India's green hydrogen plans gain pace, but demand and costs pose hurdles

India's green hydrogen sector is gathering pace, but assured demand, enabling infrastructure, lower production costs and faster project execution will be critical to growth

After failing to take off meaningfully over the past few years, India's green hydrogen sector seems finally to be entering a phase in which exponential growth could soon be possible. While that augurs well for hard-to-abate sectors such as oil refining, fertilisers and steel, the success of these efforts hinges on three key aspects: assured demand, supporting infrastructure and favourable production economics that could make green hydrogen compete with its grey counterpart already in use across industries.

Why India may miss its 2030 green hydrogen target

India is currently testing green hydrogen technologies across multiple projects with the aim of achieving the national target of 5 million tonnes per annum (MTPA) by 2030. However, with less than 10,000 tonnes per annum of capacity currently operational, mostly in pilot and small-scale projects, it is clear that the ambitious 5 MTPA target will be missed.

   

The nascent stage of development is not the only problem. There is a larger issue of projects facing delays because of novel technology, delays in equipment procurement and the time taken to build renewable energy (RE) projects to support green hydrogen production.

 

“... most importantly, the sector is dependent on government support given its economics. These factors mean that the 1.2 MTPA of green hydrogen auctioned under Strategic Interventions for Green Hydrogen Transition (SIGHT) acts as a ceiling for possible production by 2030, unless auction velocity surges in the next 12 months,” a recent report from investment banking and project advisory firm SBI Capital Markets said.

 

SIGHT is a major financial incentive scheme under India's National Green Hydrogen Mission (NGHM), with a budgetary outlay of Rs 17,490 crore to support domestic electrolyser manufacturing and green hydrogen production.

 

Experts estimate that using the SIGHT outlay, around 2.7 MTPA of production capacity stands to be incentivised. This would translate into an additional 1.5 MTPA of capacity over the next four years. Apart from the financial incentives under the government's flagship SIGHT programme, an Inter-State Transmission System (ISTS) waiver is already in place for green hydrogen, duty benefits are provided under the Special Economic Zones (SEZ) Act, and selective exemptions are available to developers under the Approved List of Models and Manufacturers (ALMM) rules regarding mandatory domestic sourcing of equipment.

 

While India announced the NGHM as early as January 2023 as part of a broader goal of achieving industrial decarbonisation, the country had only 158 green hydrogen projects at various stages of development as of August last year. Further, 94 per cent of the planned capacity is yet to move beyond the announcement stage, 0.1 per cent is under construction and only 2.8 per cent is operational, highlighting the slow pace of project commissioning.

 

“The primary barriers include a lack of committed buyers, unclear demand signals, high production costs, varying definitions of green hydrogen and inadequate infrastructure, particularly for storage, transportation and shared facilities,” said Charith Konda, lead energy specialist at the Institute for Energy Economics and Financial Analysis (IEEFA).

 

Given the multitude of incentives, many states have joined the bandwagon in the hope of attracting investment. At least 15 states have announced green hydrogen policies, and eight more are said to be in the early stages of formulating them. The structure of state incentives under these schemes typically comprises subsidies on power charges and land costs, along with project capex support. A few states, such as Odisha, Kerala and Andhra Pradesh, are also actively encouraging the development of export hubs. This is backed by projections of domestic green hydrogen demand of around 2 MTPA in the early 2030s, making room for exports to East Asia, likely with better returns than might be available domestically.

 

Another significant factor behind renewed investor interest in the sector is the recent project auctions, which saw some of the lowest prices globally. The government recently concluded tranche 1 of SIGHT Component 2 bids. Its structure, which guarantees firm demand and fixed incentives, found favour among bidders, with the auction — called Mode 2A for green ammonia — seeing firm demand contracts for 724 kilotonnes per annum of capacity across 13 projects bid out to eight developers. Interestingly, every project witnessed a winning bid below the reserve price, with the lowest price discovered at Rs 52 per kg after factoring in the incentive. While this is higher than the price of grey ammonia, it is among the lowest green ammonia prices discovered worldwide so far. Mode 2B of the auction pertains to oil-and-gas companies inviting bids for green hydrogen supply at the lowest cost.

 

“Heady bidding saw prices fall by 17 per cent within a year to Rs 279 per kg, a highly competitive level for green hydrogen globally. More companies have floated tenders for this mode, and significant runway remains for it,” the SBI Caps report said.

 

The chief executive officer (CEO) of a large multinational company setting up green hydrogen and ammonia projects worth thousands of crores in India told Business Standard that the National Green Hydrogen Mission was justified from the point of view of the decarbonisation imperative.

 

“It is a very well-thought-through and well-laid-out plan to incentivise and encourage industries to move forward. Many advanced geographies, including Europe, Korea and Japan, are currently looking at India's model of green hydrogen development and trying to study the strong incentive framework being provided,” he said, asking not to be identified. “The world is also looking at our price-discovery trajectory, with the hope that if these numbers can be achieved in India, they can be replicated. These factors indicate that the sector is headed in the right direction.”

What India must fix to scale up green hydrogen capacity

IEEFA's Konda says the government must focus on interventions in three key areas to ensure that the growth momentum being witnessed in the green hydrogen ecosystem translates into the creation of capacity at scale. “There must be very clear demand signals, enabling infrastructure and favourable economics.... Demand certainty is a major bottleneck for investors, as these are capital-intensive projects. To address this issue, the government can take steps to aggregate demand from a cluster of industries, similar to what was achieved in the fertiliser sector. Secondly, there has to be a continued focus on developing green hydrogen hubs at ports and in cities across coastal locations. This will help address the lack of supporting infrastructure. Finally, to bring down production costs and turn the economics in favour of green hydrogen or its derivatives, there must be a market-based mechanism, such as carbon credits, to internalise the environmental costs of grey hydrogen or ammonia,” he said.

 

While electrolysers are a saturated space globally, with significant overcapacity in China, refining makes the best economic case for adoption among end-use industries, followed by ammonia for fertilisers, the SBI Caps report said. This is reflected in the SIGHT structure, which prioritises these industries over others in the initial phase. Over time, it is expected that a carbon-cost regime will gradually extend green hydrogen use to other hard-to-abate sectors.