Green Hydrogen and the Financing Challenge

India targets 5 million metric tonnes (MMT) of green hydrogen production annually by 2030 to decarbonize industries and achieve net-zero emissions by 2070, but financing challenges pose significant hurdles.

• Based on a recent analysis by BloombergNEF, India is on track to meet only 10% of its stated goal.
  • High Production Costs: Green hydrogen costs $5.30–$6.70/kg, significantly higher than grey/blue hydrogen ($1.90–$2.40/kg).
  • Market Deadlock: Green hydrogen prices can drop with scaled production, but scaling requires viable economics and reduced costs.

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Significance of Green Hydrogen

• Zero Carbon Emissions: Green hydrogen is produced using renewable energy sources, emitting only water vapor as a byproduct, unlike fossil fuels that release large amounts of CO₂.
  • Example: Replacing 1 kg of grey hydrogen (emits 9 kg CO₂) with green hydrogen can reduce significant carbon emissions in sectors like refining and ammonia production.
• Versatility Across Sectors: Green hydrogen can replace fossil fuels in hard-to-abate sectors like steel, cement, fertilizers, shipping, and aviation.
  • Example: The steel industry, a major fossil fuel consumer, can adopt green hydrogen to produce green steel, reducing emissions by up to 90% compared to traditional methods.
• Use in Agricultural Sector: Green hydrogen can decarbonize the agriculture sector by replacing natural gas-derived grey hydrogen in fertilizer production, reducing carbon emissions significantly. 
  • Example:  Green hydrogen can produce ammonia, a key fertilizer component, while ensuring sustainability and reducing dependency on fossil fuels.
• Energy Independence and Security: Reduces reliance on imported fossil fuels, enhancing energy security for countries with abundant renewable resources.
  • Example: India, with an annual energy import bill of $185 billion, aims to save ₹1 lakh crore by 2030 through green hydrogen adoption under the National Green Hydrogen Mission.
• Sustainable Transport Solutions: Green hydrogen powers fuel cells in heavy-duty vehicles, ships, and trains, providing a clean alternative to diesel and natural gas.
  • Example: Japan’s development of hydrogen-powered trains and India’s pilot hydrogen-fueled buses by NTPC in Leh and Noida.
• Long-term Energy Storage: Hydrogen allows renewable energy storage for long durations, overcoming the intermittency of solar and wind power, unlike fossil fuels that are finite.
  • Example: Hydrogen storage solutions are being tested to stabilize grids in Europe and the U.S., ensuring reliable energy during high demand periods.
• Potential for Global Trade and Export: Countries with renewable energy surplus can produce green hydrogen for export, creating economic opportunities and reducing global dependence on fossil fuels.
  • Example: Australia-Japan’s Hydrogen Energy Supply Chain project aims to export green hydrogen to meet Japan’s decarbonization targets.

Green Hydrogen vs. Fossil Fuels

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India’s Potential for Green Hydrogen Production

• Abundant Renewable Energy Resources:
  • India’s solar energy potential: 748 GW (gigawatts) at full capacity; current installed solar capacity stands at 73.32 GW (December 2023).
  • Wind energy potential: Significant untapped resources in states like Tamil Nadu, Gujarat, and Maharashtra.
  • Gujarat’s RE projects linked to green hydrogen hubs; Rajasthan’s solar potential for electrolyzer-driven hydrogen production.
• Favorable Geographic Conditions: Vast land availability in states like Rajasthan and Gujarat for renewable energy parks.
  • Bhadla Solar Park in Rajasthan, a prime renewable energy hub, could support green hydrogen production.
• High Domestic Demand for Hydrogen: India currently produces 6.5 million metric tonnes (MMT) of hydrogen annually, mostly grey hydrogen, for industries like fertilizers, refining, and steel.
  • Green hydrogen can replace grey hydrogen in these sectors, reducing 50 MMT of CO₂ emissions annually by 2030.
  • NTPC and Oil India blending green hydrogen in PNG and fuel networks in Gujarat and Madhya Pradesh.
• Cost-Competitive Production Potential: By leveraging economies of scale and declining renewable energy costs, India aims to reduce green hydrogen production costs to $1 per kg by 2030.
  • Solar Energy Corporation of India (SECI) has achieved low renewable electricity tariffs at INR 2.6/kWh, which is crucial for affordable green hydrogen.
• Policy Support and Investments: National Green Hydrogen Mission: ₹19,744 crore outlay to establish India as a global hub for green hydrogen.
  • Target: 5 MMT annual green hydrogen production and 125 GW renewable energy capacity by 2030.
  • The Adani Group is investing $9 billion in the first phase of its green hydrogen venture in Gujarat’s Kutch district.
• Strategic Location for Exports: Proximity to key hydrogen-importing countries like Japan, South Korea, and Europe.
  • Ongoing trade discussions for green hydrogen exports under partnerships like the India Hydrogen Alliance (IH2A).
  • Potential forex savings of ₹1 lakh crore by reducing fossil fuel imports and earning from exports.
• Technological and Industrial Ecosystem: Growing electrolyzer manufacturing capacity with initiatives like the SIGHT programme under the Green Hydrogen Mission.
  • Pilot projects in mobility and steel sectors showcasing feasibility.
  • Green steel pilot project in Odisha leveraging green hydrogen to decarbonize steel production.

