As per the latest McKinsey & Company report on hydrogen investment and market development in China, the country is emerging as a potential hydrogen giant. 

Asian countries like India where hydrogen projects are still at the policy level or at the announcement stage can draw parallels to China’s plan to achieve carbon neutrality in various sectors, including aviation and steel before 2060. Earlier in September 2020, China pledged to reach peak carbon emissions in key sectors like aviation and steel before 2030.

China has announced many large-scale clean hydrogen projects amounting to over ten million tons of total capacity in the next 10 years. These 53 hydrogen projects, of which 50 are large-scale and resulting in over US $180 billion in committed or announced investments. The total investment includes US $20 billion in direct investment, US $75 billion in additional investment and US $85 billion in indirect investment from OEMs and suppliers. To support investment, the Chinese government has made US $20 billion of public funding available to hydrogen projects. Around US $17 billion of total investments in China are considered mature, of which 75% have been announced by fuel cell and Fuel cell electric vehicles (FCEVs) manufacturers.

China's Hydrogen Plan

Almost 50% of these clean hydrogen production projects are for transport applications. Key announced projects include Sinopec’s ambition to build 1,000 refuelling stations in the next 5 years, and the commissioning of a 200 MW PV-connected hydrogen plant in the Ningxia region. 

For China, renewable hydrogen production remains the ultimate goal and it is working on multiple pathways to decarbonize hydrogen production. Comparing production costs across technologies, electrolysis at today’s Levelized Cost of Energy (LCOEs) is already competitive with low carbon production technology (coal gasification in combination with CCS).

The transition to renewable hydrogen in China has already started, with the vast majority of announced projects using renewable energy as their source. They account for one million tons of hydrogen, or 11 GW of electrolysis capacity. For low carbon hydrogen production, CCS technologies can be used to capture up to 98% of emitted CO2 from coal gasification, making it a viable clean alternative. However, as production costs for coal gasification plus CCS are currently US $2.8/kg and evolving to US $2.5/kg by 2030; this would make coal-based low carbon hydrogen production more expensive than electrolysis in optimal production locations.

Multiple factors will drive the adoption of renewable hydrogen: First, it will benefit from China’s scale-up in renewable energy production from a total capacity of 500 GW in 2020 to 1,200 GW by 2030. Moreover, China has committed to developing a high-quality transmission grid and expanding its storage capacity to ensure the flexibility needed to increase the share of energy produced by renewables. Combined with falling electrolysis Capex costs, this can lead to renewable hydrogen production costs as low as US $2.4/kg in optimal production locations today.

By 2030, electrolysis will become the lowest priced low-carbon production technology in all locations and China is making the right moves in this direction. The cost for electrolysis could significantly decrease to US $1.7/kg in cost-optimal locations.

Hydrogen Distribution Challenges

China will need to connect renewable-rich western regions to high hydrogen demand coastal areas. Looking at China’s key hydrogen markets, such as transportation and steel production, most demand will come from coastal areas in the East. However, China’s renewable hydrogen supply centers are mainly located in the West, where there is abundant solar and wind capacity that could be taken advantage of. This implies a supply and demand gap that needs to be closed via two possible solutions: distribution of Chinese hydrogen from the West to coastal and Northern China or import of hydrogen from other countries to coastal and Northern China.

While production costs in potential export markets such as Australia, Saudi Arabia, and Chile are lower than in Western China, liquefaction and shipping costs make imported hydrogen less competitive (50% more expensive) compared to local production. As such, China is likely to supply its own hydrogen needs. However, given higher production costs, China is currently not competitively positioned to export hydrogen to other countries as compared to Australia, Saudi Arabia, and Chile.

Way Forward

Other Asian nations including India can tweak their renewables roadmap on the lines of China’s decision to make hydrogen a focal point in its decarbonization strategy for the transportation sector. As of today, most Chinese commercial vehicle players already have some level of entry into the FCEV space, mainly in buses and light trucks; however, this is likely to increase in parallel with the growth of hydrogen and expand to other types of vehicles in the near future.