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Council on Energy, Environment and Water Integrated | International | Independent
Economic Feasibility of Green Ammonia Use in India’s Fertiliser Sector
13 September, 2024 | Industrial Sustainability
Karan Kothadiya, Hemant Mallya, and Deepak Yadav

Suggested citation: Kothadiya, Karan, Hemant Mallya, and Deepak Yadav. 2024. Economic Feasibility of Green Ammonia Use in India's Fertiliser Sector. New Delhi: Council of Energy, Environment and Water.

Overview

This report presents an assessment of potential financial support available from both state and central governments for the green hydrogen sector in India, complementary to the provisions in the National Green Hydrogen Mission (NGHM). The analysis covers both power-related and non-power-related support mechanisms across 12 states, utilising official policy documents at various stages of implementation. The study categorises the potential support into three distinct forms: components with budgetary implications, components involving revenue forgone by the state, and components with socialised costs. This report aims to inform industry and financial stakeholders in India’s green hydrogen ecosystem about the nature and scale of potentially accessible support.

Key Findings

  • India consumes around 17 to 19 million metric tonnes per annum (MTPA) of ammonia for the production of fertilisers such as urea, diammonium phosphate (DAP), and other complex fertilisers (OCFs). All the ammonia produced and used in India currently is grey ammonia, derived from reforming natural gas.
  • Urea accounts for an outsized share of the total ammonia requirement, amounting to around 84 per cent, due to higher production volumes and the higher specific consumption of ammonia in urea production than in other non-urea fertilisers.
  • The cost of grey ammonia ranged from USD 197 to USD 510 per tonne of ammonia for urea production between FY 2019–20 and FY 2022–23. The corresponding figure for non-urea fertiliser production ranged from USD 287 to USD 919 per tonne of ammonia, higher by 12 per cent to 55 per cent than that for urea production.
  • The incremental cost of green ammonia blending for non-urea fertilisers is much lower than the corresponding cost for urea.
    • The total incremental cost of using a 10 per cent blend of green ammonia for urea production could amount to INR 6,286 crore (~USD 785 million) at a full-capacity production of 28.3 MTPA, assuming the levelised cost of green ammonia to be USD 700 per tonne against a delivered price of USD 9 per MMBtu for natural gas. The cost of ammonia would rise by 17 per cent under these parameters.
    • For non-urea fertiliser production, the total incremental cost of ammonia could amount to INR 684 crore (~USD 85 million) for a similar 10 per cent blend at an average production level for FY 2019–20 to 2022–23, assuming the levelised cost of green ammonia to be USD 700 per tonne against a levelised cost of USD 400 per tonne for grey ammonia. The cost of ammonia would only rise by 8 per cent for these parameters, compared to 17 per cent for urea.
  • If the government were to bear the whole incremental cost of blending 10 per cent green ammonia at USD 700 per tonne of ammonia, it would add 3 per cent to 14 per cent to the subsidy for the domestic production of urea between FY 2019–20 and FY 2022–23, but the additional burden on the subsidy for non-urea fertilisers would be under 6 per cent for non-urea fertilisers.

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“The government must aim to strategically direct the introduction of green ammonia in the fertiliser industry with an incremental blending approach in the short term and structurally reduce the levelised cost of green ammonia in the long term to allay the financial premium.”

Executive Summary

Following the Green Revolution in India, chemical fertilisers have played a pivotal role in increasing farm outputs, securing the food supply, and generating surplus production for exports, along with the other measures undertaken (Nelson, Ravichandran, and Antony 2019). During the manufacturing process of these fertilisers, ammonia (NH3 ) is used as an intermediary to provide the nitrogenous content. We estimate that India consumes around 17 to 19 million metric tonnes per annum (MTPA) of ammonia for the production of fertilisers such as urea, diammonium phosphate (DAP), and other complex fertilisers (OCFs). In addition, India also indirectly consumes ammonia embedded in fertiliser imports, estimated to be 6.3 million metric tonnes (MT) in the financial year (FY) 2022–23.

