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REPORT
Financing Green Hydrogen in India
Private Sector Considerations to Strengthen India’s Enabling Environment for a Competitive Green Hydrogen Economy
Karan Kothadiya, Hemant Mallya, Deepak Yadav

Suggested Citation: CFLI India and CEEW. 2024. Financing Green Hydrogen in India: Private Sector Considerations to Strengthen India’s Enabling Environment for a Competitive Green Hydrogen Economy. New Delhi: Council on Energy, Environment and Water (CEEW)

Overview

This report presents actionable private sector considerations for Indian policymakers at both the national and state levels to strengthen the enabling environment for green hydrogen uptake in India while also catalysing investment into the industry. These considerations align with the MNRE's mission components - generating demand, incentivising supply, and developing key enablers - and are supported by estimated demand projections as well as a breakeven cost analysis. The presented considerations, although tailored to the Indian context, may, in time, serve as an implementation blueprint for other international markets to promote green hydrogen. They are not intended to be a prescriptive set of policies, but rather, facilitate deeper public-private engagement on this topic.

Key Highlights

  • Green hydrogen demand in India is projected to exceed 27.2 million tonnes per annum (MTPA) by 2050, primarily led by industries such as steel, fertilisers, refineries and by long-haul heavy-duty road transportation applications.
  • By leveraging its competitive advantage in renewable energy costs, India can emerge as a leading exporter of green hydrogen, especially in the short-to-medium term.
  • The cost of switching from grey to green hydrogen remains the largest impediment to the industrial uptake of green hydrogen in India. As per current industry estimates, green hydrogen production costs range between USD 3.5-5 per kg while breakeven costs for green hydrogen to replace conventional fuels are less than USD 2 per kg.
  • A nascent enabling infrastructure for green hydrogen deployment and high financing costs are other prominent challenges faced by the sector.
  • Policy considerations such as waiver of power banking and open access charges, reducing the GST on electrolysers and renewable energy components, availing incentives under the SIGHT scheme, accessing cheaper green debt for financing green hydrogen projects coupled with market-driven innovations in electrolyser and renewable energy technologies can cumulatively reduce the levelised cost of green hydrogen by around USD 1.8 per kg in India.

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Tackling the premium associated with green hydrogen over incumbent fuels is critical. A synchronous suite of technology, policy and financing solutions are required to reduce this premium and to scale green hydrogen in India.
Preamble

In pursuit of sustainable growth, governments are turning to clean technologies to support their development. As countries raise ambition on climate and set ‘net zero’ targets to curtail emissions, decarbonising hard-to-abate sectors will be a critical means to this end. Green hydrogen – hydrogen produced through renewable energy – has sparked interest among policymakers, given its potential to contribute to a cleaner economic growth trajectory, especially in hard-to-abate sectors. To date, 53 countries have hydrogen strategies, and another 30 are developing similar policies to transition to it (BloombergNEF 2024).

As India assumes a prominent role in the global economy, the adoption of alternative fuels such as green hydrogen in its industries will be critical to mitigating global greenhouse gas emissions. Beyond mitigation, green hydrogen also provides a transition pathway for India to reduce its reliance on imported fossil fuels and establish export opportunities. To this end, the Government of India’s Ministry of New and Renewable Energy (MNRE) launched the National Green Hydrogen Mission (NGHM) in 2023 aiming to promote demand for green hydrogen, facilitate an increase in production, and aid in developing key enablers for the sector. However, the economics of green hydrogen in India remain challenging due to significant capital costs, the nascency of the sector, the higher cost of renewable energy, and its intermittent nature. Therefore, public–private engagement will be essential to build on India’s success in renewables and fuel its green hydrogen ambitions.

We – the Climate Finance Leadership Initiative (CFLI) India – offer a private sector view of practical next steps for consideration by the Government of India in deploying policy incentives to develop India’s green hydrogen industry and realise its ambitions of becoming a global production and export hub.

Development and scope of the ‘Financing Green Hydrogen in India’ report

CFLI India engaged with the MNRE throughout 2023 to unlock finance for India’s green hydrogen sector. At the ministry’s request, we developed a set of working considerations to provide a private sector view on the deployment of incentives under the NGHM, given our expertise as financiers and developers. These working considerations were informed by stakeholders across the green hydrogen value chain, whose inputs were captured at a ‘Financing Green Hydrogen’ workshop held in March 2023 and were presented to the MNRE in June 2023. This report builds on those working considerations and offers additional analyses to support them. We would like to thank all who participated in the workshop and provided feedback to help ensure that the policy considerations represent a unified, private sector perspective on current challenges and learnings to strengthen India’s enabling environment for a competitive green hydrogen economy. In addition, we would like to thank the Council on Energy,

Environment and Water (CEEW) for their research and analysis that supports bringing to light the private sector considerations and financial learnings.

This CFLI India report presents actionable considerations for Indian policymakers at both the national and state levels to strengthen the enabling environment for green hydrogen uptake in India while also catalysing private sector investment into the industry. These considerations align with the MNRE’s mission components – generating demand, incentivising supply, and developing key enablers – and are supported by estimated demand projections as well as a breakeven cost analysis.

The presented considerations, although tailored to the Indian context, may, in time, serve as an implementation blueprint for other international markets to promote green hydrogen. They are not intended to be a prescriptive set of policies, but rather, facilitate deeper public–private engagement on this topic.

