Air-locks in govt's green hydrogen policy as demand remains a key issue

The hydrogen market being created in India is setting up a string of suppliers, with most energy companies lining up impressive plans. But for power minister R K Singh, the difficult task will be to generate the demand for the fuel to create another alternative market to oil, gas and coal.

The green hydrogen policy announced by the power ministry last week makes a compelling case for manufacturers such as Indian Oil Corporation (IOC), Reliance Industries Ltd (RIL) and others to expand the level of production (see box). Most energy companies have announced massive targets to ramp up hydrogen production. The policy has removed interstate charges for renewable electricity (RE) needed to produce green hydrogen. The waiver will be applicable for all projects set up before 2025 and run for 25 years. Other benefits include land for manufacturers of green hydrogen to set up bunkers near ports for storage for export.

What is green hydrogen? Hydrogen is the product of several chemical reactions from natural gas and coal production. Since these processes also release carbon dioxide, the hydrogen produced is termed grey. Green hydrogen is the result of electrolysis of water, provided the source of electricity is renewable energy. India has also toyed with the intermediate blue hydrogen, where natural gas reacts with steam, aiming to capture the carbon dioxide and methane, but so far the cost economics are not favourable.

S S V Ramakumar, director for research and development at IOC, said the latest policy could cut generation costs to produce hydrogen by up to 50 per cent from the current average of Rs 500 per kg. But experts reckon that for hydrogen to be competitive as a fuel with alternatives such as solar or oil and gas, it needs to be available at less than Rs 100 per kg.

The next stage in cost reduction will, therefore, depend on what the government can do to spur industry and transport sectors to adopt the use of hydrogen in a big way. Only then will large-scale investments flow into the sector. For this to happen, the power ministry must prod a clutch of other ministries to generate demand — steel, shipping, heavy industries, civil aviation and, most significantly, road transport and highways.

All these sectors are potential users of hydrogen. There is also no inherent contradiction between chasing RE targets like solar and also making space for hydrogen in the twilight of the fossil fuel era. Compared to solar, hydrogen is not energy-efficient for running light vehicles. It can be, however, economical for trucks and ships. And, it is a far better fuel for the steel, fertiliser and cement industries than other RE sources. An S&P Platts report predicts that by 2030 hydrogen demand for industry and power generation will make up, respectively, 43.8 and 24.5 per cent of annual fuel consumption.

Despite these advantages, creating the enthusiasm for such a large-scale shift is a formidable task for any government in any major economy. This is the task the second part of the hydrogen policy needs to fulfil.

A few years ago, the Indian government could create a market maker, usually a state-run entity, to generate demand or meet a supply deficiency in any market. In the case of solar and wind renewable energy, this role is being played by the Solar Energy Corporation of India.

Given the scale of the shift, the government’s plans are remarkable. India plans to generate about 5 million tonnes of green hydrogen by 2030, while a Frost & Sullivan report forecasts global production at almost the same level of 5.7 million tonnes. There is no role envisaged for a market maker either on the demand or supply side. Frost & Sullivan estimates the global compounded annual growth rate must be 57 per cent for this decade to reach the target.

Instead, the Centre is relying on a carrot-and-stick policy to drive demand. Last year, for the first time, Singh’s ministry for new and renewable energy ticked off states for slipping up on their Renewable Purchase Obligations (RPOs). Every state has committed itself to a declaration of trajectory for RPOs up to the year 2022. These commitments add up to India’s declarations on climate change.

When states need to stick to their RPOs, they prod user industries to buy their fuel obligations from green sources. Nikesh Sinha, managing director of 8.28 Energy Pte Ltd, a Singapore-based RE company, said India’s hydrogen policy as of now is a bare-bones policy. “Companies using this fuel will be encouraged if there’s an RPO to fulfil.”

The hydrogen policy has taken steps in this direction. It states “the benefit of RPO will be granted (as) incentive to the hydrogen/ammonia manufacturer and the distribution licensee for consumption of renewable power” (ammonia is a chemical compound of hydrogen with nitrogen. It is safer and easier to store and transport than hydrogen, which vaporises rapidly from any container making it very hazardous).

The problem is that some states have begun to baulk at these commitments. Telangana Chief Minister K Chandrashekar Rao created a controversy this week by accusing the Centre of forcing it to buy RPOs from “specific developers”, implying that some of them were from the private sector. Minister Singh has rebutted the charges. While the charges could be related to the election cycle, the flare-up does show the limits for the Centre to push the RPO mechanism.  

An alternative to hasten the transition could be the role of energy exchange. The market for green energy at both the Indian Energy Exchange and the smaller PXIL has already received the regulatory approvals. The current volumes are puny but for companies selling renewable electricity, it is the best route to cut prices further. This is because the state-run electricity distribution companies are unable to offer more long-term power purchase agreements to buy electricity. It is only the spot markets where demand can rise for suppliers to be incentivised to bring more RE power to the market. Cheaper RE derived from market mechanics could, thus, lower the cost of producing hydrogen instead of having to depend on government sops.

Sinha thinks this mechanism will be revolutionary. It may be, but the market needs to understand that, too.