Challenges to Green Hydrogen Production

• High Cost of Producing Green Hydrogen: The cost of producing green hydrogen depends on two critical factors which make the production of green hydrogen expensive:
  • Levelised Cost of Electricity (LCOE): It is the average cost of generating renewable electricity over a project’s lifetime. 
    • A higher LCOE directly increases green hydrogen production costs, as renewable electricity is the primary input for its production.
    • Currently, there is a substantial disparity between green hydrogen production costs ($5.30–$6.70 per kg) and traditional grey/blue hydrogen production costs ($1.90–$2.40 per kg). 
  • Electrolyzer Costs: Electrolyzers are devices used to split water into hydrogen and oxygen through electrolysis. 
    • These systems rely on advanced technology, but due to relatively low demand, the cost of electrolyzers remains high.
    • Alkaline electrolyzers cost approximately $500–$1,400 per kilowatt (kW).
    • Proton Exchange Membrane (PEM) systems are even more expensive, ranging from $1,100 to $1,800 per kW.
• High Borrowing Costs: The cost of capital, particularly in developing markets like India, is often high.  
  • This issue arises because such investments are perceived as riskier due to uncertainties surrounding demand.   
  • This perception leads to higher borrowing costs, reflected in an increased weighted average cost of capital (WACC).
  • Studies show that a rise in WACC from 10% to 20% can increase the cost of hydrogen by up to 73%.
  • Since investment costs contribute 50–80% of the LCOE in renewable energy projects, even a small increase in WACC can significantly drive up production costs.
• Infrastructure Limitations: Lack of pipelines, storage facilities, and hydrogen refueling stations for transport and industrial use.
  • Currently, India has only a couple of operational hydrogen filling stations, in Faridabad and Gurugram, insufficient for scaling adoption.
• Energy and Water Demand: Electrolyzers consume 9 liters of water per kg of hydrogen, creating challenges in water-scarce regions.
  • Dependence on freshwater resources limits scalability, making seawater electrolysis an underdeveloped alternative.
• Storage and Transportation Challenges: Hydrogen is highly flammable and requires high-pressure tanks or cryogenic temperatures for storage and transport.
  • Liquid hydrogen storage requires temperatures below −252.8°C, which involves expensive cryogenic infrastructure.
• Lack of Standardization and Certification: Absence of harmonized global standards for hydrogen production, carbon intensity, and safety protocols.
  • Divergent definitions of “green hydrogen” allow biomass-based hydrogen, which still emits some carbon, to qualify.
• Dependence on Fossil Fuels in Energy Grid: Risk of using coal-dominated grids for electrolyzer operation when renewable energy is unavailable (e.g., at night).
  • India’s grid relies on 70% coal-based electricity, which undermines the carbon neutrality of green hydrogen projects.
• Nascent Technology and Workforce Skills: Need for R&D in efficient, low-cost electrolyzers and non-freshwater-based production methods.
  • Workforce skill gap in hydrogen production, storage, and infrastructure development.
  • The ministry of skill development and education (MSDE) estimates a demand for 2.83 lakh jobs in production and storage, along with 11,000 roles in electrolyser manufacturing by 2030 for green hydrogen production units.
• Competing Renewable Energy Needs: Diversion of renewable energy from grid decarbonization to green hydrogen production could slow progress toward overall energy transition goals.
  • India’s 2030 green hydrogen plan requires 125 GW of additional RE capacity, over and above the 500 GW target under the Paris Agreement.

