Navigating the Green Hydrogen Landscape: Opportunities and Operational

Challenges in India

Introduction

Hydrogen (H2) is one of the most abundantly used fuels across the world with its
demand reaching up to ~95 million metric tonnes per annum (MMTPA) in 2030.
Hydrogen, once primarily manufactured from fossil fuels, is now undergoing a
transformation towards greener production methods, driven by mounting concerns
over climate change and the imperative to achieve Net Zero targets by 2050. Despite
its current association with CO2 emissions, stemming from its fossil fuel usage, hydrogen
holds immense promise as a clean energy solution, particularly when produced
through environmentally friendly pathways. Governments worldwide are increasingly
incentivizing the shift from grey hydrogen (fossil-based) to renewable green hydrogen,
spurring innovation and investment in hydrogen technologies. This momentum is
projected to drive global hydrogen demand to 250 MMTPA by 2030, with green
hydrogen expected to constitute a significant portion, reaching approximately 40%
by 2050.

Leading nations in this transition, such as the European Union, Japan, and South Korea,
are anticipated to become major importers of green hydrogen by 2030, due to a
production-demand gap. Conversely, countries like India, rich in renewable
resources, stand poised to emerge as key exporters of green hydrogen, presenting a
substantial investment opportunity. The Indian government estimates this shift could
attract investments totalling around 99.4 billion USD fostering a burgeoning industry for
green hydrogen production. Despite the promising prospects, significant hurdles
remain on the path to widespread adoption and trade, necessitating concerted
efforts to overcome challenges and unlock the full potential of green hydrogen.

Colours of Hydrogen

Hydrogen production encompasses various pathways, each differing in emission

levels and production costs. Grey Hydrogen, for instance, derives from fossil fuels—
coal (through gasification process) or natural gas (via steam-methane reforming
process). Currently, nearly 99.3% of utilized hydrogen falls under this category,
contributing approximately 1.3 billion tonnes of CO2eq emissions. Fossil-fuel based
production methods produce Co2 emissions yet significant portions of emitted CO2
(around 50% to 97%) can be captured through carbon capture technologies,
transforming it into what is termed as blue Hydrogen.

Green Hydrogen, on the other hand, stands out as the purest form due to its minimal
direct emissions during production. Generated through water electrolysis—whereby
passing current separates water into hydrogen and oxygen—it relies on fully
renewable electricity for true emission-free operation. Although green hydrogen only
needs electricity and water as input, in country like India, manufacturers cannot
directly use grid electricity as it is generated majorly from coal. Thus, fully renewable
electricity must be used for hydrogen produced through electrolysis to be qualified as
“green”. Less than 0.1% of hydrogen in use today is green hydrogen.
Lastly, there exists a rare and naturally occurring form known as golden or white
hydrogen, requiring no additional processing. Refer to Exhibit 1 for pictorial
representation of different hydrogen production pathways. Exhibit 2 shows forecasted
total demand of hydrogen by 2050 and percentage of green hydrogen in use.

Hydrogen Value Chain

The hydrogen production process is just one segment within the broader hydrogen
value chain. Hydrogen, being the lightest element in nature, presents a significant
challenge in transportation and storage due to its remarkably low density (0.08375
kg/meter cube). While pipelines offer a cost-effective solution for short distances, their
large upfront investment renders them impractical for longer hauls.

To surmount this obstacle, hydrogen must first be converted into a carrier. Following
production, it undergoes compression and temporary storage before being
transformed into a carrier. The three primary carrier types in use are liquid hydrogen,
ammonia, and LOHC (Liquid Organic Hydrogen Carrier). Once converted, hydrogen
can be transported via maritime vessels for long-distance journeys and trucks for last-
mile delivery. Each carrier type presents unique challenges, necessitating separate
upgrades to ports and shipping infrastructure.

Finally, the reconversion step is crucial, wherein the carrier is reverted back to
hydrogen for utilization at its intended destination. However, certain end-uses involve
the direct application of ammonia, obviating the need for reconversion in such
scenarios. This intricate value chain underscores the complexities involved in
harnessing hydrogen as an energy carrier. Refer to Exhibit 3 for detailed hydrogen
value chain.

