Ch11: Scary Domination of China's Green Hydrogen Industry!

Imagine a country that produces over 33 million tonnes of hydrogen annually, nearly triple the output of its closest global competitor, the US.

This is China at the start of 2024, leading the world in hydrogen production and consumption.

And though it is still early days, but China has already established a clear lead in achieving the same with green hydrogen.

The story of China's nascent yet burgeoning green hydrogen industry is one of rapid growth, strategic policy-making, and significant global impact. It’s a story of ambition, innovation, and large-scale transformation.

So, let’s dive in!

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The Early Stages (Pre-2021)

• China's industrial landscape, dominated by heavy carbon-emitting sectors like steel and thermal power, laid the groundwork for a shift towards cleaner energy.
• The steel industry alone emitted about 1.8 billion tons of carbon annually, necessitating a move towards alternative, sustainable solutions.
• And the use of green hydrogen here was just non-existent, given the prices never made sense.

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The Policy Framework (2021)

• The pivotal shift began with the Chinese Government's long-term plan for hydrogen, released on March 23, 2021.
• In its 14th Five Year Plan, for the first time, the Chinese Government identified hydrogen as a "frontier" area, in which it needed to solidify its presence in.
• It signified China's commitment to developing a domestic hydrogen industry, mastering relevant technologies, and supporting the manufacturing capabilities crucial for this transition.

This policy direction aligned with China's broader goals of peaking carbon emissions by 2030 and achieving carbon neutrality by 2060.

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Increasing Ambitions (2021-2022)

While the national government's target was to produce 0.2 million tons of green hydrogen annually by 2025, local governments and companies set their sights higher.

• Motivated by national emissions reduction goals and potential CO2-related export tariffs, they initiated projects to exceed 1.2 million tons per year by 2025. The shift towards green hydrogen, produced by water electrolysis, became a national priority.
• Over 120 green hydrogen projects are under development across China, with major contributions from regions rich in solar and wind power, like Xinjiang & Inner Mongolia.
• And now, we are looking at a massive 3.2 million tons of capacity by 2025, with state-owned oil refining major Sinopec (also the present No.1 hydrogen producer in China) alone accounting for 2 million tons.
• For context, the Indian industry is expected to get to a million ton capacity only in 2028, and then scale that up to 5 million tons by 2030.

By then, being humble, the Chinese capacity will be much larger.

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Sinopec Leading the Way!

• As of 2023-end, China is the largest producer of hydrogen in the world, a third of the global capacity.
• But most of its hydrogen is gray, meaning, produced from coal and natural gas. And much of that is consumed by the country’s massive steel plants and oil refineries. Thus, these players have also been the ones to lead the corporate developments towards green hydrogen.
• This is evident in the case of Sinopec, which has launched a green hydrogen project in Inner Mongolia with an annual production of 30k tons a year, and also the world’s largest solar-to-hydrogen project, with an annual production capacity of 20k tons.

Additionally, it has also built a joint venture with US-based Cummins to build some of the most advanced electrolyzers. This one began production in 2023!

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The Electrolyzer Edge

• A crucial aspect of China's hydrogen strategy is its focus on capturing the whole supply chain, as it has done with most sectors over the last 3 decades.
• With such a massive investment into green hydrogen production capacities, there is a crazy boom in the demand for electrolyzers which perform the crucial task of splitting water into hydrogen and oxygen.
• And planning for this in advance, Chinese electrolyzer manufacturers have already built a global force to be reckoned with. And this has been fueled by the Chinese Government’s attractive incentives which are targeted at building dominance in this space.

And it’s working, as evident in China’s share of the global electrolyzer manufacturing capacity over the years.

2020: 10%

2021: 25%

2022: 35%

2023: 40%

2024: 50% (Projected)

Such rapid buildup of scale and expertise has resulted in a dramatic fall in the prices of electrolyzers, with the Chinese alkaline electrolyzers costing as low as just 20-25% of the ones made in the US and Germany!

This is a big deal, because, green hydrogen presently costs almost 2-3x as much as grey hydrogen.

Such a steep drop in the cost of electrolyzers directly brings down that difference by a big factor.

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Challenges and Uncertainties

Despite these advances, the industry faces hurdles.

• The biggest challenge is the intense competition and fear of overcapacity in the electrolyzer market, which is affecting profitability.
• Many reports suggest that Chinese electrolyzer production, which was just 5GW in 2022, is set to surge to 40GW in 2024, and 80GW in 2028. This is a big issue because the domestic market’s demand for electrolyzers is only going to be about 10GW in 2024.
• And China accounts for the most aggressive green hydrogen capacity addition in the world, meaning the export demand potential will be even lower. That presents a big challenge to the Chinese electrolyzer manufacturers who are going to have a hard time in finding buyers for their crazy capacities.

Nonetheless, the growth is undeniable, as indicated by the fact that 27 out of 31 Chinese provinces have laid out their green hydrogen-focused policy support and strategy by December 2023.

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The Road Ahead

• The future of China's green hydrogen industry is intertwined with several national energy policies.
• As we chronicle this remarkable journey, China's green hydrogen industry emerges not just as a national endeavour but as a significant player in the global shift towards sustainable energy.
• But, only once the pursuit of global dominance reaches a state of semblance and stability, can one truly determine which of the Chinese players will stand where.

Meanwhile, green hydrogen production, that’s set to boom, with China leading the way.

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Subscribe and stay tuned for more updates in this fascinating saga of studying China’s rise!

See you tomorrow morning 7.30 am with another edition.

Best,

Jayant Mundhra