All the ammonia produced and used in India currently is grey ammonia, derived from reforming natural gas. This is problematic as the use of grey ammonia leads to significant greenhouse gas emissions, particularly carbon dioxide (CO2 ). The total emissions from ammonia production were estimated to be around 25 MTPA of carbon dioxide equivalents (CO2 eq) in FY 2022–23 (Patidar, et al. 2024). Secondly, India is currently dependent on imports of natural gas and ammonia to produce fertilisers. We estimate that around 86 per cent of the ammonia requirement in FY 2022–23 was reliant on imports1. This dependency on imports renders the fertiliser and agricultural sectors vulnerable to economic and geopolitical risks and makes the Indian economy vulnerable to forex outflow.

Green ammonia, derived from green hydrogen, produced through the electrolysis of water using renewable electricity, is a potential remedy for both these problems. The use of indigenously produced green ammonia will help drive the Indian fertiliser industry’s self- sufficiency and decarbonisation. However, the financial premium associated with a complete transition from grey to green ammonia is exorbitantly high. The high cost of fertilisers produced using green ammonia may make them untenable for farmers without further increasing subsidies, putting additional pressure on the government’s already stressed subsidy expenditure. In 2022–23 alone, the central government spent INR 2,51,340 crore (~USD 31 billion) on fertiliser subsidies (Ministry of Finance 2024). The government must aim to strategically direct the introduction of green ammonia in the fertiliser industry with an incremental blending approach in the short term and structurally reduce the levelised cost of green ammonia in the long term to allay this financial premium.

In this report, we estimate the financial requirements for India’s fertiliser sector to transition to green ammonia adoption across multiple scenarios, with the goal of identifying low-hanging opportunities, understanding imperatives, and preparing a trajectory for adoption.

A. Current landscape of ammonia usage in India’s fertiliser sector

Fertiliser products in India vary significantly in terms of the volume of consumption, subsidy structures, input costs, and process and supply chain flows. Understanding these structural nuances and the ammonia requirements for the product mix in this context is critical to our analysis.

  • In FY 2022–23, India produced 28.5 MT of urea, which accounted for 68 per cent of the fertiliser production in India, and 13.6 MT of non-urea fertilisers, including DAP and OCFs (The Fertiliser Association of India 2023b). Further, India imported 9.3 MT of urea and 7.6 MT of non-urea fertilisers (The Fertiliser Association of India 2023b). Urea accounts for an outsized share of the total ammonia requirement, amounting to around 84 per cent, due to higher production volumes and the higher specific consumption of ammonia in urea production compared to non-urea fertilisers.
  • All urea production units in India produce ammonia in-house by reforming natural gas. However, the production of non-urea fertilisers largely relies on imported ammonia, estimated to account for 79 per cent to 89 per cent of their ammonia requirement.
  • Urea is a price-controlled product for farmers in India. The subsidy on urea is paid to fertiliser companies based on the differences between the market price set by the government and the cost of production, which is defined by set norms. Non-urea fertilisers, however, are not price-controlled. They garner subsidies based on the nutrient content of each grade of fertiliser. In FY 2022–23, the subsidy for urea amounted to INR 1,65,217 crore (∼USD 20 billion), whereas the subsidy for non-urea fertilisers amounted to INR 86,122 crore (∼USD 10.5 billion) (Ministry of Finance 2024).

The worsening N:P:K ratio in fertiliser consumption, the large and rising subsidy on fertilisers, and efforts to promote organic and alternative fertilisers and improve nutrient uptake efficiency are key trends in the sector. We presume that these trends will translate to a muted long- term growth potential for urea but offer a decent growth potential for organic and alternative chemical fertilisers.