End-Uses of Hydrogen

While hydrogen holds promise as a versatile fuel, its current utilization is primarily
confined to industries. Approximately 47% of global hydrogen usage is attributed to
the oil and gas sector, predominantly for crude oil desulphurization. Another 52% is
consumed by industries such as steel annealing, fertilizer production (in the form of
ammonia), and various chemical processes. Mobility applications, like hydrogen-
powered cars and buses, account for less than 1% of current hydrogen usage.

However, numerous emerging use cases are being considered to expand hydrogen's
role. Mobility applications can be broadened to include shipping, sustainable aviation
fuels, hydrogen-powered trains, and heavy-duty vehicles. Moreover, hydrogen is
being explored as a heating and power source for buildings and industrial furnaces,
including steel production. Additionally, blending hydrogen with natural gas and coal
for power generation and other applications is under investigation.

By 2050, mobility and transport are anticipated to become the predominant sectors
for hydrogen utilization, constituting nearly 40% of total usage. Refining and chemical
industries are projected to account for approximately 35%, with the remainder
allocated to heating, power, and blending purposes. Exhibit 4 outlines the expected
end use profile for hydrogen over next 25 years.
Mobility is viewed as a promising avenue for hydrogen adoption across major global
economies, prompting significant government initiatives to develop hydrogen
refuelling infrastructure and drive the sale of hydrogen-powered vehicles through
end-use subsidies.

Cost of green Hydrogen Production

The levelized cost of hydrogen (LCOH) serves as a pivotal metric for green hydrogen
manufacturers, encapsulating the effective cost of hydrogen production. Green
Hydrogen projects are highly capital-intensive projects with typical life of 25-30 years.
These projects rely heavily on debt financing through financial institutions. The
levelized cost of hydrogen thus includes all factors including input procurement cost,
operations and maintenance cost, taxes and subsidies and most importantly, the cost
of capital (in form of interest paid by manufacturer to banks against loans).

Renewable electricity and Water are two main inputs required for production of green
hydrogen. Manufacturers can choose to produce their own renewable electricity by
setting up a wind/solar plant in vicinity of green hydrogen plant. In this case the capital
expenses will shoot up for manufacturer. Alternatively, manufacturers can enter a
contract to purchase renewable electricity from a separate offshore entity in which
case the manufacturer has to pay additional charges for transmission of electricity
and losses incurred during transmission in form of grid fees.

For co-located renewable and green hydrogen plants, capital expenditures comprise
nearly 90% of the total LCOH, covering investments in solar/wind power infrastructure,
battery systems for power fluctuations, electrolysers, and hydrogen storage facilities.
The remaining 10% accounts for maintenance, electrolyser maintenance, taxes, and
utility expenses. Exhibit 5 provides a waterfall graph outlining different components of
LCOH for above mentioned two different models of sourcing renewable energy.

In India, the estimated LCOH ranges from 4-5 USD/kg H2, slightly higher than China but
significantly lower than Europe's 6-10 USD/kg H2. This discrepancy primarily stems from
intermittent renewable energy availability in European countries, leading to lower
capacity utilization and increased overall costs. Exhibit 6 shows LCOH cost comparison
between different countries. Despite lower production costs, Indian companies face
notable expenses in hydrogen conversion, shipping, and reconversion. Landed cost
of hydrogen is total incurred cost to export hydrogen from source of production to
point of utilization. Landed costs for hydrogen exports over a 10,000 km distance can
vary between 6.7 to 7.5 USD/kg H2 depending on carrier choice, with approximately
60% attributed to LCOH and the remaining 40% to other aspects of the hydrogen
supply chain. For ammonia as carrier, almost 15% and 18% of landed cost is incurred
in conversion (Haber-Bosche Process) and reconversion (Ammonia cracking)
respectively. Nearly 6% of landed cost is incurred in shipping and last mile delivery of
hydrogen. Although the landed costs might be marginally lower for liquid
hydrogen/LOHC as carrier, the global supply chains and infrastructure is already well
established to handle ammonia as carrier. Exhibit 7 provides landed cost comparison
for different carriers.