FIGURE 1: Use cases of green hydrogen as a decarbonisation tool

Source: CEEW analysis

Key Trends and Emerging Opportunities for Green Hydrogen in India

Hydrogen is becoming increasingly critical as a fuel source for India’s core industrial sectors: the country produces and consumes an estimated ~5.6 million tonnes per annum (MTPA) of grey hydrogen annually, amounting to nearly 6 per cent of global consumption (IEA 2021). To actualise India’s aspirations of building a low-carbon and self-reliant economy, the Government of India has declared green hydrogen a sunrise sector (MNRE 2023) and enacted supportive policies to enable an industrial shift to achieve this vision by 2030. Furthermore, as countries around the world also look to transition to green hydrogen, Indian policymakers see an opportunity for the country to attract foreign investment, develop robust electrolyser manufacturing capabilities, and lead innovation in this sector.

This section highlights domestic policies, sectors, and trends that are shaping the contours of India’s green hydrogen industry. In line with the national policies, our analysis forecasts that India’s core grey hydrogen consuming sectors, including the fertiliser and refining industries, will drive initial demand for green hydrogen. As green hydrogen technology and its associated economics become increasingly viable, other applications of hydrogen in the steel, mobility and shipping sectors can materialise at scale. However, tapping into export opportunities and establishing a conducive enabling ecosystem will be critical to realising the government’s targets and propelling this sector forward in the long term.

Policy support

The announcement of the Green Hydrogen Policy (GHP) in 2022, followed by the National Green Hydrogen Mission in 2023, underpin this emerging sector by defining green hydrogen, outlining a demand generation roadmap, and stating production capacity targets (Figure 2). Key targets outlined in the NGHM include a green hydrogen production capacity target of at least 5 MTPA by 2030, which extends to an ambitious export-inclusive target of 10 MTPA (MNRE 2023). To achieve these targets, the NGHM identifies critical ecosystem enablers such as infrastructure and supply chain, in addition to government incentives, policy interventions, and research and development (R&D) priorities (Appendix 3).

The country’s national hydrogen policies provide an overarching direction for industry to move towards, along with a robust foundation for state governments to build on. As of March 2024, six Indian states including Maharashtra, Uttar Pradesh, Andhra Pradesh, Rajasthan, Odisha, and West Bengal have released green hydrogen policies. Madhya Pradesh and Karnataka have included provisions for green hydrogen in their renewable energy policies, while Punjab, Haryana, Gujarat, and Kerala have policies in the pipeline. These state government policies detail regional targets, offer incremental incentives for focus applications, and provide benefits for electricity provision, amongst other interventions, to attract investors and encourage the establishment of green hydrogen production units across Indian states.

FIGURE 2: Green hydrogen related policy milestones

Source: CEEW compilation based on policy documents

Current trends in India’s grey hydrogen market​

India’s captive grey hydrogen market is estimated to be worth approximately USD 8.5-10 billion, based on production costs of USD 1.5-1.8 per kg (Biswas, Yadav and Guhan 2020). India’s fertiliser and refining industries, where grey hydrogen functions as an intermediary and most production and consumption is in-house, together account for 98 per cent of domestic grey hydrogen production at 5.6 MTPA (Figure 3). The remaining share of grey hydrogen, produced as a byproduct in certain industrial processes, is commercially traded and utilised for glass making, laboratory research, and pilot projects.

Given the demand dependence on the fertiliser and refining industries, India’s grey hydrogen consumption has seen marginal growth in the last decade, attributed primarily to a low compound annual growth rate (CAGR) of approximately 1 per cent in these sectors since the financial year (FY) 2015. However, hydrogen consumption in the fertiliser and refining industries could double to nearly 10.6 MTPA by FY 2030 if the respective sectoral production capacity targets are met. In the case of the fertiliser industry, this includes increasing domestic production to offset imports as outlined by the Ministry of Chemicals and Fertilisers, while for the refining industry, the Ministry of Petroleum and Natural Gas (MoPNG) aims to increase capacity by setting up new refineries across the country. Similar increases can be expected in the petrochemicals sector, where consumption may grow to 1.3 MTPA for the same reasons. Together, these three sectors are anticipated to drive India’s total grey hydrogen demand up from 5.6 MTPA in FY 2020 to 11.9 MTPA in FY 2030.

FIGURE 3: Total hydrogen demand in India (MTPA)

Source: CEEW analysis; (Monna, et al. 2021)

Emerging trends in India’s green hydrogen market

India’s hydrogen demand and production are set to nearly double by FY 2030, led primarily by its core hydrogen-consuming sectors. However, only a fraction of this may be green. Phase I of the NGHM’s implementation roadmap posits refining, fertilisers, and the city gas sectors as leading India’s green hydrogen transition from FY 2023-FY 2026, while Phase II identifies steel, mobility, and shipping as sectors that could explore green hydrogen uptake through FY 2026-FY 2030. However, despite this we note that the total domestic demand for green hydrogen in FY 2030 may be short of the NGHM’s 5 MTPA target, thus highlighting the role export opportunities could play in supporting growth of the sector in the near term.

In FY 2030, we project that the largest proportion of industry, which currently accounts for 44 per cent of India’s grey hydrogen demand at 2.5 MTPA (Figure 3). Based on the government’s targets Government of India 2023), we estimate total sector is a prime candidate for a transition to green hydrogen as it is comparatively less price-sensitive to production costs than other relevant sectors, which in turn cushions it against a green hydrogen premium. to overall production costs is smaller than it is for sectors such as fertilisers. According to NITI Aayog’s estimates, around 24 per cent of the sector’s hydrogen demand in FY 2030 can be met by green hydrogen approximately 1.1 MTPA to India’s projected total green hydrogen demand in 2030 (Figure 4).