B. Baseline cost of grey ammonia

We estimate the baseline costs of grey ammonia, along with the landed cost of imported ammonia for non-urea fertilisers. Based on the input costs, we estimate the following:

  • The cost of grey ammonia ranged from USD 197 to USD 510 per tonne of ammonia for urea production between FY 2019–20 and FY 2022–23.
  • The corresponding figure for non-urea production ranged from USD 287 to USD 919 per tonne of ammonia, higher by a wide range of 12 per cent to 55 per cent than that for urea production. This difference is attributable to higher input costs for non-urea fertiliser production, in terms of the cost of imported ammonia and imported liquefied natural gas (LNG).

The difference in grey ammonia costs for urea and non-urea fertiliser production implies that the financial premiums associated with a transition to green ammonia use will also be different. It is important to note that grey ammonia costs reflect the price volatility in the period considered due to the supply chain disruptions caused by the pandemic and geopolitical events. Similar episodes in the future may pose risks to India’s fertiliser sector.

C. Key findings

While green ammonia can be a fungible replacement for grey ammonia in non-urea fertiliser production, the technical proof-of-concept of blending green ammonia in urea production has not been demonstrated. In this report, however, we focus mainly on the financial implications of green ammonia adoption while briefly discussing the technical challenges.

We calculated the incremental cost of blended ammonia over a range of parameters such as the cost of green ammonia (USD 500 to USD 1,100 per tonne), the cost of grey ammonia (USD 200 to USD 600 per tonne), the landed cost of natural gas (USD 6 to USD 15 per million metric British thermal units (MMBtu)), and the proportion of green ammonia blended (5 per cent to 50 per cent). Given the volatility of commodity prices, it is important to note that there is a range of possible outcomes, as illustrated in Table ES1 and Table ES2.

  • The total incremental cost of using a 10 per cent blend of green ammonia for urea production could amount to INR 6,286 crore (~USD 785 million) at a full-capacity production of 28.3 MTPA, assuming the levelised cost of green ammonia to be USD 700 per tonne against a delivered price of USD 9 per MMBtu for natural gas.
  • The ammonia cost would rise by 17 per cent under these parameters. This translates to a corresponding increase of INR 2.22 per kg (∼USD 0.03) in urea production cost, which ranged between INR 15 (~USD 0.2) to INR 25 (~USD 0.3) per kg between FY 2019–20 and FY 2022–23 as per our estimates. Urea was effectively sold to farmers at INR 5.36 per kg (∼USD 0.07) (Department of Fertilizers 2024b).
  • Green ammonia blending in urea production necessitates the additional procurement of CO2 , which is factored into the cost of blending.
  • For non-urea fertiliser production, the total incremental cost of ammonia could amount to INR 684 crore (~USD 85 million) for a similar 10 per cent blend at an average production level for FY 2019–20 to 2022–23, assuming the levelised cost of green ammonia to be USD 700 per tonne against a levelised cost of USD 400 per tonne for grey ammonia.
  • The cost of ammonia would only rise by 8 per cent for these parameters, compared to 17 per cent for urea. This amounts to an incremental cost of INR 0.54 (∼USD 0.007) per kg of fertiliser end product, compared to a market price ranging between INR 20 and INR 47 per kg (∼USD 0.2–0.6) (Department of Fertilizers 2024b).

Table ES1 Sensitivities to the incremental cost of blended ammonia used in urea production at the full capacity of 28.3 MTPA (INR crore)

Evidently, 100 per cent green ammonia in fertiliser production in India will impose exorbitant costs at the current economics, even for non-urea fertilisers. An incremental approach, starting with a 5 to 10 per cent blend can cushion the impact on the sector’s financials.

