Funds for Growth: Addressing the barriers in green hydrogen project development

Green hydrogen is attracting a lot of interest in India with impressive targets announced and many projects in the pipeline. The government has even launched a dedicated National Green Hydrogen Mission to promote the uptake of green hydrogen at a pan-India level and create an export hub. This mission targets at least 5 million metric tonnes per annum (mmtpa) of annual green hydrogen production by 2030, with a further potential to reach 10 mmtpa. This is a big undertaking especially since there is almost negligible quantity of green hydrogen produced in the country and the market ecosystem is still in its nascent stages.

Meanwhile, a total budget outlay of Rs 197,440 million has been allocated under the National Green Hydrogen Mission to promote large-scale uptake of green hydrogen in India. This comprises an allocation of Rs 174,990 million for the Strategic Interventions for Green Hydrogen Transition Programme (SIGHT), Rs 14,660 million for pilot projects, Rs 400 million for R&D, and Rs 388 million towards other components. Further, support will be provided for pilot projects and green hydrogen hubs will be developed. A green hydrogen policy has also been introduced which has many provisions for green hydrogen and green ammonia manufacturers, including the waiver of interstate transmission charges till June 2025, priority for grid connectivity, grant of open access, energy banking and renewable purchase obligation benefits.

While all these initiatives do encourage developers and investors, a key factor that will decide the future of green hydrogen is its cost per unit, which is quite high when compared to grey hydrogen. According to the International Energy Agency, the current green hydrogen production costs of $3-8/kg will fall to $1.3-4.5/kg in 2030 and $1.0-3.0/kg by 2050 at a global level. The cost of renewable power and the price of electrolysers are the main determinants of the cost of green hydrogen. Already, the government has many schemes in place to promote renewables and India has one of the lowest renewable energy costs worldwide. For green hydrogen, however, it is vital to have affordable cost of round-the-clock renewables to run green hydrogen electrolysers. Regarding electrolysers, a production-linked incentive scheme is planned to incentivise domestic manufacturing of electrolysers, and this is expected to help bring down costs. The International Renewable Energy Agency also estimates that globally the cost of electrolysers will decrease by 40 per cent in the short term and by 80 per cent in the long term owing to evolving technology, economies of scale, and increasing domestic manufacturing capabilities of nations.

Another important criterion for green hydrogen projects which decides the bankability of green hydrogen projects is that the entire value chain needs to be considered – the renewable energy project, electrolysis and green hydrogen generation, and finally storage, transport and offtake. Currently, there is a severe gap in terms of offtake arrangements for green hydrogen and its derivatives owing to the difference in pricing mechanisms of green energy and oil and gas and the high costs of green hydrogen. Storage and transport of green hydrogen over long distances is another consideration for financiers. Thus, many green hydrogen projects are being planned in areas that are close to industrial clusters as well as ports to supply green hydrogen to industries in hard-to-abate sectors and export wherever possible with minimal logistical issues. Since water is another key requirement for green hydrogen projects, many of these plants are being built in regions with abundant water bodies.

Renewable energy projects and other infrastructure projects have often suffered due to land constraints, timely approvals, contract sanctity and specifically in the case of renewables, inadequate transmission infrastructure as well. Thus, adequate planning needs to be done to ensure that the same issues do not plague the green hydrogen space as well. Moreover, development of green hydrogen segment will need coordination between various government departments and agencies, and thus, a clear mechanism needs to evolve regarding permits required for green hydrogen projects. All these factors will ultimately impact project costs and financing, and the financial viability of green hydrogen projects in India.

As the green hydrogen market is in the early stages of development, most financing agencies are still analysing and exploring the potential risks with respect to green hydrogen projects. This will surely change as the industry matures. In the early days, most experts agree that green ammonia, which is a more established technology when compared to green hydrogen, will garner more interest from financiers. Further, it is widely believed that some initial support will be required from the government to improve financial viability of projects. The proposed PLI incentives, waiver of various transmission charges and banking facilities for renewable energy are a welcome step in this regard. Like any other new sector, the need for government support will reduce as the industry matures. Finally, long-term large offtake contracts and demand creation are vital to address the financing risks and enable the promotion of green hydrogen market in the country.