The economics of green hydrogen production hinge on two factors — the levelised cost of electricity (LCOE) and electrolyzer costs, both driven by the cost of capital.
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As India charts its path to net-zero emissions by 2070, green hydrogen offers a crucial pathway to decarbonise its industrial sectors. India’s ambitious target of producing 5 million metric tonnes (MMT) of green hydrogen annually by 2030 signals its bid to establish early leadership in this emerging sector. However, the daunting economics of financing these projects threatens to derail India’s green hydrogen ambition.
Based on a recent analysis by BloombergNEF, India is on track to meet only 10% of its stated goal. The sluggish progress is attributable to the substantial disparity between green hydrogen production costs ($5.30-$6.70 per kg) and traditional grey/blue production costs ($1.9-$2.4 per kg). This wide price differential makes it challenging to drive domestic offtake and attract private investment. It also creates a classic market deadlock — green hydrogen costs can only decrease with scaled production, but scaling requires viable economics.
The barriers
The economics of green hydrogen production hinge on two factors — the levelised cost of electricity (LCOE) and electrolyzer costs, both driven by the cost of capital. In emerging markets like India, perceived higher risks push up borrowing costs, leading to a high weighted average cost of capital (WACC). As investment costs make up 50-80% of LCOE in renewable energy projects, WACC significantly impacts overall costs.
Studies show that an increase in WACC from 10% to 20% can trigger up to a 73% surge in the levelised cost of hydrogen, even when all other production factors remain constant. Add to this the current high costs of electrolyzers, ranging from $500-1,400/kW for alkaline and $1,100-1,800/kW for proton exchange membrane systems, and the financial viability becomes even more challenging.
The global perspective on investments reflects these barriers. By May 2024, only 27.6% of the 1,572 announced large-scale clean hydrogen projects valued at $370 billion had reached final investment decisions. This disparity between plans and financial commitments indicates that the market’s structural barriers extend beyond technological readiness. India needs to adopt innovative financing mechanisms and policy frameworks to effectively de-risk investments and attract capital to scale its green hydrogen sector.
On the policy front, several countries are showing the way. The U.K.’s Low Carbon Hydrogen Standard Certification provides a model for building market confidence. Similarly, strategic hydrogen hubs in the U.S., Japan, and Australia reflect a shift from traditional industrial development approaches — rather than letting infrastructure follow demand, these nations are fostering integrated ecosystems where infrastructure, production, innovation, and consumption co-evolve. Adapting this approach, with localised industrial clusters linked to renewable energy sources, could create self-sustaining hydrogen corridors in India that attract investment.
How to de-risk investments
On financing, India needs a multi-pronged approach to de-risk investments. First, the government must implement a comprehensive policy framework that extends beyond production incentives to address fundamental financing barriers. This includes establishing long-term hydrogen purchase agreements and partial loan guarantees to reduce investor uncertainty. It should also create “regulatory sandboxes” that allow for rapid experimentation with novel business models while maintaining safety standards, similar to how fintech innovation was accelerated in India.
Second, India’s financial sector must move beyond traditional project finance paradigms designed for conventional energy infrastructure. Indian banks and financial institutions must develop products that address hydrogen’s distinctive challenges — long development timelines, uncertain demand, and complex value chains. While blended finance and green bonds provide initial momentum, the sector requires innovative approaches like modular project financing that lets facilities scale in phases, reducing initial capital requirements. “Anchor-plus” financing models could help, where a creditworthy industrial anchor customer underwrites the base capacity while additional capacity is financed using flexible instruments as market demand grows. Equipment-leasing structures could transform electrolyzer investments from prohibitive upfront costs into manageable operational expenses, following the successful model of solar and wind sectors.
Third, India’s international collaboration must move beyond aspirational agreements to tackle practical market-making challenges. Establishing standardised carbon intensity and hydrogen origin certification can facilitate exports and bolster trust in India’s hydrogen supply chain. Key trade corridors, such as the Hydrogen Energy Supply Chain Project between Australia and Japan, show how cross-border partnerships can provide the demand certainty needed for large-scale investments.
In the next few years, early projects in industrial hubs such as Odisha, Maharashtra, and Gujarat that demonstrate viable business models will shape how the sector develops in India. The green hydrogen projects must integrate financial structuring from the outset. The focus must be on delivering hydrogen at prices that suit key industries.
India’s success in green hydrogen will depend on leveraging its abundant renewable resources through efficient project execution, access to low-cost capital, and strategic investments.
Amarendu Nandy, Assistant Professor (Economics) at the Indian Institute of Management Ranchi. Views are personal; Malvika Awasthy, Green Energy Professional at ReNew. Views are personal
Published – December 17, 2024 01:11 am IST
