If data is the new oil is hydrogen the new gas?

In late June this year, Reliance Industries announced a US $10 billion investment for the production and use of hydrogen (H2). H2 is a colourless gas physically. But in the race to Net Zero Carbon, it comes in multiple colours, each representing a specific process.

The many colors of H2

Grey is the cheapest at US $1 to 1.5 per kg (2020) but the least green, because H2 is stripped out of natural gas (CH4) with carbon dioxide emissions. Blue H2 is cleaner. The CO2 is captured and stored, albeit not permanently and costs US $4.55 per kg (2020). Turquoise H2 transforms the carbon into solid form. But technical issues persist. Red H2 is separated from water using nuclear power—post-Fukushima, a safety stigmatised fuel. The most promising is zero carbon Green H2. Renewable energy separates hydrogen from water through electrolysis. Current costs are US $6 per kg of H2, which industry estimates will reduce to US $2.5 by 2030.

US $38 billion in committed investment for H2

Green H2 is at the implementation stage. Around 30 countries (including Japan, South Korea, Australia and New Zealand in the Asia Pacific) and California have announced strategies, vision documents or roadmaps to a hydrogen economy—a phrase from a 1970 technical report by Lawrence W. Jones of the University of Michigan. China, per its exceptional characteristics, has R&D ongoing and pilot hydrogen-fuelled heavy vehicles (HDV) already ply, as in the United States. Post the establishment of the Hydrogen Council in 2017—an industry entity, in which both Reliance and Indian Oil Corporation are members, 262 projects have been announced with a possible investment of US $300 billion by 2030, of which, US $38 billion is backed by engineering and investment approvals.

Reliance replicates its Telecom entry strategy in Green H2 – a 1-1-1 target for 2030

So, what’s new about the Reliance foray? First, the target to produce green H2 at US $1 for 1 kg in 1 decade is aggressive—60 percent lower than the global industry estimate of US $2.5 per kg of H2. Second, the expansive scale of the US $10 billion financial commitment—25 percent of firm project commitments globally. Third, the integrated, end-to-end business strategy—in-house creation of new solar and wind energy capacity of 100 GW (22 percent of the targeted national renewable (RE) capacity by 2030), electrolyser manufacturing capacity and fuel cell development for static and transport demand.

Mukesh Ambani (age 64), the richest Asian, Chairman and MD, Reliance Industries, is entitled to dream big. But is this just hot air fanned by the Net Zero expectations unleashed by COP26 in November? There is “green love” in the air, on the road to Glasgow. But the committed “skin in the game”, points to a transformational vision, rather than convenient “green washing”.

Post the establishment of the Hydrogen Council in 2017—an industry entity, in which both Reliance and Indian Oil Corporation are members, 262 projects have been announced with a possible investment of US $300 billion by 2030, of which, US $38 billion is backed by engineering and investment approvals.

Reducing the cost of green H2 depends crucially on two inputs: A combination of cheap RE and large-scale electrolysers reduces the cost of H2 by 75 percent. Add in the potential for cheap financing via green bonds, expected to grow from issue volume of US $2 trillion this year to US $50 trillion by 2030, the possibility of government subsidies and the dream becomes an achievable tech-play.

Prime Minister Modi announced on 15 August 15 2021, a National Hydrogen Mission to make India a global hub for the production and export of green hydrogen by 2047—the centenary celebration year of independence.

Natural gas never to be “The Next Stop”?

Ironically, whilst H2 is yet to become competitive versus RE used directly or even coal-based electricity and natural gas, it has caught the nation’s imagination. Meanwhile, a mature low carbon energy source, Natural Gas (NG) languishes with a share of 7 percent in India’s total primary energy consumption, versus the government’s target of 15 percent. Two downsides inhibit NG. First, the bogey of imported LNG depleting forex reserves—an obsession of our export pessimistic growth strategy. Second, NG is uncompetitive for power generation, versus abundantly available Indian coal, and possibly also versus RE, if storage costs crash, as expected.

A new book, The Next Stop, masterfully edited by the gas industry veteran, Vikram Singh Mehta, previously CEO, Shell India, Executive Chairperson Brookings India and now Chairperson, Center for Social and Economic Progress, along with a galaxy of contributing experts, unpeels this conundrum—our cavalier neglect of NG, a cleaner than coal mature technology. What remains unsaid, is the fear, that the high technological and business hopes around H2, might flounder on the same short-term, political economy driven, regulatory spaghetti, which strangulates NG.