FIGURE 4: Projected green hydrogen demand in India by FY 2030 and FY 2050 (MTPA)

Source: CEEW analysis

Achieving these projections, however, necessitates updating existing refining units as well as integrating green hydrogen into refinery operations. After analysing plant designs of older refining units in India, we note that it may be more efficient for this sector to prioritise the structural integration of green hydrogen in upcoming units rather than retrofitting existing units at this stage. Multiple refineries in India have already announced green hydrogen pilot projects to support the sector’s transition.

India’s fertiliser industry is another priority sector for the transition to green hydrogen and is projected to significantly drive green hydrogen uptake. The sector currently consumes 3 MTPA of grey hydrogen, amounting to 54 per cent of the country’s grey hydrogen demand (Figure 3). Based on the government’s emphasis on localising imported fertiliser products and imported ammonia, in addition to the recent capacity expansion to the urea production sector (Ministry of Chemicals and Fertilizers 2022), we estimate that the sector’s total hydrogen demand may grow to 6.1 MTPA by FY 2030.

However, the financials for substituting green hydrogen in fertiliser production are currently prohibitive. The cost of hydrogen production contributes substantially to overall production costs for fertilisers and, as a result, any premium associated with green hydrogen inputs could sharply inflate overall production costs for fertilisers. As a result, a blending mandate may be the most suited to unlock demand in this sector. However, the Government of India’s already large subsidy expenditure for the fertiliser industry makes it challenging for it to bridge the viability gap any further. These barriers are compounded by aging domestic fertiliser plants, in addition to technical challenges, and factor into our green hydrogen demand projection for the sector (Figure 4). Based on these barriers, we expect that by FY 2030, only approximately 10 per cent of the fertiliser sector’s 6.1 MTPA hydrogen demand (Figure 3) will employ green hydrogen. Non-urea fertilisers are likely to be the primary demand driver at this stage because of the input-specific lower premium non-urea fertilisers have, when compared to urea fertilisers, and due to fewer technical challenges in switching from grey to green ammonia.

While the economics of switching from conventional fuel to green hydrogen in the NGHM’s Phase II sectors is currently prohibitive, existing analysis highlights pathways where technological innovations and economies of scale show meaningful green hydrogen demand from steel, mobility, and shipping in the long term (Figure 4).

However, due to the extended lead times for technology development, capacity deployment and infrastructure creation in these sectors, these pathways may not move from the margins to the mainstream until closer to FY 2050 in India. Demonstrating proof-of-concepts in Phase I of NGHM and developing infrastructure will be critical for green hydrogen demand to materialise in these sectors.

Although refining, fertilisers, steel, and long-haul road transportation sectors are projected to be the major demand drivers for green hydrogen, it is worth noting several additional applications. Phase I of the NGHM marks city gas distribution as a near-term priority sector. However, the sector is unlikely to contribute substantially to green hydrogen demand based on the blending parameters of initial pilot projects and the volumetric and energy requirements of the sector (MoP, GoI 2023). Niche sectors like railways and aviation, also mentioned in Phase II of the NGHM, are encouraged to undertake pilot projects to drive decarbonisation. By 2050, petrochemicals and the power sector may contribute to green hydrogen demand. However, this is based on the emergence of stable pathways for the use of green hydrogen in petrochemicals and improvements in the efficiency of electrolysers and fuel cells for the power sector. Other applications of green hydrogen in domestic and industrial heating are being explored globally, but current costs and better suitability of other decarbonisation solutions render them less cost competitive in the Indian context.

Over and above sectoral demand and enabling policies, the geographical location of Indian industries will likely determine which regions drive domestic green hydrogen demand (Figure 5). Currently, Gujarat accounts for 30 per cent of India’s grey hydrogen consumption, followed by Uttar Pradesh (17 per cent), Maharashtra (8 per cent), Rajasthan (7 per cent), and Madhya Pradesh (6 per cent). As mentioned, several of these states including Uttar Pradesh, Maharashtra, and Rajasthan are pursuing green hydrogen policies hydrogen-consuming states account for approximately two-thirds of the country’s total grey hydrogen consumption. Existing demand from established industrial bases will continue to account for the majority of the country’s emerging green hydrogen consumption. However, going forward, steelproducing states such as Jharkhand, Chhattisgarh, Odisha, and Karnataka may also emerge as large consumers of green hydrogen.

FIGURE 5: Hydrogen demand sites in India (FY 2020, in tonnes per annum (TPA))

Source: CEEW analysis

Positioning India as a global contender

Given our projection of 2 MTPA of domestic green hydrogen demand by FY 2030, demand from export markets will be key to meeting India’s green hydrogen production capacity target of 5 MTPA. Globally, the projected demand for hydrogen is expected to be around 150 MTPA by 2030, with green hydrogen projected to meet 51 MTPA of this demand (IEA 2023).

Several countries have already stated their intentions to import green hydrogen and its derivatives, such as ammonia, to support their decarbonisation goals. The European Union has committed to importing 10 million tonnes of green hydrogen by 2030 (European Commission n.d.). Similarly, East Asian countries such as Japan, Singapore, and South Korea have also expressed interest in importing green hydrogen and its derivatives to meet their climate commitments. India’s geographical proximity to the potential East Asian importers will support India’s export ambitions and help create a strong international supply chain. Multiple Indian firms are proactively exploring export opportunities with several export-oriented projects for green ammonia production already announced.

Developing an enabling ecosystem

In addition to spurring demand for green hydrogen, developing an enabling ecosystem, including critical infrastructure will play a pivotal role in supporting India’s ambitions for this sector. Key enablers are a core component of the NGHM, which highlights the opportunity for India to lead on the manufacturing of electrolysers and renewable energy equipment, in addition to the customised infrastructure this sector requires for safe and efficient storage and transportation across offtake industries. The domestic production of electrolysers, renewable energy equipment, and other system components in sectors with emerging green hydrogen applications presents another opportunity for the country to reduce import reliance and assume market leadership in green hydrogen production.