Grey hydrogen production costs are significantly lower as compared to green

hydrogen with values close to 2 USD/kg H2. 90% Carbon Capture during steam
methane reforming process elevates the hydrogen production costs by roughly 1
USD/kg Hydrogen positioning blue hydrogen as slightly costlier but comparatively
environment friendly alternative to grey hydrogen.

Cost of Capital

Given that renewable plants and green hydrogen projects are primarily financed
through debt-based project financing by large investment banks, the cost of capital
emerges as a pivotal factor determining the success of these endeavours. The cost of
capital in simple terms is interest rate charged by bank against the loan given for
project development. It's estimated that even a modest increase of 1 percentage
point in the cost of capital results in a roughly 0.3 USD/kg hike in the levelized cost of
hydrogen. This substantial cost of capital primarily stems from the nascent stage of the
hydrogen industry and the uncertainties surrounding its future trajectory (high project
risk translates to higher interest rates). The cost of capital in India is close to 10% much
higher than European countries where it ranges between 6-8%.

For green hydrogen producers, a significant portion (approximately 60%) of the risk is
attributed to offtake risk. Offtakers are entities or companies that commit to
purchasing green hydrogen in predetermined quantities over a long duration.
Securing favourable offtake deals can substantially mitigate the project risk for
manufacturers, making financing more attractive and enhancing overall profitability.
Another critical determinant is government support. Given that the current
consumption of green hydrogen is financially challenging for offtakers, substantial
government intervention is necessary to sustain and expand this sector to a viable
level. Governments can achieve this through various financial and non-financial
instruments. In general, manufacturers who benefit from government auction
schemes, grants, and incentives can anticipate lower cost of capital enhancing their
financial viability and competitiveness in the market.

Government Support & Subsidies

Currently, the production costs of green hydrogen are nearly double that of grey
hydrogen. This disparity is even more pronounced in Europe, where green hydrogen
costs are three to five times higher than grey hydrogen. This significant cost gap makes
green hydrogen a less attractive option for industries, thereby impeding the growth of
hydrogen infrastructure. However, there's optimism regarding future cost reductions.
The increased demand for electrolysers is anticipated to drive down their capital costs
from $1000 USD/kW today to approximately $650 USD/kW by 2030. Coupled with
decreases in the costs of renewable power, capital, and the rising cost of CO2
emissions (EU ETS), it's collectively expected that green hydrogen production cost
could decrease to around $2.5 USD/kg H2 by 2040. Until then, governments must
intervene to promote the adoption of green hydrogen.

Governments employ various instruments to drive the uptake of green hydrogen.

These include mandates for industries such as chemicals, fertilizer, aviation, and
shipping, as well as direct grants for green hydrogen-related infrastructure projects
and tax rebates. Additionally, governments worldwide have launched production-
linked incentive schemes. Governments also bridge the gap between grey and green
hydrogen through Carbon Contracts for Difference schemes, implemented in various
ways in Germany, the Netherlands, Denmark, Japan, and the UK.

Regulations Surrounding green Hydrogen

Each country has its own set of regulatory criteria for categorizing hydrogen as
"green," leading to varying standards. One key challenge arises from emissions
classification, typically categorized into three scopes. Scope 1 emissions originate
directly from the production process, while Scope 2 emissions stem from the inputs
required, such as electricity, natural gas, coal, water, and nitrogen. Generally,
upstream emissions caused by these inputs are termed as Scope 2 emissions. Scope 3
emissions encompass machinery, equipment used in production and transportation.
However, most countries typically focus on Scope 1 and Scope 2 emissions for
practicality and convenience in emissions accounting. Some countries include
lifetime emissions from hydrogen value chain which includes emissions from sourcing
of inputs, actual production process of hydrogen, conversion to carrier, shipping,
reconversion, last-mile delivery and utilization. Other countries only include emissions
from production process (including input sourcing).

