Global demand for hydrogen has dramatically increased over the past five years, creating what many refer to as the hydrogen economy. What makes hydrogen attractive is that it acts as both an enabler of renewable energy systems and can be used to decarbonise companies, sectors, and other end users.
According to recent reports, there are approximately 131 large-scale hydrogen developments that have been announced since February, bringing the total number of projects in the global pipeline to 359 with an estimated USD 500 billion to be allocated globally for investment in hydrogen projects over the next decade. Hydrogen also features prominently in many countries' mandates to aid in decarbonisation.
But is this new?
In India, hydrogen derived from fossil fuel and electricity has been used as early as 1962 when India deployed the country’s first large-scale alkaline electrolyser in Nangal Punjab. That plant has since been replaced with hydrogen production from natural gas.
At the same time globally every country is trying to change their existing energy mix to reduce carbon emissions as part of the global energy transition movement. India is pursuing energy transition in its own way. Energy transition in India means providing 24/7 electricity access to rural areas while simultaneously reducing its carbon footprint as part of its commitment under the Paris Accord. In its quest to become a leader in clean energy, India’s renewable energy sphere has witnessed exponential growth with investor friendly policies and incentives. With the resurgence of hydrogen as an alternate fuel, India has also thrown its hat in the ring.
The Ministry of New and Renewable Energy (MNRE) as early as 2006 published a Hydrogen and Fuel Cell Road Map (2006 Roadmap), which highlighted the importance of the public-private partnership model in developing hydrogen energy technology in India and identified decentralised power generation and the transport sector as key areas for hydrogen applications.
On 15 August 2021, India's Independence Day, the Prime Minister announced the launch of the National Hydrogen Mission, reinvigorating India’s commitment to a clean energy future. The launch of the National Hydrogen Mission was made along with a host of other announcements with the underlying theme of making India energy independent by 2047 (i.e. before its 100th year of independence).
The government has yet to specify details of the National Hydrogen Mission. According to press reports, the MNRE drafted the National Hydrogen Energy Mission document, which is under inter-ministerial consultation. Production of “Green Hydrogen” has been identified as the government's primary focus area since it is cleaner than other forms of hydrogen.
1. Challenges of Regulating Hydrogen
Many countries have no specific legislative framework to govern a hydrogen economy, and in the meantime, they will need to rely on existing legislation that applies to similar products in general. Apart from the lack of a streamlined and coherent legislative framework, such existing legislation typically focuses on the health and safety aspect of hydrogen production and transportation, but does not address issues specific to the use of hydrogen as a green energy solution (e.g. certification and proof of origin).
In India, while the government has yet to release details of the National Hydrogen Mission, the Ministry of Power (MoP) has published the draft Electricity (Promoting Renewable Energy through Green Energy Open Access) Rules, 2021 (Green Energy Rules). Under the Green Energy Rules, distribution companies, open-access consumers, captive consumers and industries have the option to meet their renewable purchase obligation requirement by purchasing Green Hydrogen. Green Hydrogen is defined under the Green Energy Rules as hydrogen produced using electricity from renewable sources. With the circulation of the Green Energy Rules, the government has already indicated its intention to scale up the production of Green Hydrogen and to promote its utilisation in multiple sectors. According to The Energy and Resources Institute (TERI), the demand for hydrogen will increase five fold in 2050 with industry consumption being the major driver.
While hearing a petition concerning the air quality in Delhi NCR, the Supreme Court of India implored the government to explore hydrogen-based fuel technology to tackle the pollution crisis. With these many drivers, the government is exploring alternatives for traditional automotive fuel, and the promotion of hydrogen-fuel vehicles will also be a priority of the government. In September 2016, Ministry of Road Transport and Highways (MoRTH) classified hydrogen as a fuel for automotive application for Bharat Stage VI vehicles. In September 2020, CNG with a 18% blend of hydrogen (HCNG) was also classified as an automotive fuel. Furthermore, the Bureau of Indian Standards has developed specifications for hydrogen-enriched CNG for automotive purposes. These government initiatives are aligned with the 2006 Roadmap.
While the government lays the foundation for the promotion of hydrogen in India's changing energy mix, stakeholders eagerly await the details of the National Hydrogen Mission.
2. Contractual Challenges
There are many challenges to be faced in the wholesale introduction of hydrogen as an energy alternative. Some of the key challenges include:
- Cost of technology – the relatively high cost of technology is due to the nascent nature and low readiness of the technology involved in hydrogen production.
- Health and safety – the issue of health and safety has always been a key consideration in the use of hydrogen. Hydrogen is a light gas that is colourless, odourless, highly flammable, and its large-scale use has commonly been perceived as high risk (remember the Hindenburg airship disaster).