Green hydrogen hubs will play a vital role establishing India as a frontrunner in the global transition to green hydrogen and are expected to emerge close to either domestic demand centres or major ports that can facilitate exports. The development of upstream component manufacturing industries can be centred around these areas. Green hydrogen hubs offer an opportunity to rationalise the storage and transportation infrastructure as production and consumption facilities are co-located. Coastal states with renewable energy potential and robust port infrastructure such as Odisha – which has already signed memorandums of understanding (MoU) to this effect – and others such as Tamil Nadu, Gujarat, and Maharashtra are likely contenders to develop these new hubs. They can build on the upcoming infrastructure by facilitating the participation of international stakeholders and may help broaden demand beyond the few Indian states where demand is currently concentrated.

While policy, both at the national and the state level, is essential to initiate an industrial transition towards India’s emerging green hydrogen industry, adequate and affordable financing will also be key in supporting the industry’s subsequent growth. To secure green hydrogen investments from developed countries, India has highlighted five activities that may involve the use or production of green hydrogen to be eligible for the trading of carbon credits per Article 6.2 of the Paris Agreement (Ministry of Environment, Forest and Climate Change 2023). While this is a step in the right direction, the active flow of private capital will be critical to achieving economies of scale for green hydrogen in India.

Challenges to Scaling Green Hydrogen in India

This section presents the overarching barriers across the value chain – demand, supply, infrastructure, and financing – to deploying green hydrogen at scale in the Indian market. While these challenges are interrelated, incentivising demand remains at the heart of the commercial challenge. Green hydrogen will only command a higher share in industries’ fuel and feedstock mix when it is competitively priced with grey hydrogen and other incumbent fossil fuels. Until then, the green hydrogen sector will have to rely on government mandates and external financial support for demand generation. Tackling the premium associated with green hydrogen over incumbent fuels is critical. Further, technology, policy, and financing solutions are of utmost importance in reducing the cost of green hydrogen, building an enabling ecosystem, and catalysing finance.

Challenge 1: Incentivising demand

Project developer and financing institution struggles to identify sufficient demand in India to make green hydrogen projects viable at scale, creating commercial uncertainty and hindering investment in large-scale projects.

The cost of switching from grey to green hydrogen remains the largest impediment to the industrial uptake of green hydrogen. As per current industry estimates, green hydrogen costs USD 3.5-5 per kg, while breakeven costs for green hydrogen to replace conventional fuels in existing sectors are less than USD 2 per kg (Figure 6). Green hydrogen production costs may further increase due to cost overruns in projects if timelines and cost estimates are disrupted due to administrative or operational challenges. the NGHM does point to forthcoming consumption Government of India is in the process of establishing the Indian carbon market, it is also unclear if, and when, carbon prices will be high enough to encourage demand sectors to switch to green hydrogen, especially given that other clean alternatives may have a lower cost of CO abatement.

Challenging breakeven costs for green hydrogen versus incumbent fuels and commodities

The green hydrogen cost curve (Figure 6) plots the breakeven cost of green hydrogen production (USD per kg) against the theoretical potential of consumption (MTPA) that will be unlocked at the breakeven cost across various sectors of the economy. A base case scenario presents green hydrogen’s cost competitiveness against incumbent fuels and commodities, at market prices.To present a forward-looking view, an aggressive scenario has also been depicted in Figure 6, which assumes higher prices of incumbent fuels. Furthermore, economised parameters have been considered in mobility applications. Comparing the green hydrogen production costs in India with the breakeven costs in both scenarios demonstrates that the use of green hydrogen will command a sharp premium. However, certain applications have a lower premium in the aggressive scenario. 

FIGURE 6: Green hydrogen cost curve

The NGHM’s Phase I focus sectors for green hydrogen – fertiliser production (excluding urea) and refining – have the most achievable breakeven costs basis our analysis, ranging from USD 2.1-1.7 per kg. Cumulative demand unlocked in these sectors is estimated to be 4.7 MTPA, around half of which will originate from refining. Grey hydrogen – which currently relies on expensive imported fossil fuels – allows for a higher breakeven. Although shipping is a Phase II application area, its breakeven costs are comparable with those of the fertiliser and refining sectors due to high taxes on bunkering fuels. This sector could unlock an estimated 0.6 MTPA of green hydrogen demand in India.

The breakeven cost in urea production is much lower, at USD 1.03 per kg, albeit being a Phase I focus sector. This is because urea production in India receives high financial support through retail price subsidies. Furthermore, a transition from grey to green hydrogen use in urea production would necessitate procuring carbon dioxide externally, unlike the production of other fertilisers. This adds to the cost of transition which lowers the breakeven.

Hydrogen use in mobility applications is unlocked at a green hydrogen cost below USD 1.2 per kg. While the breakeven cost at the tank inlet for hydrogenfuelled buses and trucks is around USD 2-3 per kg, the green hydrogen production cost must be significantly lower than this value to compensate for an increase due to hydrogen refuelling stations. The breakeven cost of hydrogen production for use in trucking is at a meagre USD 0.12 per kg, due to a high differential in the purchase cost and fuel economies of hydrogenfuelled trucks and diesel trucks. These differentials will reduce over time, with economised production and technological improvements.

Other sectors – such as steel production, the green hydrogen–based methanol-to-jet-fuel pathway in aviation, and green hydrogen–based methanol production – are cost prohibitive, with breakeven costs of approximately USD 1 per kg or less.