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Government Initiatives for Green Hydrogen Production in India

• National Green Hydrogen Mission (2023):
  • Objective: Make India a global hub for green hydrogen production, use, and export.
  • Key Targets:
    • 5 MMT annual green hydrogen production by 2030.
    • Add 125 GW renewable energy capacity for hydrogen production.
    • Save ₹1 lakh crore in fossil fuel imports and reduce 50 MMT CO₂ emissions annually.
  • Sub Schemes under the NGHM:
    • Strategic Interventions for Green Hydrogen Transition Programme (SIGHT): It aims to support 4GW of domestic electrolyser manufacturing capacity and assist production of 1 million tonnes of green hydrogen by 2030.
    • Green Hydrogen Hubs: States and regions capable of supporting large scale production and/or utilization of hydrogen will be identified and developed as Green Hydrogen Hubs.
      • Green hydrogen projects planned in Gujarat, Odisha, and Tamil Nadu.
• Green Hydrogen Policy (2022):
  • Waiver of interstate transmission charges for 25 years for projects commissioned by December 31, 2030.
  • Open access policy: Ensures availability of renewable energy for hydrogen production.
  • Land Allocation: Support for establishing renewable energy parks.
• Pilot Projects:
  • Mobility and Industry: Hydrogen buses in Leh and Noida; green steel initiatives in Odisha.
  • Budget allocation of ₹1,466 crore for pilot projects, including mobility and shipping.
• Exemption of Taxes and Duties: Special provisions for green hydrogen projects located in Special Economic Zones (SEZs).
• Electricity (Promoting Renewable Energy through Green Energy Open Access) Rules, 2022: These facilitate renewable energy supply through open access for green hydrogen production.
• ISTS waiver of Green Hydrogen: The government has exempted inter-state transmission charges for 25 years for producers of green hydrogen and green ammonia for projects commissioned before December 31, 2030.
• Research and Development (R&D): ₹400 crore allocated for R&D under the National Green Hydrogen Mission.
  • Focus on indigenous electrolyzer technology and non-freshwater-based hydrogen production methods.
• Production-Linked Incentive (PLI) Scheme: Incentives for manufacturing green hydrogen equipment like electrolyzers under the government’s broader PLI framework.
• International Collaborations:
  • Partnerships with countries like Japan, Germany, and Australia for technology transfer, trade agreements, and joint projects.
  • Example: Cooperation agreements with Japan for green hydrogen trade and supply chain development.

Way Forward for Green Hydrogen in India

• Comprehensive Policy Framework: Develop a comprehensive policy framework extending beyond production incentives to address financing barriers.
  • Introduce long-term hydrogen purchase agreements and partial loan guarantees to reduce investor uncertainty.
  • Establish “regulatory sandboxes” to experiment with new business models safely and efficiently, drawing from fintech innovations.

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• Innovative Financing Mechanisms: Indian banks should adopt non-traditional financing structures tailored to hydrogen’s unique challenges, such as uncertain demand and long project timelines.
  • Modular project financing could allow phased scaling of facilities, reducing upfront capital requirements.
  • “Anchor-plus” financing models can secure base capacity investments from industrial customers, with flexible instruments financing additional capacity.
  • Equipment leasing for electrolyzers can transform prohibitive upfront costs into manageable operational expenses, replicating the success of solar and wind sectors.
• Focus on Pilot Projects and Cost-Effective Business Models: Launch early projects in industrial hubs that integrate financial structuring and demonstrate cost-viable business models.
  • Emphasize delivering green hydrogen at competitive prices for industries like steel and ammonia production.
• Infrastructure Development: Establish hydrogen hubs with integrated production, storage, and distribution systems.
  • Develop pipelines, refueling stations, and other logistics to facilitate large-scale adoption.
  • Establish localised industrial clusters in states like Odisha, Maharashtra, and Gujarat to promote regional self-sustaining hydrogen corridors.
• Promote R&D and Skill Development: Invest in indigenous technologies for electrolyzers and alternative hydrogen production methods.
  • Launch training programs to build a skilled workforce for hydrogen production and infrastructure management.
• Encourage International Collaboration: Forge partnerships with key importing countries like Japan and the EU for technology transfer, market access, and export facilitation.
• Carbon Pricing and Disincentives for Fossil Fuels: Introduce carbon pricing mechanisms to make green hydrogen competitive and phase out grey hydrogen in industrial sectors.

Conclusion

Green hydrogen is a transformative solution to achieve India’s net-zero targets, decarbonize industries, and ensure energy independence. By addressing cost barriers, enhancing infrastructure, and leveraging global collaborations, India can emerge as a leader in the global green hydrogen economy.