Can green hydrogen offer cost competitive replacement?

Fossil fuels consumption for energy has been significantly increasing over the last fifty years across the world. In spite of the recent escalating gas and oil prices due to Russia-Ukraine conflict, the demand for these fuels is not dying down. However, keeping in mind the evil effects of the fossil fuels on the climate conditions, the world leaders have agreed to phase down their usage and to shift towards alternative fuels to mitigate spiraling carbon emissions. Several nations have put deadlines for this energy transition, and a majority of them have been investing heavily on green hydrogen production plants.

India has committed to reach netzero by 2070, and has announced numerous measures to achieve it. In February 2022, India had launched the Green Hydrogen Policy aiming at boosting the domestic production of green hydrogen to 5 MTPA by 2030, half of the EU’s target of 10 MTPA, and making India an export hub for the energy source. Big industrial houses like Reliance Industries, Adani Group, L&T-Renew Power and several PSUs like NTPC, IOC, and HPCL are planning big investments in the sector.

As part of the energy transition, Indian government could soon announce an incentive program worth $2.2 billion to help reduce the production of cost of green hydrogen in the country.

But now some questions are raising whether green hydrogen can really offer cost competitive alternative to fossil fuels?

Cost comparison between hydrogen and fossil fuels

India, the world’s third biggest oil consuming and importing nation, spent $119.2 billion in 2021-22 (April 2021 to March 2022), up from $62.2 billion in the previous fiscal year, according to data from the oil ministry’s Petroleum Planning & Analysis Cell (PPAC). Import of petroleum products in 2021-22 fiscal was 40.2 million tonnes.

The nation consumed 202.7 million tonnes of petroleum products in 2021-22, up from 194.3 million tonnes in the previous fiscal, but lower than pre-pandemic 214.1 million tonnes demand in 2019-20. Besides, India also spent $11.9 billion on import of 32 billion cubic meters of LNG in 2021-22.

The country’s annual import bill for fossil fuels is projected to triple by 2040 as the country is set to experience the largest energy demand increase in the world over the next two decades, according to a new study by International Energy Agency.

India is one of the largest consumers of hydrogen in the world with a demand of 6.7 MTPA which comprises 7-8% of the global hydrogen demand. Hydrogen is used in India, mainly as an industrial feedstock in the creation of ammonia-based fertilisers and in refineries. Globally, nearly 90 million tonnes per annum (MTPA) of hydrogen is consumed, but currently, more than 95% of the world’s hydrogen is fossil fuel based, produced via Steam Methane Reforming (SMR) or coal gasification.

The cost of hydrogen from electrolysis today is relatively high, between around $7/kg and $4.10/kg depending on various technology choices and the associated soft costs. This makes it hard to compete with the existing cost of grey or brown hydrogen. But India has some of the most competitive levelized cost of electricity (LCOE) for solar and wind in the world while remaining a net importer of natural gas. Given the promises of electrolyser cost and LCOE decline, it is more beneficial to expand green hydrogen production in India rather than production of grey or blue hydrogen.

KPMG in India estimates, current grey hydrogen (hydrogen made using fossil fuels) costs ₹160-200/kg, based on natural gas input cost of $10-13/MMBtu (Metric Million British Thermal Unit) and possibly rising further due to the price movements seen in the immediate term. The National Hydrogen Policy could immediately result in reduction of green hydrogen production costs by 20-30% to ₹230-240 per kg, based on the policy measures announced and issues such as banking are sorted out. The green hydrogen (hydrogen made with renewable energy) demand could comprise 20-30% of the overall hydrogen demand in India, which is expected to jump to almost double at 12 million tonnes per annum (MTPA),

Green hydrogen costs in India could potentially fall by half to as low as Rs 160-170 per kg by 2030, bringing parity with grey hydrogen and other fossil fuels, says a KPMG study. Current green hydrogen production costs range anywhere between ₹320 and ₹330 per kilogram in India.

Glreen hydrogen prices are determined largely by the cost of electrolysers and electricity. Beyond that, there are the operating costs, transmission and distribution (T&D) costs, and wheeling charges for electricity as well as specific local duties and taxes like the goods and services tax (GST) in India. The supply chain model, distance to demand centre, system design, and utilization factor are additional factors that strongly influence the delivered cost of hydrogen.

The way ahead for green hydrogen in India

With proactive collaboration among innovators, entrepreneurs and government, green hydrogen has the potential to drastically reduce CO2 emissions, fight climate change, and put India on a path towards net-zero energy imports.

Both near-term and long-term policy pathways to reduce the cost of green hydrogen need to be encouraged to enable cost competitiveness against alternatives.

A cost-competitive green hydrogen is bound to lead to market creation. But the government can also encourage near-term market development by identifying industrial clusters and enacting associated viability gap funding and mandates.

An emerging green hydrogen economy means opportunities around research and development and manufacturing of components such as electrolysers and fuel cells, crucial to enabling the industry to develop and scale.

A globally competitive green hydrogen industry also leads to prospects of exports of green hydrogen and hydrogen-embedded low-carbon products such as green ammonia and green steel.

Tags: Adani Group, Alternative Fuel, Cost Competitive, Energy Transition, Green Hydrogen, India, NTPC, Reliance