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.
| Report Findings:
A recent analysis by Bloomberg NEF reveals that India is likely to achieve only 10% of its stated target by 2030.
- The slow progress primarily stems from the significant cost gap between green hydrogen and traditional hydrogen production methods.
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Difference between Green Hydrogen and Grey Hydrogen
- Green Hydrogen is produced using renewable energy (like wind or solar) to power electrolysis, splitting water into hydrogen and oxygen with zero carbon emissions.
- Grey Hydrogen is produced from natural gas through steam methane reforming (SMR), emitting significant carbon dioxide during the process.
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Challenges to Green Hydrogen’s Growth
- 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 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).
- This cost difference continues to maintain the preference for grey hydrogen.
- 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.
Steps to Scale Up Green Financing for Green Hydrogen in India
1. Policy Interventions for De-Risking Investments
- 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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2. 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.
3. Development of Integrated Hydrogen Hubs
- Create strategic hydrogen hubs linked to renewable energy sources, fostering ecosystems where production, innovation, and consumption co-develop.
- Establish localised industrial clusters in states like Odisha, Maharashtra, and Gujarat to promote regional self-sustaining hydrogen corridors.
4. Strengthening International Collaboration
- Establishing international standards and certification for green hydrogen’s carbon intensity and origin will build trust in its supply chain.
- Developing partnerships, such as Australia and Japan’s Hydrogen Energy Supply Chain Project, can create demand certainty and boost investor confidence.
5. 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.
Learning from Global Strategies
Several countries are successfully addressing these challenges and provide useful models for India:
- United Kingdom: The Low Carbon Hydrogen Standard Certification builds confidence in the market by establishing clear guidelines for green hydrogen production.
- United States, Japan, and Australia: These nations are developing hydrogen hubs—integrated ecosystems that bring together production, innovation, infrastructure, and consumption. This approach focuses on fostering self-sustaining hydrogen corridors rather than waiting for demand to create infrastructure.
By adapting similar strategies, India can build localized industrial clusters that connect hydrogen production to renewable energy sources, making projects more attractive for investors. |
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Conclusion
Green hydrogen holds the potential to transform India’s energy landscape and help achieve its net-zero goals. However, the path to success requires overcoming significant financing and policy challenges. By adopting global best practices, fostering industrial hubs, and de-risking investments, India can position itself as a leader in the global green hydrogen revolution.
December 17, 2024