- Government support – incentives and grants are needed to reduce the costs of the technology and make them more competitive.
- Competition – although it may be seen that EV and battery storage are in direct competition with hydrogen (e.g. as developments fight for limited government support and suitable legislation), in the broader scheme of decarbonisation they go hand in hand. No single source of green energy is the solution to decarbonisation.
in addition, the potential for hydrogen to play a significant role in decarbonisation should not be understated. In the first instance, its ability to be an energy store (with longer term storage than existing battery technology) and the amount of energy it contains (twice as much as LNG – kWh/kg basis) makes it a highly attractive renewable energy feedstock.
In India, hydrogen development is at a nascent stage as interested parties wait for the government to release policy documents to understand how the government proposes to execute its vison of harnessing hydrogen. While the many benefits of hydrogen as a fuel are well known, only as the hydrogen economy grows will the business and legal risks associated with this technology become clear. Given the MNRE’s stellar track record in developing renewable energy in line with its investor friendly policies, it is expected that the MNRE will promote hydrogen policy in a similar way.
Despite the MNRE's consistent support of renewable energy developers, one area of concern for developers of renewable projects has been the reneging of power purchase agreements (PPAs) and delays in payments by offtakers. With renewable projects being bid on despite highly competitive tariffs and wafer-thin margins for developers, payment delays and termination of PPAs can cause significant stress within India’s renewable development sector. The government is to some extent seeking to address the concerns of the developers with the draft Electricity (Amendment) Bill 2020, although parliament has yet to pass this legislation.
Considering the current high cost of hydrogen production (especially Green Hydrogen), the government should come out with a liberal hydrogen policy with incentives for producers and consumers to encourage investment in the sector. The Union Power Minister's recent statement on extending the production-linked investment scheme for investors in electrolyser manufacturing and viability gap funding for Green Hydrogen in heavy mobility is a welcome step.
Nevertheless, given the high cost of production of Green Hydrogen, financing hydrogen projects is of concern for Indian investors. Unlike solar modules, the costs of electrolysers are not competitive and require significant capital investment. The proposed National Hydrogen Mission should therefore aim to bring the production cost of Green Hydrogen down through the granting of subsidies for the equipment required for each stage of the supply chain or in the form of fiscal incentives to promote the demand for Green Hydrogen. This would provide Green Hydrogen with a level playing field against other forms of energy.
Procuring financing for hydrogen projects would be another challenge for project developers. Given the inter-dependency among different value chains, and due to evolving technology associated with hydrogen production with performance standards yet to be established, lenders may perceive risks in financing hydrogen projects. These risks may to some extent be addressed if the government ensures adequate demand for hydrogen by creating a value chain to create a stable market for hydrogen-project developers. The government’s move to adopt Green Hydrogen to fulfil renewable purchase obligations of industries is a welcome step in this regard. According to reports, the government also intends to put Green Hydrogen obligations on fertiliser producers and petroleum refineries, which are also welcome moves.
Another concern, which may prove to be an impediment in scaling Green Hydrogen production in India, would be the development of back-to-back renewable projects for supporting production. India is still trailing in its ambitious target of achieving 175 GW of renewable energy by 2022 and the pandemic has further disrupted the renewable-energy market. In its “Report on the Potential Roles of Hydrogen In India”, TERI highlighted that India needs 20 times its installed capacity of renewable energy if 100% of India’s 2050 hydrogen demand is to be met through electrolysis. This means that India must significantly increase development of renewable energy. The government must also demonstrate how it will scale-up the deployment of renewable energy for powering hydrogen production.
3. Hydrogen’s Future
Hydrogen has a bright future. It is an enabler of renewable energy systems with the ability to decarbonise end users and the potential to be used as fuel for combustion engines. On the global stage, there are several developing hydrogen projects of different scales in many places such as India, Australia, Oman, France and the UK.
In India, there is a strong push towards to developing the country as a centre of excellence for hydrogen. The Indian government's decision to announce the National Hydrogen Mission is a step in the right direction to give impetus to India’s clean-energy mission. Given its nascent stage, however, it is too early to gauge investor sentiments. While the government is leaving no stone unturned to become a carbon neutral economy, India has yet to announce a carbon-emission tax to disincentivise the use of fossil fuels as exists in other countries. Without disincentivising the use of fossil fuels, India’s commitment to become a clean-energy leader will be a battle half won. Despite the challenges ahead, stakeholders remain as hopeful about India’s energy transition as we are about the global hydrogen economy.
For more information on opportunities in the hydrogen-energy sector in India and internationally, contact your CMS client partner or CMS experts:
This article was written by Marc Rathbone (Partner at CMS) in conjunction with Dibyanshu Sinha (Khaitan & Co).