Government incentives to catalyse demand by tackling production costs

The current incentives granted by the NGHM to provide viability gap funding for green hydrogen production and indigenise electrolyser manufacturing are intended to be catalytic. However, on a standalone basis, they will fall short of bridging the gap between green hydrogen production costs and the necessary breakeven costs. The subsidy for green hydrogen production (MNRE 2023), which is capped at USD 0.66 per kg in the first year and tapers down to USD 0.4 per kg by the third year, is insufficient for almost all sectors. The subsidy offered in the second tranche of the Strategic Interventions for Green Hydrogen Transition (SIGHT) scheme continues these rates for green hydrogen production (MNRE 2024) in addition to offering an analogous subsidy for green ammonia production (MNRE 2024). Furthermore, the production-linked incentives (PLI) scheme for electrolyser manufacturing (MNRE 2023) with an allocation of approximately USD 560 million and an average incentive of USD 39.5 per kW, can only support around half of the electrolyser capacity needed to achieve India’s 2030 green hydrogen goals. Therefore, financial institutions and green hydrogen sector participants must complement the government’s efforts with innovative solutions to incentivise and unlock the demand for green hydrogen.

Challenge 2: Limited enabling infrastructure for green hydrogen deployment

Much like electricity and natural gas networks, deploying green hydrogen at scale relies on robust distribution and storage infrastructures to connect supply and demand nodes. However, green hydrogen supply chain infrastructure does not yet exist in India outside of several local industrial clusters that consume hydrogen. Moreover, power evacuation infrastructure closer to ports may also be insufficient to cater to export markets. This creates commercial uncertainty for project developers and financiers of green hydrogen, who must consider additional operational challenges. The added cost for developers to build the enabling infrastructure could also be prohibitive for new green hydrogen projects.

Medium-term applications that do not currently consume hydrogen, such as mobility, steel, and city gas distribution, will impose specific infrastructure requirements that must be built at scale from scratch.

The production target of green hydrogen will need around 125 gigawatt (GW) of additional renewable energy capacity to be developed in India, beyond the country’s ambition of 500 GW of renewable energy capacity by 2030 (MoP n.d.).

Developments in India aimed at building robust and enabling ecosystems

The central government’s decision to offer a 25-year waiver on interstate transmission system (ISTS) charges for green hydrogen projects commissioned before 31 December 2030 through the GHP is a welcome incentive for the industry (MoP 2023). While state distribution company tariffs and state-level electricity duty on them may still be applicable, open access transmission charges would reduce because of the ISTS waiver. The GHP also maximises the use of existing infrastructure to connect renewable energy production areas with green hydrogen consumption nodes.

However, some states are unwilling to provide similar incentives on intrastate wheeling charges, which might impede the growth of the green hydrogen economy. The NGHM also mentions facilitating enabling infrastructure for two green hydrogen hubs by 2026. However, at present, limited details are available on the scale and type of public funding this would involve. Furthermore, assessing the cost-effectiveness of hydrogen hubs by comparing the costs of delivering renewable energy with the cost of transporting hydrogen/ammonia is necessary. The success of the NGHM’s integrated mission strategy (MNRE 2023) will be critical to ensuring coordinated and effective infrastructure development to support India’s green hydrogen sector.

Challenge 3: High financing costs in emerging markets

Private investments in India carry a high cost of capital, particularly for capital expenditure-intensive projects in upcoming green sectors such as green hydrogen. The weighted average cost of capital (WACC) for green projects such as solar photo voltaic, natural gas and utility scale batteries in India ranges between 9 per cent and 11 per cent (IEA n.d.). High interest rates in advanced economies can also result in capital outflows from emerging markets such as India as the cost of borrowing increases. These challenges are often compounded by currency risk and macroeconomic volatility that dampen investor demand in unproven and upcoming sectors such as green hydrogen. Additionally, green hydrogen projects also face a substantial technology risk, especially for electrolysers, hydrogen storage, and fuel cells.

Slow progress on unlocking adequate financing for India’s green hydrogen sector

Raising capital from private financial institutions is expensive for Indian green hydrogen producers. While domestic financial institutions have been working with the Government of India to develop financing frameworks for domestic green hydrogen projects including guidelines on credit appraisal, risk assessments, and concessionary finance to aid credit flow into green hydrogen projects, these innovative solutions are still at the early stages. Development finance institutions globally have been cautious and sparing in financing green hydrogen with concessional capital at scale due to the nascent development in the sector. Furthermore, given the nascency of this sector, financial institutions are at the early stages of developing innovative financing solutions such as first-loss equity, risk insurance, and subordinated debt. Incentives offered by developed countries to support their green hydrogen sectors will also deter capital flow to emerging economies such as India. Inadequate financing hinders the demonstration of green hydrogen technologies at scale, which causes uncertainties associated with the sector to remain unresolved, further discouraging financing.

Private Sector Considerations for Policymakers

Considering the challenges that the domestic green hydrogen ecosystem faces, and learnings from emerging markets globally, in this section we offer working policy considerations for the Government of India. These multifaceted considerations aim to reduce green hydrogen production costs, generate sustainable demand for green hydrogen, and leverage critical enablers for building a thriving green hydrogen sector in India.

Consideration 1: Reducing green hydrogen production costs

As per industry estimates, the levelised cost of green hydrogen (LCOH) in India in 2024 is estimated to range between USD 3.5-5 per kg. The variance in LCOH could be explained by the mix and type of renewable energy, capacity utilisation factor of renewable energy assets, plant load factor, power efficiency, assumed degradation, and contracted price of electrolysers.

