Green Hydrogen and the Financing Challenge

Context:

Green hydrogen is emerging as a key solution for decarbonizing industrial sectors, aligning with India’s goal of achieving net-zero emissions by 2070. However, the economic challenges, especially in financing its production, remain significant.

What is Green Hydrogen?

Green hydrogen is produced via renewable energy-driven electrolysis, where water is split into hydrogen and oxygen. Renewable sources like solar, wind, or hydropower are used, making it a clean, sustainable alternative. India’s ambitious target is to produce 5 million metric tonnes (MMT) of green hydrogen annually by 2030.

Why Opt for Green Hydrogen?

• Traditional hydrogen production methods grey hydrogen (from fossil fuels) and blue hydrogen (fossil fuels with carbon capture) emit greenhouse gases.
• Green hydrogen offers a zero-emission solution, aiding global climate goals and combating climate change.

Challenges Associated with Green Hydrogen

1. High Production Costs:
   • The cost of electricity (LCOE) and electrolyzers contribute to high production costs.
   • In India, the high cost of capital further undermines financial viability.
2. Cost Disparity:
   • Green hydrogen production costs range between $5.30-$6.70 per kg, compared to $1.9-$2.4 per kg for grey/blue hydrogen.
   • This disparity discourages domestic adoption and private investments, creating a market deadlock where scaled production is needed to reduce costs, but scaling requires viable economics.
3. Global Investment Gaps:
   • By May 2024, only 27.6% of the 1,572 announced large-scale clean hydrogen projects worth $370 billion had reached final investment decisions, highlighting structural barriers beyond technological readiness.
4. Technological Readiness:
   • Scaling futuristic technologies involves high risks, deterring investors and financial institutions.
   • Limited large-scale testing of such technologies adds to the uncertainty.

India’s Key Green Hydrogen Initiatives

1. National Green Hydrogen Mission:
   • Focuses on reducing production costs, stimulating demand, and establishing certification frameworks for green hydrogen and derivatives.
2. Financial Incentives and Pilot Projects:
   • Includes incentives for electrolyzer manufacturing and green hydrogen production.
   • Pilot projects are exploring applications in low-carbon steel production, mobility, and shipping, fostering innovation and cost reduction.
3. Green Hydrogen Hubs:
   • Plans to develop strategically located hubs with requisite infrastructure for efficient large-scale production and utilization.

Strategies to Overcome High Costs

1. Blended Finance Models:
   • Combining public and private capital reduces risks and enhances investment appeal.
   • Government-backed financial instruments, such as concessional loans, can lower borrowing costs and the weighted average cost of capital (WACC).
   • Collaborations between government and private sectors mitigate risks and secure project financing through incentives, subsidies, or tax breaks.
2. Green Bonds and Climate Financing:
   • Issuing green bonds provides long-term funding at reduced costs, appealing to sustainability-focused investors.
3. Carbon Credits and Offtake Agreements:
   • Leveraging carbon credits or securing long-term offtake agreements ensures steady revenue streams, bolstering investor confidence and supporting production scale-up.
4. Strategic Industrial Clusters:
   • Developing localized industrial clusters linked to renewable energy sources fosters self-sustaining hydrogen corridors, attracting investments and creating integrated ecosystems.

Conclusion:

Global examples, such as the U.K.'s Low Carbon Hydrogen Standard Certification and hydrogen hubs in the U.S., Japan, and Australia, showcase innovative approaches to building market confidence and overcoming structural barriers. India must adopt similar strategies to promote green hydrogen development.

By implementing innovative financing mechanisms and robust policy frameworks, India can address economic challenges and establish itself as a global leader in green hydrogen production.