The incremental cost of green ammonia blending for non-urea fertilisers is much lower than the corresponding cost for urea. If the government were to bear the whole incremental cost of blending 10 per cent green ammonia at USD 700 per tonne of ammonia, it would add 3 per cent to 14 per cent (INR 3,535 to INR 6,541 crore) to the subsidy for the domestic production of urea (INR 43,050 to INR 1,25,270 crore) between FY 2019–20 and FY 2022–23, but the additional burden on the subsidy for non-urea fertilisers would be under 6 per cent (below INR 974 crore) over the total subsidy for the domestic production of non-urea fertilisers (INR 15,906 to INR 50,090 crore). In FY 2022–23, geopolitical disturbances led to a sharp rise in grey ammonia costs. Resultantly, we estimate a potential net gain of INR 505 crore with the use of 10 per cent green ammonia in non-urea fertilisers in that year.

Reducing the levelised cost of green ammonia by providing low-cost capital or grants is an important imperative. We estimate that a 23 per cent reduction in the levelised cost of ammonia can be achieved with a 5 percentage point reduction in the capital cost. Using only green ammonia in the Indian fertiliser industry can reduce CO2 eq emissions by more than 32 MTPA as per our analysis. The cost of this mitigation would vary with the difference between green and grey ammonia costs. For urea production, the mitigation cost can range between USD (−10) per tonne of CO2 , signifying a net gain, to USD 232 per tonne of CO2 depending on the difference between green and grey ammonia costs, which can range from green ammonia being cheaper by USD 100 to grey ammonia being cheaper by USD 300 per tonne. For the same difference in the costs of green and grey ammonia, the cost of CO2 mitigation is lower for non-urea fertiliser production, as there is no cost associated with procuring CO2 as a feedstock. The mitigation cost ranges between a net gain of USD 60 to a cost USD 180 per tonne of CO2 .

Table ES2 Sensitivities to the incremental cost of hydrogen are tempered for the production of non-urea fertilisers

D. Policy recommendations

The annual cost of blending green ammonia in India’s fertiliser industry, even up to 10 per cent, can range between INR 1,000 to INR 12,000 crore (∼USD 125 to USD 1450 million). If the Indian government bears this cost to catalyse green ammonia adoption, the impact on expenditure will be non-trivial. Hence, the introduction of green ammonia requires a calibrated and systematic approach, which factors in the structure of the industry and the differences in emissions mitigation costs between urea and non-urea fertiliser products. We suggest the following policy recommendations to ease this transition:

  • Prioritise the transition of non-urea fertilisers to green ammonia use. The green premium is lower for non-urea products than for urea. Moreover, the technical requirements for blending are also much simpler. Green ammonia can be a fungible replacement for the imported ammonia used in non-urea fertiliser production. The government could facilitate this transition through mandates and incentives for green fertiliser use.
  • Reduce the capital cost for green hydrogen assets through the provision of low-cost capital or grants to reduce the levelised cost of green ammonia. Capital expenditure by the government for these measures will enable a consequent reduction in revenue expenditure in the form of subsidies.
  • Develop administrative frameworks allowing the fertiliser industry to earn through carbon credits. As the industry can utilise captured CO2 from other industries in addition to mitigating its own emissions with green ammonia blending, it must be allowed to issue carbon credits and earn revenue through them. To prepare the sector to leverage carbon markets, we recommend that the government define a monitoring, reporting, verification, and certification framework in addition to the institutional measures under the Detailed Procedure for Compliance Mechanism under the Carbon Credits Trading Scheme (Bureau of Energy Efficiency 2023) and institute an exchange to facilitate trading of credits.
  • Investigate pathways to introduce green ammonia in nitrogen delivery to crops. Firstly, alternatives to urea, such as ammonium sulphate or ammonium phosphate, could be promoted, by offering attractive incentives for farmers. Secondly, the technical parameters of blending green ammonia or green hydrogen in urea production must be investigated through a pilot project to demonstrate proof of concept.

These measures will be instrumental in promoting green ammonia adoption, which will reduce the import dependence of the fertiliser sector, and secure its energy needs, in addition to the primary objective of decarbonising the industry.

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