European regulations define hydrogen as "green" if its lifetime emissions, are below 3.8
kg CO2eq per kg H2. Moreover, the EU stipulates that green hydrogen must be
produced solely through electrolysis using fully renewable energy sources. In contrast,
Japan requires production related emissions to be less than 3.4 kg CO2eq per kg H2,
with no restrictions on the production pathway. This means that even "blue" hydrogen,
with sufficiently low emissions, can be considered "green" in Japan. Meanwhile, India
has set production emissions limit of 2 kg CO2eq per kg H2, with the condition that
production utilizes electrolysis powered by renewable electricity sources. Exhibit 8
gives rough numbers for total emissions associated with different production routes.

Understanding the implications of these regulations holds significant importance for

several reasons. Firstly, only hydrogen classified as "green" is eligible for government
support. Secondly, Many governments have established mandates for companies
(e.g., the EU mandates that 42% of hydrogen used in industries must be green by 2030),
compelling these companies to seek the most cost-effective yet compliant hydrogen
sources to avoid penalties and minimize expenses. Lastly, the choice of carriers and
transportation methods can influence the environmental classification of hydrogen;
certain transportation, conversion, or reconversion methods may render hydrogen
"non-green" due to associated emissions levels.

Therefore, comprehending these regulations is pivotal for manufacturers in identifying

potential customers, understanding their requirements, designing efficient supply
chains, and formulating broader business strategies.

Outlook for Green Hydrogen in India

Major economies worldwide have articulated their strategies for green hydrogen,
encompassing Europe, the USA, Australia, Brazil, Japan, China, India, Korea, and
others. These countries are prioritizing the development of electrolyser capacity,
renewable energy capacity, ports, storage infrastructure, and pipeline networks to
facilitate the production, processing, and uptake of green hydrogen. Targets for total
consumption and production of green hydrogen by 2030, 2040, and 2050 have been
established, indicative of a global commitment to decarbonization.

For instance, the European Union aims for 20 MMTPA hydrogen consumption by 2030,
with 10 MMTPA expected to be imported, of which around 30% will be green
hydrogen. A notable distinction emerges based on whether a country's focus is on
imports or exports. India, in 2023, launched its Green Hydrogen Mission with the goal
of producing 5 MMTPA of green hydrogen domestically by 2030. Given India's
abundant and inexpensive renewable resources, it is poised to become one of the
leading producers and exporters of green hydrogen.

In the Indian economy, several key players have emerged in this space, including L&T,
ReNew Power, Greenko, SembCorp, Reliance, Torrent Power, JSW Power, Adani
Green, among others. L&T recently commissioned its first green hydrogen plant in
Hazaria, with plans to collaborate with ReNew Power for the construction, operations,
and maintenance of additional green hydrogen plants. Reliance, India’s largest grey
hydrogen producer, intends to invest USD 75 billion in clean technologies in the
coming years, including a substantial shift from grey to green hydrogen.

Despite the significant investment pledges from key players, the on-ground
implementation poses numerous operational challenges in the Indian landscape.
Addressing these challenges is crucial for realizing India's ambition of becoming a
green hydrogen exporter.

Challenges

Despite recent positive developments, green hydrogen manufacturers in India

encounter several challenges. The availability of a stable electricity source poses a
significant hurdle, as renewable power is not consistently accessible throughout the
day. This intermittency leads to lower capacity utilization of installed electrolyser
capacity and increased overall production costs. Moreover, the domestic demand
for green hydrogen is expected to remain low due to lax government mandates and
a focus on exports rather than driving domestic consumption. Consequently,
domestic manufacturers are compelled to turn to the export route and secure offtake
deals from foreign consumers, exposing them to the complexities of the hydrogen
supply chain.

Ensuring cost-competitive production becomes imperative for Indian manufacturers,

who face stiff competition from other renewable-rich countries such as Australia,
Saudi Arabia, UAE, Chile, and Brazil. Moreover, India's relatively larger distance from
green hydrogen importers renders pipelines an infeasible transport option (unlike
North Africa, which benefits from its proximity to Europe).

