scheme in early November, while others are expected to follow suit soon.

Observers believe the scheme is targeting fuel-cell heavy trucks with a gross vehicle weight of 31 metric tons (mt) or more. Battery-driven electrical passenger cars and light trucks already enjoy high market penetration because their charging network is well under development.

"I expect the main market for hydrogen or hydrogen-based liquid fuels on the transport sector to be in freight, other heavy road transportation…rather than light passenger vehicles where electrification is the more competitive solution," said Lauri Myllyvirta, lead analyst at the Centre for Research on Energy and Clean Air, a think tank.

"Freight makes up more than half of total transport fuel demand in China and many other countries, so this is a major market," he added.

While the steelmaking, cement, aluminum, and petrochemical sectors can all make great progress in decarbonization by replacing fossil fuels use with clean hydrogen, trucks provide another entry into this fledgling market. Fuel-cell trucks are already in the market, and the infrastructure costs for refueling them are relatively low compared with other hard-to-abate sectors.

China's previous subsidy scheme focused on the sales of fuel-cell vehicles, while the new one will also cover technology development, fueling stations, and operational grants.

Data from chinatrucks.com, a Beijing-based business information provider, showed total sales of fuel-cell heavy trucks reached 435 units in January-October. German consultancy Roland Berger said sales could exceed 50,000 units in 2030 if the fueling infrastructure is more developed and vehicle costs decrease.

Chunping Xie, a climate change policy fellow at the London School of Economics, said the subsidy scheme is important in pushing for hydrogen business in China. The program is "an attempt to establish an industry chain and promote fuel-cell vehicle development," she added.

Others suggested that while subsidies could be justifiable in initial phases, the Chinese government should find better means to create a hydrogen market in the long term.

"Subsidies—which are not fiscally sustainable—should be limited in scope and duration to stimulate demand in early phases," non-profit International Council on Clean Transportation said in a research report. "Policies following the 'polluter pays' principle can generate the revenue needed to fund incentive programs in the long term."

Jinmiao Xu and Darshak Mehta, two energy specialists at Asian Development Bank, said Beijing should view direct subsidies as "an instrument of last resort."

"They may be useful for the very initial years when one really needs to kickstart the initiative. While hydrogen may be perceived to be in that stage, the fact is that it is an area of very high interest commercially," the bankers told Net-Zero Business Daily in an email.

"The government can be a good facilitator with appropriate policies and support through instruments like green/ESG [environmental, social and governance] bonds. They can be more supportive through encouragement to the banking sector to give hydrogen-related loans preferential treatment."

With most subsidies routed to fuel-cell vehicles rather than hydrogen supply, IHS Markit Senior Research Analyst Megan Jenkins expressed concerns over the scheme's decarbonization effects.

"City clusters may choose to focus on building out hydrogen refueling networks that source cheaper hydrogen supply over green hydrogen," Jenkins said.

China produced 33.4 million mt of hydrogen in 2019, nearly all of which from fossil fuels, according to the China Hydrogen Alliance. The trade group estimated the gray hydrogen's production costs are much lower than green hydrogen (produced from renewable energy) and blue hydrogen (from fossil fuels with carbon capture and storage technology).

Currently, the country operates 120-MW electrolyzers to produce green hydrogen when demonstration-scale projects are not taken into account.

In October, an IHS Markit analysis found green hydrogen projects with specific details on renewable capacity amounted to more than 14GW in China. 430 MW of them—which can produce 60,000-70,000 mt in total per year—are due to come online in 2023, while the timelines for the rest are unknown.

Hydrogen giant turns clean?

Among Chinese companies, state-owned Sinopec Group has shown the strongest ambition in leading the country's push into hydrogen.

The energy major is already China's largest hydrogen producer with an annual output exceeding 3.9 million mt, but its output is mainly from fossil fuels and used in petrochemical and oil-refining processes.

Earlier this year, Sinopec announced it plans to invest more than ¥30 billion ($4.6 billion) for hydrogen refueling stations, production and logistic facilities, and associated research and development in 2021-2025.

The company is aiming to increase its installed solar and wind power capacity by 2 GW each in the same period, which will help to support green hydrogen production capacity of over 1 million mt by 2026. Sinopec plans to develop 1,000 refueling points in the five years, having just 27 at end-2020.

Parts of the investment program are expected to be eligible for government subsidies. For others, analysts believe Sinopec can easily secure finance from the capital market with its status as a state major.

"If state-owned firms move into zero-carbon industrial processes and hydrogen production as forcefully as I would expect, access to finance from state-owned banks is unlikely to be an issue," Myllyvirta said.

Observers said the company can leverage on its fuel retail network—China's largest—and experience in handling hydrogen. Sinopec also wants its CO2 emissions to peak by 2030 before a national deadline, so part of the clean hydrogen output is expected to be used to decarbonize its own operations.

The company plans to commission its first green hydrogen project with an annual output of 10,000 mt in Inner Mongolia next year. Sinopec did not disclose any production target for blue hydrogen, but it aims to commission a carbon capture, utilization, and storage project with a capacity of 1 million mt per year by yearend. This is designed to seize CO2 from a coal-based hydrogen plant at its Qilu facility in Shandong.

Erica Downs, a senior research scholar at Columbia University, suggested that Sinopec can still face some roadblocks despite being well positioned to develop clean hydrogen business. Those include bottlenecks in high-end materials, equipment manufacturing, and core technologies such as liquid hydrogen storage, Downs said.

A national roadmap

Eyeing the potential decarbonization effects of blue and green hydrogen, more than 30 countries have published national roadmaps to develop a market for the fuel in the coming decades.

In China, some provincial governments—including Sichuan and Hebei—have also published hydrogen development plans in 2021-2025.

But the central government has yet to unveil a national hydrogen strategy, despite having stressed the importance of the fuel in its decarbonization pathway.

Xie said the National Energy Administration or the National Development and Reform Commission should soon establish a roadmap, given China's goal to reach peak CO2 emissions by 2030 and achieve carbon neutrality by 2060.

"A coherent and coordinated framework at the national level would be needed for the development of hydrogen, covering its generation, transportation and use," Xie added. "Though with great uncertainties, hydrogen is one of a handful of new solutions to reduce carbon emissions and can potentially play a crucial role in the transition to a net-zero carbon economy."

China can often allow local governments to experiment with different policy measures before setting out a national strategy, according to Jenkins. "[It's] most likely a matter of time before a hydrogen-focused document comes out," she said.

Analysts widely believe the country needs to raise output of clean hydrogen and increase its usage across the sectors to reach its climate goal.

To achieve net-zero CO2 emissions in 2060, the International Energy Agency said China must cut annual direct emissions from hydrogen production by 300 mt over the next four decades. This would require a nearly complete shift from gray to green and blue hydrogen.

The energy watchdog expects Chinese demand for clean hydrogen and its derivatives to reach 90 mt by 2060 in this scenario. Of them, more than 55% would be consumed by the industrial and transportation sectors.

For the potential to be realized, industry experts said the country needs much more investment in the supply chain than currently announced figures. The Hydrogen Council recently estimated that the funding gap stands at $160 billion for China to create a market of 20 mt clean hydrogen by 2030.

The government has admitted that China faces challenges in technologies, logistics, large-scale production, and research and development when developing a hydrogen economy.

"These issues are recognized, and I would expect a lot more investment [going forward]," Myllyvirta said.

Posted 29 November 2021 by Max Tingyao Lin, Principal Journalist, Climate and Sustainability

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