Green Hydrogen Pathway

Cost economics 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 regarding 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 pathway in line with its national target of reducing carbon emissions by about 35 per cent from 2005 levels, by 2030.

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 an application standpoint, green hydrogen do­es have significant potential in industry sectors such as refineries, fertilisers, steel and mo­bility, 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, 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 approximately 10 tonne of CO2 for each tonne of grey hydrogen produced. By replacing grey hydrogen with green hy­drogen, the entire GHG emission from the SMR process, which contributes 20-25 per cent to the overall emissions from refi­nery processes, can be eliminated.

The current hydrogen demand in the co­untry is already about 6 mmt and is esti­ma­ted to double by 2030. The current de­mand can be categorised as bulk de­mand driven by refineries and petrochemicals, fertilisers/ammonia (contributing ap­proximately 99 per cent of the demand for hydrogen as feedstock); and distributed demand from chemicals (such as specialty chemicals, hydrogen peroxide), food processing, pharmaceuticals, float glass, etc. Going forward, a lot of the late­nt gro­wth is expected to come from the mobility and power sectors (fuel cell us­age) from 2025 onwards.

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

However, estimates (IRENA 2020) indicate that the falling costs of renewable el­ec­tricity, coupled with the falling cost of electrolysers, could potentially reduce the cost of producing green hydrogen to under $2 per kg in less than a decade. It is projected that the cost of electrolysers can decrease by 40 per cent in the short term and by 80 per cent in the long term owing to factors such as evolving technology, eq­uipment design, economies of scale, co­mmercialisation of technologies and establishment of domestic manufacturing capabilities. While the country has seen solar power tariffs as low as roughly 2.7 cents per kWh, natural gas prices have also increased to over $25 mmBtu. It is estimated that the cost of grey hydrogen, which is quite sensitive to the natural gas price, is expected to either be at similar levels or increase further in the coming decade. At a price of $1.5-$2 per kg, whi­ch is quite likely by the end of this de­cade, green hydrogen will become more than cost competitive with grey hydrogen, allo­wing it to make inroads into 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 commercialisation of hydrogen technologies (anion exchange membrane, polymer el­ectrolyte membrane, solid oxide electrolyser cell, etc.) and corresponding policies to support investments in production and consumption. The policy outlook has brightened with the announcement of the National Hydrogen Energy Mission in the Union Budget 2021, which will help es­tab­lish a road map 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. For ex­ample, the European Union has set a target of investing about 300 billion euros in green hydrogen production by 2030; the UK intends to scale up its electrolyser ma­­nu­facturing capacity to 300 MW per year by 2023 and to 1 GW per year by 2025; and the Nether­lands will enable co­untrywide hydrogen-based urban heating by 2030. India, too, needs to take 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 the available advantages – the gro­wing and affordable renewable energy supply; existing hydrogen consumption pathways in refineries and fertilisers; 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 in the form of mandatory blending/hydrogen purchase obligations; supply enablement via capex funding/renewable energy subsidy; and policy incentiv­es/subsidies for green hydrogen consum­ption; as well as mandating the scaling up of 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 the 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.

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