India is a reluctant “open economy”. “Self-reliance” remains an instinctive first option. Consider our conflicted outlook on global trade – we want to export more but not import. We never pushed hard for cross border energy trade, despite enduring electricity shortages. We import oil because we have no choice. However, once solar energy came of age—where we have abundant potential, as in iron ore or skilled worker—government lobbied to locate the International Solar Alliance in India and become the hub for a solar grid from West Asia to Australia via South East Asia.

Green H2 produced from solar and wind power, albeit a nascent technology, ticks both the boxes of self-reliance and cost competitiveness. Hence our eagerness to be a global hub. However, global industry expectations are instead, focused on Chile, the Middle East, North Africa and Australia as export hubs, being potentially the least cost producers of RE.

The blue-green bridge

Mehta and his colleague authors make a good case for time sequencing our response to the opportunities and the pressing needs of climate change. The wait till commercialisation of green hydrogen could be longer than anticipated. Despite potentially lower costs driven by scale effects, cheap green financing and global technological collaborations, the challenges in safe storage and transport of this volatile gas are significant.

Would not India be better off ramping-up natural gas use immediately, wherever it is an affordable merit good– cooking fuel, city and long-distance trucking and back-up city power, niche trigeneration applications and as Rahul Tongia of Brookings quantifies, marginal peaking supply, even as we wait for eventual self-reliance via domestically produced “green” hydrogen?

In the uncertain world of technology development, one does not indefinitely postpone purchasing life sustaining essentials, in the hope of a future cheaper deal. Think of energy in the same way as securing COVID-19 vaccines. Buy into the best technology that you can afford, use it to grow the economy and enhance your income to afford newer, cleaner technologies.

Blending 15 percent of H2 with NG is possible immediately as an interim strategy. But do we have the pipeline infrastructure to support a gas economy? India has barely 16,000 km of gas pipelines in place and 15,000 km under development. Compare this, says Gurpreet Chugh of ICF, with the 76,000 km in China, with a similar population, or 30,000 km in Argentina, with a third less of area.

Make natural gas competitive

Self-reliance should also extend to supportive policies for gas production and shedding the rentier strategy versus natural resource extraction. Crippling rationing protocols for domestic gas have embedded a dual pricing gas regime, which constrains both producer profits and government revenue and exposes producer profitability to regulatory uncertainty.

Gas remains outside the value-added GST regime and, therefore, does not benefit from setting-off tax on inputs. The government’s minimalist view on the role of gas substituting oil, could also be driven by its unwillingness to reduce the lucrative tax revenue- accounting for 24 percent of net union tax revenues and 14 percent of state government revenues- earned from oil, which also passes for climate responsive action via price disincentives on fossil fuels.

Domestic gas has price caps, lower that the international import parity price, to hold down the cost of domestically produced Urea. Ashok Gulati and Pritha Banerjee of ICRIER suggest that government should follow economic logic. By dismantling the dual pricing gas regime and decontrolling fertiliser production and import, it could enjoy triple benefits—making domestic gas production attractive, the fertiliser industry competitive and rationalising the use of water polluting fertiliser. Farmers can be compensated against the price rise, through direct subsidy transfers. Whether economic logic can overwhelm the pervasive, albeit irrational, fear of import dependence for an input into food supply and prices is unclear.

From a strict conservationist viewpoint, the global production of fossil fuels must decline by at least 3 percent annually till 2050 for remaining within the 1.5 degrees Celsius at 50 percent probability. The political economy, growth and income consequences, unless green fuels can compensate, are sure to be at least as calamitous as the eventual climate holocaust.

Hydrogen is a reasonable long-term, carbon free substitute for natural gas. What we have yet to figure out is the politically acceptable, least economically disruptive, energy use and carbon emission path, that converges to an equitably sequenced-in-time, Net Zero Carbon future. Glasgow could help, were it to prioritise equitable, meaningful mitigation options by the most profligate users.

Adapted from the authors piece September 12, 2021 https://www.orfonline.org/expert-speak/if-data-is-the-new-oil-is-hydrogen-the-new-gas/

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