In conjunction with the outlay granted by the NGHM to provide viability gap funding for green hydrogen production and to indigenise electrolyser manufacturing, several additional policy incentives could be considered to further decrease the LCOH. These incentives that lower the cost of renewable energy have an outsized impact on the LCOH, totalling as estimated reduction of USD 0.83 per kg of hydrogen (Figure 7). These include waiving power banking and open-access charges in addition to reducing the Goods and Services Tax (GST) on renewable energy components. Incentives such as a reduction in GST on electrolyser components; availing incentives under the SIGHT scheme for the production of electrolysers, green hydrogen, and green ammonia; and a decrease in capital costs through green debt access, that help drive down the cost of electrolysers have an estimated impact of USD 0.41 per kg. Waiver of power banking charges and green debt access would affect the cost of both the electrolyser and renewable energy as illustrated in Figure 7.

FIGURE 7: Estimated impact of the policy considerations on green hydrogen production costs

Source: CEEW analysis

Market-driven innovations in electrolyser and renewable energy technologies could also support to lower the cost of electrolysers and renewable energy by an estimated USD 0.62 per kg. The cumulated impact of the aforementioned incentives along with potential innovations could lead to an estimated LCOH ranging between USD 1.63-3.13 per kg.

Other important factors that can impact the cost of green hydrogen production include the efficiency of the electrolyser, scale of domestic production, and costs of supporting distribution and storage infrastructure.

Establishing a supportive power banking framework​

Renewable energy banking could also be instrumental in reducing the cost of green hydrogen by increasing the utilisation of electrolysers. As per our models for a solar-only operation, electrolysers currently have a 33 per cent utilisation factor with 30 per cent oversizing of solar power plants. While the GHP already allows banking for a period of 30 days, hydrogen-consuming state governments could also make similar allowances for green hydrogen projects on a monthly basis, injected at any 15-minute time block. This would further improve the utilisation of electrolysers and reduce green hydrogen costs. There is already precedence for this given that several state governments allow up to 100 per cent (Gulia, Banga and Garg 2021) of their renewable energy to be banked at different terms, even monthly (Sharma 2022). To facilitate uniformity in renewable energy banking provisions, the MNRE could consider standardising and reducing the terms for power banking vis-à-vis green hydrogen projects across states.

Providing low-cost open-access electricity​

Waivers on interstate open-access charges (MNRE 2023) could also support the provision of wheeling power between special economic zones, given that the production sites of green hydrogen and its derivatives may be located at a considerable distance from renewable assets and across state lines. Similar to the central government, states could provide waivers on ISTS charges. States such as Rajasthan, Andhra Pradesh, and Uttar Pradesh already provide waivers or have reduced the intrastate open-access charges in their respective green hydrogen policies.

Reducing goods and services tax

The Government of India could reduce the GST for components used in green hydrogen/green ammonia production (solar and wind-electricity generation modules), including during its sale as a final commodity. Under the existing GST structure, electrolysers are taxed at 18 per cent, and renewable energy setups at 13.8 per cent under a composite structure. The reduction in GST could be planned for a stipulated period until a 5 MTPA production capacity is established.

Reducing capital costs through green debt​

Central and state governments could consider providing direct fiscal support through low-cost loans, government-owned institutions, and other forms of financial assistance. The provision of low-cost green debt at rates commensurate with other green bonds or loans will be necessary to reduce the WACC for green hydrogen projects. This could help reduce green hydrogen production costs without significantly burdening government finances.

Projected budgetary outlay of the considerations​

To implement the aforementioned considerations, direct financial support from the central and state governments will be essential. We estimate that waiving off open-access charges may have the largest impact on government finances (Figure 8). This impact, when annualised, could vary for each state, over a wide range of INR 7,115-18,072 crore (approximately USD 890 million to USD 2.2 billion). This is because the base components of the open-access tariffs are dictated by different policies across each state. Reducing GST on electrolysers and renewable energy will also incur a considerable loss of revenue for both the central and state governments. Until the capacity to produce 5 MTPA green hydrogen is established, the lost revenue due to the reduction in GST to 5 per cent may cost the government over a range of INR 8,015-10,593 crore (USD 1,068-1,412 million) per year. At a 5 MTPA green hydrogen production level, and by accounting for differences in state-level tariffs on power banking, the annualised impact on the governments for fully supporting power banking ranges between INR 515-2,163 crore (USD 69- 288). These measures could complement the outlay in the NGHM, increasing the effectiveness of viability gap funding and PLI in the NGHM.

FIGURE 8: Estimated impact of the considerations on finances of state and central governments (INR crore)

Source: CEEW analysis Impact on government finances (INR crore)

Consideration 2: Catalysing sustainable demand for green hydrogen

Established and growing demand for green hydrogen will be instrumental in developing economies of scale, driving down the cost of green hydrogen, and creating a virtuous cycle. Mandated green hydrogen purchase obligations (HPO) for domestic industries can help initiate demand. Promoting exports to markets that have signalled intentions to import green hydrogen or green ammonia is another lever that can be employed to generate demand.

Stipulating green hydrogen purchase obligations

India’s green hydrogen ecosystem is experiencing a supply-side push, but still lacks the necessary demandside pull required to scale. Through the Energy Conservation (Amendment) Act, 2022, the central government could mandate the offtake of green hydrogen by instituting blending requirements in industrial units, such as in the fertilisers and refining industries. Blending mandates, with periodic upward revisions clearly outlined, may be needed in the early stages of this transition to help stimulate demand. A small blending proportion would spread the incremental cost of green hydrogen over the total volume of hydrogen used, thereby cushioning its impact on the financials. The MNRE has initiated discussions with stakeholders in the industry to outline a plan for green HPOs. Similar policies were successful in scaling India’s renewable energy generation from 2003 onwards, when state electricity regulatory commissions set obligations for large commercial entities. While this may trigger an increase in the cost of industrial output, offtakers could eventually benefit from long-term stability in fuel costs and secured energy requirements due to reduced dependence on imported fossil fuels from volatile international markets.

