India Must Sweeten The Deal For Green Hydrogen

India ignited the green hydrogen revolution in 2022 with a dedicated policy, sparking a flurry of initiatives and enticing investors with lucrative incentives.

But the dream of a green hydrogen-powered future faces a critical hurdle: cost. While the government has laid the groundwork, the current price tag for green hydrogen of $4.5 per kilogram, or approximately Rs 387 per kg, remains stubbornly high, outpacing other conventional energy sources.

Current Incentives In Place

India's target for green hydrogen production by 2030 is five million metric tonne per year. To reach this, the country has not only waived of open access charges, but also introduced the Strategic Interventions for Green Hydrogen Transition, or SIGHT financial incentive program. This scheme helps support the production of green hydrogen and the manufacturing of electrolysers.

The SIGHT progamme's current outlay stands at Rs 17,500 crore, with Rs 4,440 crore set for electrolysers and Rs 13,050 crore for green ammonia production. Out of Rs 4,400-crore outlay set for electrolysers, Rs 2,200 crore has been fully allotted, while the balance has been launched but not allotted. For the program pertaining to green ammonia production, only Rs 3,040 crore has been fully allotted, while the balance is yet to be launched.

As per Avendus, listed players that actively participated and won in the SIGHT production linked incentives for green hydrogen production include, Reliance Industries Ltd., CESC Ltd., UPL Ltd., Torrent Power Ltd. and JSW Energy Ltd.

Green Hydrogen In India: Disadvantages And Gaps

While India is well poised to make the green hydrogen leap due to factors like strong domestic demand, high renewable energy potential and low energy costs, certain hurdles remain. The key challenges include:

• High set-up and operations costs: A KPMG report estimates that the current cost of green hydrogen production stands at around Rs 320-330 per kg. This cost needs to fall to as low as Rs 160-170 per kg by 2030 to be competitive with grey hydrogen and other competing fuels.

• Logistical difficulties: This includes arranging water, electricity, storage and infrastructure by offtakes.

• Mismatch in offtake agreement tenure: Offtakers want lower tenure of 5-7 years, while producers want higher tenure of 20-30 years.

• Limited debt financing: India currently only has specialised power finance institution for financing options.

But the biggest challenge is cost. The present cost of green hydrogen is nearly twice that of hydrogen produced from coal and about four times that of hydrogen produced from natural gas. As per reports, green hydrogen cost stood at $4.5-5.5 (Rs 386-472) per kg. This number has to be reduced to $2.5-3 (Rs 214-257) per kg by 2030 to boost viability and drive competitiveness.

As per the KPMG report, the best-case scenario would be that the cost of green hydrogen falls to $1.6 (Rs 137.25) per kg by 2030 and $0.70 (Rs 60.05) per kg by 2050.

What Is Needed

SBI Capital Markets Ltd. notes that adding strategic incentives will help make current green hydrogen cost more viable and comparable to current grey hydrogen costs.

This includes waiver of power banking charges, GST reduction, and green debt provision, as well as market driven cost reduction.

Context: Green hydrogen is produced by splitting water into hydrogen and oxygen using electricity from renewable sources like solar, wind, or hydropower. Grey hydrogen is produced from natural gas or coal using steam methane reformation, but without capturing the greenhouse gases

SBI Capital notes that India needs to make state wise norms regarding the area uniform. The brokerage also highlights how a reduction in GST for electrolysers as well as renewable power and components could help.

In term of financing, a reduction in the cost of capital would be pivotal. This is where India could tap more into the green bonds.

Lastly, market driven natural reductions in electrolyser cost due to scale and technology could also allow some relief to green hydrogen costs. As per Avendus, electrolyser capex accounted for 45% of the total cost of green hydrogen production in 2023. This needs to fall to 34% by 2030.