【What is next for China’s hydrogen supply chain (1) --- Production】
Although 2020 was a rough year for most industries, hydrogen industry has welcomed some good news from Chinese governments. At national level, the state government has officially recognized hydrogen as energy by including hydrogen into energy statistics reporting system and revised energy law. At local level, more and more governments have issued development plans for hydrogen and full cell vehicle industry (Fig 1).
In the following three decades, what energy sources can be utilized for fuel-cell-use hydrogen production? What business opportunities can the decarbonization trend entail?
Three types of hydrogen
Hydrogen production comes in three shades based on emissions generated in production process: grey, blue, and green.
Grey hydrogen is generated from fossil fuels, producing significant amounts of carbon emissions.
Blue hydrogen is hydrogen produced from fossil fuels and chemicals (e.g. chlor-alkali, propane and ethane) that should meet low-carbon threshold (14.51 kgCO2e/kg H2)* with the application of carbon capture and storage (CCS) technology.
Green hydrogen is the cleanest type of hydrogen that produced from renewable energy with carbon emission lower than 4.90 kgCO2e/kgH2.*
*Emissions level is according to the latest group standard Low-carbon Hydrogen, Clean Hydrogen and Renewable Energy Hydrogen Standard and Confirmation issued by China Hydrogen Alliance.
Three development phases of hydrogen fuel production
Based on our assumptions, China would go through three development transitions from blue and grey hydrogen to green hydrogen production between 2020 and 2050 (Fig 2).
In the short term (2020-2025), low impurities and emissions allow blue hydrogen sourced from chemicals (majorly chlor-alkali, propane, ethane) to replace grey hydrogen and become a makeshift fuel supply.
At present, grey hydrogen is the major supply given around 98% of hydrogen is used for industrial feedstock. Despite of the lowest production cost (around 10 Yuan/kg) and resourceful fossil fuels nationwide (Fig 4), particularly in coastal provinces such as Shandong, Jiangsu, Guangdong and Liaoning, grey hydrogen is not qualified and sustainable for fuel-cell applications due to emissions and impurity issues.
Grey hydrogen production is discouraged by the latest national reward policy, Notice on the Development of Fuel Cell Vehicle Demonstration Applications [Subsidy Policy Analysis], which says that hydrogen production with less than 15 kg CO2/kg H2 can be rewarded RMB 3 Yuan/kg. In this respect, only blue and green hydrogen can satisfy the emission-control standard. In the future, similar local reward policies can be expected with reward amount benchmarking the national policy. In this case, 6 Yuan/kg reward would be granted to blue and green hydrogen suppliers, around 40% of green hydrogen production cost using curtailed renewable power.
In addition, the latest national standard Fuel for PEM FCEV (GB/T 37244-2018) regulates that six types of impurity shall be under ppm level, because hydrogen containing impurities higher than given level can damage fuel cell and shorten its lifespan. Unadvanced purification and impurity testing technologies are two key barriers to the application of grey hydrogen to fuel cell.
Instead, by-production hydrogen after PSA treatment can reach 99.99%~99.999% purity with low-level impurities, which is qualified for PEM FCEV use. East China, including provinces like Zhejiang, Jiangsu and Shandong, is playing a leading role in blue hydrogen supply sourced from chemicals, followed by Guangdong and Liaoning (Fig 6). At current stage, chlor-alkali manufacturers are the major suppliers of by-product hydrogen. In the next decade, chemical manufacturers of PDH and ethylene are expected to outrace chlor-alkali counterparts to be major suppliers of by-product hydrogen, because chlor-alkali industry is already mature while PDH and ethylene industries have great development potential.
In theory, no extra GHG emissions will be generated during hydrogen purification process. The biggest drawback is that by-product hydrogen supply is not demand-driven. Specifically, it is determined by the demand of main industrial products instead of actual hydrogen demand. In this case, hydrogen supply is unstable and limited as it fluctuates based on chemical industry output.
During the same period, a small amount of green hydrogen will be produced from curtailed renewable power and supplied for demonstration projects (Fig 7). For example, Hebei ranks first in developing power-to-gas projects by utilizing curtailed wind power to supply green hydrogen for fuel cell buses running in Beijing Winter Olympic Games 2022. Other projects are mostly in north area and Sichuan province.
China’s power-to-gas projects show a similar layout as the distribution of curtailed renewable energy sources (Fig 8). In China, renewable energy rests in north and south west China. Xinjiang and Inner Mongolia are resourceful of wind and solar power, while hydropower concentrates on Sichuan province. The layout similarity indicates that hydrogen is encouraged as a way to reduce power curtailment and increase power utilization rate (Fig 9). ). [Four reasons why China promotes hydrogen energy (Part 1)]
In the medium term (2026-2035), industrial by-product and curtailed renewable power continue to supply the majority of hydrogen fuel nation-wide.
