India's green hydrogen mission is high on ambition but low on resources

Centre must boost support through grants, carbon taxes, and procurement mandates to achieve global H2 hub aspirations

India’s green hydrogen journey is high on ambition, but low on resources to make it work. New Delhi will need to step up support in the form of grants, carbon taxes, and procurement mandates if it harbors hopes of becoming a global H2 hub.

Take the case of the country’s first federal level green hydrogen tender that is offering incentives for production of the fuel under the government’s Rs19,744 crores hydrogen mission. The idea was to turn India into a global hydrogen hub, a super-supplier of clean, cheap fuels to the world, and achieve a target of 5 million tonnes a year of green hydrogen production by 2030.

But then you can’t run a bullet train on an old narrow-gauge track, can you? The subsidy per unit of green hydrogen output is minuscule compared to what Western powers are offering, and unconvincing for domestic offtake. Moreover, the tenders were repeatedly delayed.

New Delhi sought bids 18 months after announcing the National Green Hydrogen Mission in January 2022. But the tenders still turned out undercooked and bidders sought repeated clarifications, delaying the bid submission process thrice, according to government documents. The fresh deadline is 31 October.

But even if that can be explained away as a fallout of a new technology, the incentives given by the government under the tender to produce green hydrogen are perverse: you get only as much as Rs 50 (60c) per kilogram in the first year to produce as much as 450,000 tonnes of the clean fuel: that cap drops to Rs40/Kg in the second year, and to Rs30/Kg in the third year.

In the first phase, the government will fund 1.35 million tonnes of green hydrogen for three years which will cost the government around Rs 5,400 crores, around 40 per cent of its total outlay for fuel production. Now whether such meagre outlays will generate the proposed Rs 8 trillion in investments across the green hydrogen value chain is unclear.

Compare that to what the US is offering under the Inflation Reduction Act-- as much as $3/Kg in base tax credit. In addition, the US bipartisan infrastructure law has committed $8 billion for the development of six to ten regional hydrogen hubs. By 2030, the expected production cost of the US green H2, including the IRA tax benefits, would be in the range of $0.5-1.5/Kg, which makes it the lowest production cost region in the world, consultant EY said in a report. The US will have high export potential as they will be competitive with regions, such as the Middle East and North Africa, on a landed cost basis to global hydrogen demand regions such as Europe and East Asia.

But the IRA, which includes the largest hydrogen subsidies in the world, carries stringent specifications on the amount of carbon that can be emitted while producing the hydrogen to claim higher credits—nearly five-fold tighter than Indian rules, Indian officials said. Europe, which has a slew of green hydrogen schemes, is offering around 4 Euros/Kg, according to industry sources.

Industry body India Hydrogen Alliance (IH2A), which counts Reliance among its members, has demanded price support of $ 2/Kg for first-generation green hydrogen projects. It also sought state support of $360 million over the next three years to set up five national green hydrogen hubs in Gujarat, Karnataka, Maharashtra, Kerala, and Andhra Pradesh.

"First of all, I don't think India will ever be able to match what Europe and the US are able to do,’’ said Hemant Mallya, fellow, Council on Energy Environment and Water. "Because they are able to take on a debt burden but we can't do the same. We don't have that luxury. But then one could argue that you could go for a lower volume with a higher subsidy,’’ he added.

India consumes around 6 million tonnes of hydrogen a year, with 3.25 million tonnes consumed by fertilisers and much of the rest by refineries, according to CEEW data. By 2050, the demand for hydrogen may surge to 28 million tonnes of which 80 per cent may be green, according to industry estimates. Delhi set a target to produce at least 5 million tonnes a year of green hydrogen by 2030, with an associated renewable energy capacity addition of 125 GW, boosting demand for electrolyzers.

The green hydrogen program has an initial budget of around Rs 19,744 crores until 2030 of which Rs 13,050 crores is earmarked for green hydrogen production and the rest to ake electrolyser equipment..

"While 5 mtpa target may still appear ambitious, and exports competitiveness a monitorable ability, to enable transition for domestic value chain itself will be a big step in the green energy race,’’ according to Hetal Gandhi, director at rating agency Crisil Research..

Gray hydrogen at $1.5-$2.5/Kg costs half of what it costs to produce green hydrogen. Mallya says that green hydrogen’s production cost in India is only around $3.50/Kg but the risk premium on the fuel drives it up to $6-$7/Kg, a rate cited by industry participants.

"Right now, the economics for green hydrogen doesn't make sense. If you see the technology also, I don’t see any viability coming in the first 3-4 years," said Simarpreet Singh, CEO of Hartek Group, an EPC contractor for power and renewables.

India will offer subsidies for around 3GW per year of electrolyser manufacturing capacity and 3 million tonnes of fuel production capacity, Indian officials said. 

But the tender for electrolysers, machines that use electricity to split water molecules into hydrogen and oxygen, is also underfunded. The Solar Energy Corporation of India is offering incentives to develop an electrolyser manufacturing capacity of only 1.5 GW, a fraction of the required 60 GW capacity required to meet India's goal of producing 5 million tonnes of green hydrogen, CRISIL says.

India’s underfunded green hydrogen tenders serve little purpose without procurement mandates or carbon taxes, industry sources said. A lower incentive structure can only work if industries are forced to buy green hydrogen. A HPO or hydrogen purchase obligation is key to promoting offtake but fertilizer and petroleum ministries have resisted, industry sources said. Last year, the government announced plans to mandate the purchase of green hydrogen by fertilizers, refiners and steel plants. But in an about turn, in January, New Delhi said that there will be no mandates--without mandates and higher incentives, investments in green hydrogen may flow to the US and Europe. Also, a  focus on exports means whatever little subsidy is being given may end up subsidising consumers in western nations, industry sources said. 

KEY TAKEAWAYS

Delayed tenders

The tendering process has been plagued by delays, potentially impacting India’s ability to meet its ambitious H2 production targets

Economic constraints

India’s economic realities, including limited debt capacity, pose challenges in matching Western investment levels

Domestic demand

Domestic industries, such as fertiliser and refineries, present major demand for green H2, but cost-effectiveness remains a hurdle