In the initial phase, the refining and non-urea fertiliser industries could be brought under the ambit of HPOs, as the premium associated with green hydrogen is lower in these applications than in urea fertilisers. The price increase due to the blending of green hydrogen in refineries could be passed on to the end consumers if the cost of crude oil in the international market reduces to compensate for the increased prices. To minimise the impact on citizens, the government could consider reducing taxes on refinery products. Once the cost of green hydrogen has decreased significantly, urea plants could also be brought under the ambit of HPOs. A hydrogen blending mandate in urea fertiliser plants could be supported by the viability gap fund under the SIGHT scheme.

Facilitating a compliance carbon market​

We welcome the Government of India’s release of the Carbon Credit Trading Scheme (CCTS) (MoP 2023). Under this scheme, obligated entities in the fertiliser, refining, and steel sectors must comply with the set carbon targets. A carbon price on these obligated entities would incentivise the transition to green hydrogen in these sectors. The design of a compliance carbon market with allowances and carbon pricing aligned with the Paris Agreement goals, will be critical to successfully incentivising demand for green hydrogen without imposing exorbitant financial pressures on the obligated entities.​

Providing financial assistance to the fertiliser industry for consuming green hydrogen​

Given that the cost of fertiliser production in India is highly sensitive to the cost of fuel, any blending mandate for green hydrogen will significantly impact the financials of the fertiliser industry. Furthermore, it may be challenging for the government to increase the outlay for fertiliser subsidies, which exceeded USD 10 billion a year in FY 2021 and FY 2022. The total subsidy expenditure is heavily dependent on the volume of chemical fertilisers consumed, which the Indian government has already initiated efforts to rationalise through the Prime Minister - Promotion of Alternate Nutrients for Agriculture Management Yojana (PMPRANAM scheme) (Ministry of Agriculture and Farmers Welfare 2023). This scheme aims to promote the use of alternate and organic fertilisers through a market development assistance subsidy, and incentives to states to reduce chemical fertiliser consumption. The subsidy expenditure that will be saved due to the reduced use of chemical fertilisers through these initiatives could support the fertiliser industry’s green hydrogen consumption, either as support for capital expenses or as partial viability gap funding. The Department of Fertilisers, Ministry of Chemicals and Fertilisers, could consider making a provision to allocate a portion of the incentive amount to fertiliser plants located within the state where the reduction has occurred. This would also help states achieve their decarbonisation strategies within the State Action Plans on Climate Change.

Promoting exports of green hydrogen and its derivatives​

Through the NGHM, India envisions becoming not only a leading producer but also a major exporter of green hydrogen and its derivatives. Infrastructure and administrative support for export-oriented units could be prioritised to facilitate trade. Such units would need to be able to access incentives and other benefits of exportfocused green hydrogen hubs. Port infrastructure should ensure adequate land availability and other resources for storing and handling green hydrogen derivatives. Further, through appropriate bilateral and multilateral agreements, India could remove structural and regulatory barriers to trade with key allied partners, facilitating a free international market for these fuels. India could also encourage initiatives that aim to leverage opportunities for collaboration with partners in allied countries to mutually enhance production capacities or develop technologies across the green hydrogen value chain.

Consideration 3: Leveraging critical enablers for a thriving ecosystem

Policy interventions to simplify project development processes, facilitate open trade and financing, and catalyse innovation in the green hydrogen ecosystem are critical. These interventions include establishing enablers to reduce transaction costs, removing structural bottlenecks for project development, developing standards and certification procedures, and investing in R&D.

Facilitating land and water allocation

Clear processes for land acquisition in manufacturing zones – for instance, on a long-term lease basis or land-for-sale – and streamlining the processes for obtaining various land use and zoning approvals for green hydrogen production, component manufacturing, distribution, and storage through a dedicated singlewindow clearance system, could be instrumental in facilitating growth in this sector. The transportation of green hydrogen will require the installation of pipeline infrastructure and obtaining a timely right-of-way would be paramount. To simplify right-of-way processes, the Government of India could introduce a law similar to that in the power transmission sector, where the licensee is given the right to build transmission lines under Section 164 of the Electricity Act.

State governments could consider replicating measures adopted by Uttar Pradesh, Andhra Pradesh, and Rajasthan to provide land and water at subsidised rates. States could also consider full or partial exemptions from land tax, local-body tax, land use conversion charges, non-agricultural tax, and industrial water consumption charges. While these measures may have a minimal impact on the overall cost of production of green hydrogen, they have the potential to be instrumental in improving the ease of doing business for developers.

Increasing research and development allocation

The proposed allocation of INR 400 crore (USD 49 million) under the NGHM is welcome; however, further investment may be required to reduce dependence on critical raw materials and promote ‘Make in India’. The R&D Roadmap for Green Hydrogen Ecosystem in India (MNRE 2023) released by the MNRE outlines India’s priorities along the green hydrogen value chain. Such a focused approach to R&D initiatives may be critical to the sector’s progress. Further, R&D initiatives should be able to access provisions under the newly established Anusandhan National Research Foundation to augment the available resources. The government could float projects aimed at improving critical technology components in the public domain with clear eligibility criteria, project targets and milestones, and funding criteria. The results and methodology of such projects could be disclosed for public review, and the intellectual property could be published. Industrial stakeholders and start-ups, along with academia and other non-competing entities, could be eligible to undertake such projects and secure the associated funding.

