Eco push. For creating demand for green hydrogen, a combination of competitive procurement and subsidy is needed
The National Green Hydrogen Mission is highly ambitious. The goal is ‘to make India the Global Hub for production, usage and export of Green Hydrogen’ and ‘to assume technology and market leadership’.
The production of 5 million tonnes of green hydrogen for domestic use is the goal. Green hydrogen is a potential substitute for fossil fuels and can be used for transport (cars, trucks, trains, ships and aircraft), for production of ammonia, fertilisers, chemicals and steel, and for generating electricity.
A beginning in each of these is envisaged.
The cost of green hydrogen is considerably higher than that of the fossil fuel it can replace.
Further, downstream uses are at different stages of development in the world. While the construction of a pilot plant for making green steel can be taken up now, work on powering planes with green hydrogen is just starting on the drawing board. Governments in the advanced industrial economies are putting in money for the development of a green hydrogen economy which can make the transition to net zero feasible.
At the same time this would also help their firms gain competitive advantage. India has joined the advanced economies in attempting this.
As the production of green hydrogen begins, ensuring that demand for downstream uses is created to match production would be essential. In comparison to designing a PLI (Production Linked Incentive) Scheme for a mature product in an existing market, such as mobile phones, the task here is more complicated as domestic demand for green hydrogen must be created.
How to do so while minimising the need for budgetary support? Can other instruments be devised for the same outcomes? One way would be to go in for competitive procurement, create a competitive industry structure so that movement down the cost curve is accelerated through successive bids enabling India to also get the full benefit of the global decline in prices that is likely.
This approach gave us exceptionally good results in the National Solar Mission when the price of solar power was initially about four times the price of thermal power and has now become clearly much cheaper.
For the Hydrogen Mission, the minimum size of plants for least cost production would need to be determined for the production of green hydrogen and its downstream uses at the outset. To illustrate, the minimum size of a new fertiliser plant, a green ammonia manufacturing unit, and a green hydrogen producing plant may be determined.
Then working backwards from the fertiliser plant, supply and demand of green ammonia and green hydrogen would have to be matched for the supply chain.
Competitive bids may be invited to get the least cost of production of green hydrogen. With this green hydrogen cost, the price of green ammonia may be competitively determined. This input price would then become the basis for inviting bids for production of green fertiliser.
Subsidy from the Budget for each tonne of green fertiliser produced may then be given to bridge the gap between the market determined price of green fertiliser and the price fixed by government for sale to farmers.
This subsidy would naturally be far higher than the subsidy being given per tonne for normal fertiliser production. No subsidy would, however, be needed for the intermediate stages.
Similarly, government could enter into a long-term procurement contract for the entire production of a green steel plant. As this would be one of the first green steel plants in the world, our major steel producers should be persuaded to form a consortium and set up the plant so that they all learn the new technology. The purchase price would then have to be on a cost plus basis. It would also be necessary to accept at the outset that cost and time overruns could occur.
This more expensive steel may be used by government in all its own construction projects as well as of its agencies. The impact on the final cost per square meter would be marginal and could be easily absorbed by the budgets of the construction projects. No direct subsidy would be needed.
For shipping, the supply chain up to green ammonia would be the same as for fertiliser production. Competitive procurement of green shipping services from a reasonable future date could be done through a long-term contract indicating the price at which green ammonia would be supplied.
This would completely de-risk the investment in building a cargo ship that would use green ammonia. The higher cost of the shipping service can easily be absorbed by the Indian user as freight costs are a fairly small portion of his total cost. In this case again, subsidy would not be needed.
For the market-based competitive chemical, pharma and other industries, use of green hydrogen could be promoted by making its cost comparable to the fuel it would substitute and this could done by a combination of a lower GST rate as has been done for Electric Vehicles (EVs), and/or a direct subsidy per kg of green hydrogen used.
This would also need to be done for the use of green ammonia for electricity generation for meeting seasonal spikes in electricity demand. However, storage and transport of hydrogen have high costs.
Provision of public money for technology development as well as cost reduction would be essential if India is to reach the technology frontier, not just as an user but also as an innovator. The potential for this is high due to the abundance of young talent.
Financing the private sector in partnerships with our research institutions to work to develop scalable outcomes would be the challenge needing leadership.
That likelihood of success is inherently uncertain would need to be explicitly accepted to give decision makers the confidence to be ambitious and take risks.
With creative policy instruments used with speed, flexibility and agility we could be at the global frontier in this decade and that too at affordable costs.