By 2035, annual production amount of by-product hydrogen is estimated to remain stagnant at around 3 million tons/year, short of annual demand of FCEV (around 4.3 million tons/year). Green hydrogen can compensate for the supply shortage thanks to competitive production cost (12.2 ~ 15 Yuan/kg) by utilizing low-cost curtailed renewable power in North and Southwest China, yet hydrogen production CAPEX remains high. A further reason of the steadily growing supply is that power-to-gas is a key measure of power balance management to minimize the gap between power supply and demand (Fig 11). However, constrained by local resources and storage/transport technologies, green hydrogen produced could be difficult to supply every demand area. Coal-to-gas, therefore, would be another supply option for coal-resource provinces, such as Shanxi, if purification and CCS technologies were advanced and price-competitive.
In the long term (2036-2050), green hydrogen would become the mainstream supply considering increased installed capacity and reduced generation cost of renewable power (majorly wind and solar power).
Renewable power is a promising hydrogen source in China, supplying around 70% of hydrogen by 2050 base on China Hydrogen Alliance estimation. One reason is huge production potential. Abundant renewable resources in North and Southwest areas allow China to meet hydrogen fuel demand both domestically and internationally. The other driver is that reduced hydrogen production CAPEX allows hydrogen to become a consumer of both curtailed and on-grid power. This is also because power production CAPEX of renewables is projected to gradually drop to lower than fire power level, as the installment scale of renewable power rises to achieve China’s carbon-neutral goal by 2060. So far, several state-owned energy investment groups and power generators have launched demonstration power-to-gas projects using curtailed power around China (Fig 7), such as SPIC, CNE Energy, China Huaneng Group. However, high generation cost of renewables may stop green hydrogen from centralized production using on-grid power, which could only be an economical source if green electricity price and hydrogen production CAPEX. further declined.
In addition to the mainstream method water electrolysis, biomass gasification and microbial conversation are two advanced production technologies in the long term. Biomass energy can be of great potential for green hydrogen production, given that a daily supply of 400 tons life waste can produce hydrogen supplying 1000 fuel cell buses or logistics trucks. Hynertech, Tri-Ring Group and Wuhuan Engineering have launched a demo project of hydrogen carriers produced from life waste in Wuhan, which has a daily waste supply of around 12000 tons. There is a large untapped market in China.
It is noticeable that there is gap between renewable resource areas and major hydrogen demand markets in the medium and long term. To bridge this gap, different scales of storage and transport technologies need to be developed for national hydrogen distribution. For example, liquid tanker trucks can be used to transport high-volume hydrogen from west to east. More detailed analysis on future development of hydrogen storage and transport means will be available soon on our website.
China’s transition to green hydrogen production indicates a few emerging and promising markets, investors and concerning manufacturers would be better keep an eye on:
PSA and CCS technologies. In the short term, immaturity and high costs of purification and carbon capture technologies render fossil fuels impossible to be commercialized for hydrogen fuel production. Currently, domestic players (e.g. Jaran Hydrogen Energy Technology, Ally Hi-tech) have launched demo purification projects, yet not commercialized. On the other hand, several state-owned energy enterprises, like CNPC, Sinopec, CR Power, have taken the lead in launching CCS demonstration projects yet carbon capture cost remains high at RMB 300~900 yuan/ton CO2. Thus, international enterprises specialized in low-cost, advanced purification and CCS technologies can have great chances in helping grey hydrogen penetrate hydrogen fuel market in the mid-term. Particularly, CCS businesses are most likely to be encouraged in petrol/coal-resource provinces, such as Xinjiang, Shanxi, Liaoning and Shandong, because the Chinese government strives to utilize large-amount fossil fuels in an eco-friendly way.
Electrolyzer. Advances in electrolyzer and its key components are crucial to large-scale, cost-effective green hydrogen production in the long term. So far, China has a cost edge in ALK electrolyzer for large-scale hydrogen production, led by one domestic player Suzhou Jingli. The high production cost and limited output stops PEM from scale production, and SOEC is still at lab stage. Electrolyzer manufacturers and key component suppliers are worth to pay attention to the emerging market of green hydrogen, particularly in north and southwest China, where local governments actively promote hydrogen to resolve power curtailment.
Impurity testing for hydrogen fuel. The assumingly increasing hydrogen fuel demand would create large impurity testing demand due to the regulations of the national fuel standard (GB/T 37244-2018) (Fig 5). The absence of qualified testing equipment makes China unlikely to satisfy future testing demand. So far, only one domestic institution (Sinopec Research Institute of Petroleum Processing) is qualified to conduct impurity testing work on hydrogen fuel with self-developed technologies. More international testing institutions and testing equipment suppliers are expected to serve China’s hydrogen fuel market.
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