Green Hydrogen Outlook

Cost economics is key to driving adoption

 

Manas Majumdar, Partner and Lead – Strategy & Transformation, Energy & Chemicals, KPMG

As the third decade of the 21st century begins, the world has been taken over by a sense of urgency on climate change. There is increased societal and market pressure on companies to either cease their investments or diversify away from carbon intensive fuels to clean technologies. India too is treading on the clean energy pathways in line with its national target of reducing carbon emissions by ~35% below 2005 levels, by 2030.

Now among various clean energy technologies, India is keenly exploring low‐carbon hydrogen as a key driver to support the country’s clean energy transition. From application standpoint, green hydrogen does have significant potential in industry sectors such as refineries, fertilizers, steel, mobility, etc., since it can be used as a feedstock replacement or a substitute for natural gas/ coking coal/ oil, as fuel. So, a transition to green hydrogen can help reduce greenhouse gas (GHG) emissions from various sectors where hydrogen (fossil fuel based) is already being used today, and also in areas where green hydrogen can be a substitute. For instance, the current demand for hydrogen in refineries is usually covered by grey hydrogen produced through steam methane reforming (SMR) of naphtha or natural gas, which produces ~10 tons of CO2 for each ton of grey hydrogen produced. By replacing grey hydrogen with green hydrogen, the entire GHG emissions from the SMR process, which contributes 20-25% to the overall emissions from refinery processes, can be saved.

The current hydrogen demand in the country is already ~6MMT and it is estimated to double to ~12MMT by 2030. The current hydrogen demand can be categorized as (i) bulk demand which is driven by refineries and petrochemicals, fertilizers/ammonia (contributes to ~99% of demand wherein hydrogen is used as feedstock) and (ii) distributed demand from chemicals (such as specialty chemicals, hydrogen peroxide), food processing, pharmaceuticals, float glass, etc. Going forward, lot of the latent growth will come from mobility and power sector (fuel cell usage) which is expected to start growing from 2025 onwards.

With such potential and promise, there are some barriers for green hydrogen adoption that need to be addressed, chief among them is economic viability vis-à-vis alternate fuels. Apart from the cost of green hydrogen being significantly higher than its competing fuels currently, there are other challenges like electrolyser and renewable energy capacity requirements, intermittency of renewable energy power and water availability for green hydrogen production (9-10kg of water for every kg of hydrogen) that need to be mitigated to ensure adoption on a wider scale in the country. If we look at the cost of producing green hydrogen, currently it ranges from USD 4-6 per kg1 , which is 2-3 times more than current grey hydrogen costs. The major cost drivers of green hydrogen are the cost of renewable electricity to power the electrolyser and the cost of electrolyser itself. This high cost for producing green hydrogen has resulted in slower adoption rates by the end-users.

However, estimates (IRENA 2020)2 indicate that falling costs of renewable electricity coupled with falling cost of electrolyser can potentially reduce the cost of producing green hydrogen to < USD 2 per kg in less than a decade. It is projected that cost of electrolyser can decrease from 40% in the short term to 80% in the long-term owing to factors such as evolving technology, equipment design, economies of scale, commercialization of technologies and establishment of domestic manufacturing capabilities. While country has seen solar power tariffs as low as ~2.7 cents/kWh, the natural gas prices have also increased to USD 25+ /MMBTU. It is estimated that the cost of grey hydrogen which is quite sensitive to natural gas price is expected to either be at similar levels or increase further going forward in the decade. At a price of USD 1.5-2 per kg, which is quite likely by end of this decade, green hydrogen will become more than cost-competitive with grey hydrogen, allowing it to make inroads across various end-use segments.

It is worth noting that such an outcome is subject to developments in other areas. Future cost reductions in green hydrogen, will depend on rapid scaling up and commercialization of hydrogen technologies (anion exchange membrane/ polymer electrolyte membrane / solid oxide electrolyzer cell etc.) and corresponding policies to support investments in production and consumption. The policy outlook has brightened with the announcement of National Hydrogen Energy Mission in Union Budget 2021, which will help establish a roadmap for hydrogen in India’s energy ecosystem and set ambitious targets to drive the development of the nascent hydrogen industry. Globally, many countries have already announced aggressive green hydrogen targets such as – European Union has set a target of investing ~€300 billion in green hydrogen production by 2030, UK intends to scale up its electrolyser manufacturing capacity to 300MW/year by 2023 and to 1GW/year by 2025, Netherlands to enable country-wide hydrogen based urban heating by 2030. India too needs to have focused and specific actions to overcome the cost barriers, scale up infrastructure development, and accelerate the transition to a hydrogen economy.

Overall, India is attractively poised to become a green hydrogen economy, it just needs the right push to ascend. And this policy push needs to leverage and coordinate among the available advantages such as – its growing and affordable renewable energy supply, existing hydrogen consumption pathways in refineries, fertilizers and emerging demand segments in mobility, steel, power, etc. To make this hydrogen economy a reality in India, it would require supply and demand side support as well as technology development support – primarily through setting hydrogen adoption targets through mandatory blending/hydrogen purchase obligation (HPO), supply enablement through capex funding/ renewable energy subsidy, and policy incentives/subsidies for green hydrogen consumption as well as requiring scaling up on infrastructure for renewable energy capacity, broader transmission infrastructure and electrolyser technology. Looking further ahead, India can also look to achieve the goal of becoming the world’s biggest green hydrogen hub, if it develops entire hydrogen value chain (including storage, transportation, and distribution) to support the transition to green hydrogen and provide opportunities for global hydrogen trade and supply to energy-intensive markets.

 

1 https://irena.org//media/Files/IRENA/Agency/Publication/2020/Nov/IRENA_Green_Hydrogen_breakthrough_202 1.pdf

2 Renewable Energy Statistics 2020, by International Renewable Energy Agency (IRENA)

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