Developing an end-to-end supply chain designed for cost efficiency and emissions
reduction is crucial. This encompasses capital investment for electrolyser plant and
renewable plant, sourcing electricity and water, hydrogen storage and
transportation, carrier conversion, tanker handling at ports, shipping, and
reconversion processes. Each step must not only be cost-effective but also emissions-
free or low-emission to meet the stringent requirements for green hydrogen set by the
different countries.

The Way Ahead

Given the myriad factors and complexities within this sector, conducting an
operational feasibility study is paramount for green hydrogen manufacturers in India.
The process entails several crucial steps.

Firstly, it's imperative to identify potential export markets for Indian producers. These
markets not only need to exhibit significant demand but also must offer cost
advantage as well as operational feasibility while adhering to emissions-related
regulations for green hydrogen.

Secondly, a thorough examination of supply chain-related challenges facing Indian

manufacturers is essential. This includes designing a comprehensive supply chain for
green hydrogen from input sourcing to last-mile delivery.

Finally, identifying collaborators at each stage, conducting cost and emissions

analyses, and ensuring alignment with regulatory standards are integral components
of this process. Moreover, it's crucial to consider potential government interventions
and their benefits to manufacturers when designing supply chain components. This
can help optimize supply chain efficiency and leverage available support
mechanisms effectively.
Exhibit 1: Colour Categorization based on production pathways of hydrogen

Exhibit 2: Estimated total demand for hydrogen and percentage of green hydrogen

Exhibit 3: End-to-End Supply chain for hydrogen

Note: At each step only certain bullet points may be applicable depending on choice of production method and supply chain
design. Reconversion step might not be relevant if ammonia is directly used, such as in case of fertilizer industries
 Exhibit 4: Hydrogen Demand Forecast by end-use application

2050

Exhibit 5: Cost components in levelized cost of hydrogen production in India

Model 1: Electricity Sourced from independent offshore renewable power producer

Model 2: Electricity Sourced from on-premises (located close to electrolysis plant) solar power plant

Note: Electricity cost in model 2 represents cost of capital involved in building solar power plant. Although the
manufacturer now does not have to pay for electricity and grid fees, the total plant capacity utilization factor
comes down significantly as solar power is not available throughout the day. Due to this, there is less production of
hydrogen increasing the capex cost of electrolysis plant per kg of hydrogen produced
 Exhibit 6: Levelized cost of Hydrogen Comparison for different Countries

12
9.76 9.88
10
8.1
LCOH (USD/kg)
8 7.5 7.25

6
4.51
4

0
India Germany Netherlands Spain France Japan

Landed Cost of Hydrogen Comparison for different Countries

Note: The second graph shows comparison of landed cost for exported green hydrogen from India vs domestically
produced and consumed hydrogen. Thus, only distribution cost component is added for other countries.
Exhibit 7: Landed Cost of Indian export component-wise distribution based on carrier
choice

6.85 7.06
6.75

Landed Cost (USD/kg)

6.00
LCOH
4.00 Conversion
Shipping
2.00 Reconversion
Distribution
0.00
LH2 LOCH NH3

Note: Shipping distance assumed is 10,000 kms

Exhibit 8: Emissions involved (kg CO2eq/kg Hydrogen) in different parts of supply

chain

Emissions from Input Sourcing & Production Process (Scope 1 and Scope 2 emissions)
Steam Methane Reforming 11.4
Coal Gasification Method 24
Steam Methane Reforming (90% carbon capture) 1.14
Electrolysis with Grid Electricity (India) 24
Electrolysis with Renewable Electricity 0

Emissions from Conversion & Reconversion Process

Hydrogen to Ammonia 0.9
Hydrogen to Liquid Hydrogen 1.05
Hydrogen Adsorption in LOHC ~0
Ammonia to Hydrogen ~0
Liquid Hydrogen to Hydrogen ~0
Hydrogen Extraction from LOHC ~0

Emissions from Transportation

Pipeline 0.7
Shipping Ammonia 1.9
Shipping LOHC 3.8
Shipping Liquid Hydrogen 0.3

Note: All emissions are effectively calculated as Kg of CO2eq emitted per kg of Hydrogen
produced/converted/transported.