As the world is grappling with the urgent need to combat climate change and quickly transition to cleaner energy sources, green hydrogen is emerging as a promising solution. India, one of the largest energy consumers and greenhouse gas emitters, has recognised the immense potential of green hydrogen in decarbonising its economy. The Indian government has set ambitious targets and launched policies such as the National Green Hydrogen Mission (NGHM) to promote the production and usage of green hydrogen. However, financing remains a critical challenge in scaling up green hydrogen initiatives in the country. A recent report by the Clean Finance Leadership Initiative and the Council on Energy, Environment and Water dives into the current state of green hydrogen financing in India, challenges faced, and policy considerations and innovative financing solutions needed to unlock the potential of this clean energy source. Renewable Watch provides key insights from the report…
Current landscape
India’s current hydrogen demand is primarily met through grey hydrogen, produced from natural gas, which accounts for nearly 6 per cent of the global consumption. The fertiliser and refining industries are major consumers, together accounting for 98 per cent of the domestic grey hydrogen production. However, with the growing emphasis on decarbonisation, India aims to transition to green hydrogen produced through renewable energy.
The Indian government has set a target of achieving a green hydrogen production capacity of at least 5 million tonnes per annum (mtpa) by 2030 under the NGHM. To meet this target, the government estimates an investment of over $100 billion and an addition of around 125 GW of renewable energy capacity. The NGHM adopts a two-phase approach, focusing on creating sustainable demand in the first phase (FY 2023-26) and enabling deep decarbonisation of the economy in the second phase (FY 2026-30).
Challenges in financing green hydrogen projects
Despite the government’s supportive policies and ambitious targets, financing green hydrogen projects in India faces several challenges as given below.
High production costs: The current cost of green hydrogen production in India ranges from $3.5 to $5 per kg, significantly higher than the break even costs of less than $2 per kg required to replace conventional fuels in existing sectors.
Lack of enabling infrastructure: The absence of a robust distribution and storage infrastructure for green hydrogen creates commercial uncertainty for project developers and financiers.
High financing costs: Private investments in capital-intensive green hydrogen projects in India carry a high capital cost owing to currency risks, macroeconomic volatility and the nascent stage of the sector.
Limited availability of concessional capital: Development finance institutions have been cautious in providing concessional capital at scale for green hydrogen
projects due to the sector’s early stage of development.
Policy considerations for reducing green hydrogen costs
To address these challenges and reduce the cost of green hydrogen production, the report suggests several policy considerations. One, waiving power banking charges and open access charges to reduce the renewable energy cost for green hydrogen projects. Two, reducing goods and services tax (GST) on renewable energy components and electrolysers used in green hydrogen production. Three, providing low-cost green debt at rates commensurate with other green bonds or loans to reduce the weighted average cost of capital for green hydrogen projects. Four, increasing the allocation for research and development to reduce dependence on critical raw materials and promote indigenous manufacturing.
Catalysing sustainable demand for green hydrogen
Creating a sustainable demand for green hydrogen is crucial for this sector’s growth. The report recommends the following measures to stimulate demand:
- Stipulating green hydrogen purchase obligations (HPOs) for domestic industries, starting with the refining and non-urea fertiliser sectors and gradually expanding to other sectors as costs decrease.
- Facilitating a compliance carbon market with allowances and carbon pricing aligned with Paris the Agreement’s goals to incentivise the transition to green hydrogen.
- Providing financial assistance to the fertiliser industry for consuming green hydrogen by allocating a portion of the subsidy savings from reduced chemical fertiliser consumption.
- Promoting exports of green hydrogen and its derivatives by prioritising infrastructure and administrative support for export-oriented units and establishing bilateral and multilateral agreements to facilitate trade.
Innovative financing solutions
Apart from policy interventions, innovative financing solutions from private sector financial institutions, developers and international organisations are essential to scale up green hydrogen investments in India.
Going forward, standardisation of medium-term offtake agreements for green hydrogen, similar to bankable power purchase agreements in the renewable energy sector, can provide revenue certainty for project developers. Also, mitigation of offtake risks by designing projects with the flexibility to sell excess renewable power to the grid as an alternative revenue stream will be key. In addition, management of currency risks by developing hedging products in collaboration with multilateral development banks and structuring contracts in dollars rather than rupees should be done. Moreover, with the use of concessional capital, guarantees and viability gap funding mechanisms, the capital cost of green hydrogen projects should be lowered, in a bid to make Indian green hydrogen production competitive in global markets. Further, there should be more investments in project preparation and capacity building to bring more projects into the pipeline and enhance the ability of financial institutions to evaluate green hydrogen projects.
Conclusion
Green hydrogen holds immense potential for India to decarbonise its economy, reduce dependence on fossil fuel imports and emerge as a global leader in clean energy. However, financing remains a critical bottleneck in scaling up green hydrogen initiatives in the country. By implementing policy considerations and innovative financing solutions discussed above, India can unlock the necessary investments to achieve its ambitious green hydrogen targets.
The government’s supportive policies provide a strong foundation for the sector’s growth. However, a concerted effort from all stakeholders, including policymakers, financial institutions, developers and international organisations, is required to address challenges and create an enabling environment for green hydrogen financing.
By reducing production costs, catalysing sustainable demand, leveraging critical enablers, and deploying innovative financing solutions, India can attract the necessary investments to build a thriving green hydrogen ecosystem. This will not only contribute to the country’s decarbonisation goals but also create new economic opportunities, generate employment, and position the country as a global hub for green hydrogen production and exports.
As the world transitions to a low-carbon future, green hydrogen will play a crucial role in achieving the global climate goals. By unlocking the potential of green hydrogen financing, India can lead the way in this clean energy revolution and create a sustainable and prosperous future for its citizens