Encouraging standardisation and certification to promote trade

While India has already released its definition of ‘green hydrogen’ (MNRE 2023), aligning with a global consensus on standards and certification norms will help create further interoperability and ensure smooth trade. Given India’s ambitions for this sector, there is an opportunity for the country to lead efforts to establish a global rules-based cooperative framework for green hydrogen (Ghosh, et al. 2022.). Gaps in safety standards across the green hydrogen value chain should also be addressed (Sripathy, et al. 2023). Testing and certification facilities for all green hydrogen value chain components, with the involvement of premier research institutions and private stakeholders, can be facilitated with centralised institutional oversight to ensure quality control and project safety.

Initial Learnings on Green Hydrogen Financing

The policy considerations presented in this report represent a suite of high potential, near-term actions that the Indian government could pursue to accelerate private investment in domestic green hydrogen production. However, not all barriers to investment can be solved through government-led interventions. Private-sector financial institutions, developers, and offtakers must partner with multilateral development banks, donors, and other development finance institutions to deploy innovative financing solutions at scale.

Financing green hydrogen and green ammonia projects remains a challenge, highlighted by the few projects that have secured sufficient financing to commence development. However, as demand increases, financiers must develop innovative financing solutions in response to market dynamics. In the meantime, existing projects that have received financing, as well as projects for proximate energy sources, such as renewables and liquefied natural gas, present valuable lessons.

Learning 1: Standardise medium-term offtake agreements

Financial institutions could work with project developers to create standardised medium-term offtake agreements for green hydrogen, similar to the movement towards more standardised, bankable power purchase agreements in the renewable energy sector. A governmental nodal agency to facilitate such agreements would be critical. Financial institutions have indicated that 10-year offtake agreements would be sufficient, less than the typical project lifetime of 20–30 years. Since ammonia is a globally traded commodity with fluctuating prices, medium-term agreements can support developers and buyers, who need flexibility on pricing and volume.

Learning 2: Mitigate offtake risk with real options

Financial institutions could work with project developers and governments to design projects where renewable power generation capacity can be connected to the grid, providing an alternative revenue stream in case offtake risks make planned projects unviable. Although term-ahead and day-ahead markets in India have low trading volumes, they offer an avenue for project developers to sell excess power expeditiously. Purchase agreements should shield project developers from challenges in amortising capex in case of offtake risks. Finance professionals consider technology risks to be minimal, as most project costs will be related to proven technologies (e.g., solar, wind, and hydro-renewable power).

Learning 3: Manage currency risk with proven hedging products

Financial institutions could work with multilateral development banks and other organisations to develop currency hedging products for green hydrogen projects focused on export markets. For hydrogen and ammonia projects focusing on export markets, structuring contracts in USD rather than INR can mitigate currency risks associated with investments in India.

Learning 4: Scale use of concessional capital, guarantees, and viability gap funding

Financial institutions and developers could work with multilateral development banks and donors to facilitate the investment of concessional capital in the green hydrogen sector in India. Guarantees and viability gap funding mechanisms should be encouraged to lower the cost of capital for projects and make Indian green hydrogen and ammonia production competitive in global markets.

Learning 5: Invest in project preparation and capacity building

Green hydrogen/green ammonia production and its supporting distribution and storage infrastructure require high upfront capital investment and considerable effort in designing, structuring, and financing projects. Significant project preparation funding will be needed to bring more projects into the pipeline and move them towards fundraising. However, project developers have also found that mainstream financial institutions currently do not have the capacity to evaluate hydrogen and ammonia projects, given their lack of experience and familiarity with the idiosyncrasies of these projects. Resources are therefore required to draw together investors from across commodities, infrastructure, and liquefied natural gas teams, all of which can play a role in transferring knowledge from their verticals to the green hydrogen sector and help in better evaluating green hydrogen and ammonia projects.

FAQs

Frequently Asked Questions

  • What is green hydrogen?

    Green hydrogen is the hydrogen produced through the use of renewable energy for the electrolysis of water.

  • Why is green hydrogen important for decarbonisation efforts?

    Hydrogen can act as a fuel, industrial feedstock, reductant, and energy carrier. At present, most hydrogen used worldwide is grey – produced through natural gas reforming – a process that leads to significant greenhouse gas emissions. As countries seek to decarbonise their economy and reduce their dependence on fossil fuels, green hydrogen – produced using renewable energy to electrolyse water – will be critical for them to achieve their energy transition goals.

  • Where can green hydrogen hotspots emerge in India?

    The geographical location of Indian industries will likely determine which regions drive domestic green hydrogen demand. Currently, Gujarat accounts for 30 per cent of India’s industrial hydrogen consumption, followed by Uttar Pradesh (17 per cent), Maharashtra (8 per cent), Rajasthan (7 per cent), and Madhya Pradesh (6 per cent). Going forward, the steel-producing states such as Jharkhand, Chhattisgarh, Odisha, and Karnataka may also emerge as large consumers of green hydrogen. The demand for green hydrogen for mobility applications will be dispersed throughout the country.

  • Can India emerge as a leading exporter of green hydrogen?

    By leveraging its competitive advantage in renewable energy costs, India can emerge as a leading exporter of green hydrogen, especially in the short-to-medium term. Several European and East Asian countries have already stated their intentions to import green hydrogen and its derivatives, such as ammonia, to support their decarbonisation goals. Multiple Indian firms are proactively exploring export opportunities, having already announced several export-oriented projects for green ammonia production.

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