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Insights Beyond the Headlines: Exploring Green Hydrogen's Economic Realities and the Promising Horizon of Green Ammonia in China
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【Snapshots】
1. The operational challenges faced by Sinopec's Kuqa project have raised concerns about the economic feasibility of large-scale green hydrogen initiatives in China. Projections from INTEGRAL indicate a growing cost competitiveness for green hydrogen, with potential breakeven between green and grey hydrogen in specific regions by 2032 and anticipated overall competitiveness after 2040.

2. Government subsidies are essential to assist downstream sectors in absorbing increased costs, thus supporting the economic feasibility of green ammonia production in regions like Jilin.
 
3. Major stakeholders, motivated by the prospect of profitability and market expansion opportunities, continue to invest significantly in green hydrogen projects, particularly emphasizing downstream applications like green ammonia and its emerging new applications.
 
Key words: #Green hydrogen #Green chemicals #Ammonia  #Emerging applications #Water Electrolysis Hydrogen Production #Economic viability #Sinopec
 
If you like this article, please also refer to our comprehensive analysis report "2023 Hydrogen Supply Chain in China" and "2023 Hydrogen and Fuel Cell Industry in China"
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In breaking news from December 2023, the world's largest green hydrogen project in Kuqa, China, led by Sinopec (figure 1), faces operational hurdles due to safety issues in electrolyzers. These challenges, impacting efficiency and actual operation hours, have cast doubt on the economic viability of large-scale green hydrogen projects in China.
 
Figure 1: Sinopec Kuqa Green Hydrogen Project
Source: Sinopec
 
The Kuqa project faced operational limitations due to inefficiencies in its electrolysis systems (figure 2), which failed to meet the promised efficiency range of 30-100%. This forced operators to adjust the number of active electrolyzers, reducing operational time and significantly increasing the Levelized Cost of Hydrogen (LOCH).
 
Figure 2: Alkaline Water Electrolyzer in Sinopec Kuqa Green Hydrogen Project
Source: LONGi
 
Regarding the viability of the hydrogen economy, the Levelized Cost of Hydrogen (LCOH) stands as a crucial metric influencing decisions on green hydrogen project investments. When examining factors impacting LCOH, the fixed cost, primarily driven by the expense of the electrolyzer system, and the Operational Expenditure (OPEX) heavily rely on the Levelized Cost of Electricity (LCOE), constituting approximately 70% of the total cost on average. Additionally, the number of hours the electrolyzers operate directly affects production capacity, despite the relatively advantageous renewable LCOE in the chosen Kuqa, Xinjiang site. Foreseen to be around 18 RMB/kg, this operational challenge is anticipated to significantly elevate the LCOH to over 35 RMB/kg at this phase, as approximated by INTEGRAL’s LCOH simulation model. This estimation, almost three times the current grey hydrogen level, poses a severe threat to the economic viability of these on-purpose green hydrogen projects.
 
 
Figure 3: Forecast of Levelized Cost of Hydrogen
Source: INTEGRAL's analysis
 
 
According to INTEGRAL’s modeling, the competitiveness of green hydrogen's cost in China is steadily rising, with projections indicating potential breakeven between green and grey hydrogen by 2032 in certain regions (figure 3). Blue hydrogen is expected to reach cost parity with grey hydrogen by 2034. Overall, green hydrogen is forecasted to become price competitive across China after 2040.
 
If so, who are the first movers before breakeven: Risk or Reward?
 
Despite the distance from achieving cost-effectiveness, green hydrogen projects in China continue to attract substantial capital investments even though the breakeven will not come until the next decade. There could be curiosity about why these investors, mainly major energy corporations and state-owned enterprises (SOEs), are heavily investing in what might appear as "unprofitable" ventures, despite the possibility of encountering similar hurdles as Sinopec. Having a glance at the green hydrogen projects under planning in China, the majority have targeted the downstream application of green chemicals, especially green ammonia.
 
Ammonia seems to be the current primary pathway for green hydrogen consumption. According to research data until April 2023, there are over 19GW of green hydrogen projects under construction or in planning. Among these, 58% of the green hydrogen projects are associated with synthetic ammonia, with over 80% of the capacity supporting downstream hydrogen scenarios equipped with ammonia facilities, according to our research. In terms of projects that directly disclose the green chemical capacity, there are 81 green chemical projects across 13 provinces in China (figure 4), of which green ammonia projects take the majority. Most of these initiatives are centered in Inner Mongolia, notably with a substantial concentration in Ordos and Chifeng cities, followed by Gansu province and Jilin province. These regions are actively engaged in strategic planning for the advancement of green ammonia, aiming at becoming key producers of these chemical products in the future.
 
 
Figure 4: Green Chemical Pojects in China (ammonia & methanol)
Source: Public information summarized by INTEGRAL
 
There are mainly two types of green ammonia projects. The majority of green ammonia initiatives are led by renewable energy (RE) producers upstream such as China Energy Group (中国能源集团), SPIC (国家电投) and Envision(远景能源)and with a smaller number originating from chemical companies such as China Coal Group(中煤集团), Baofeng Energy (宝丰能源) and ZTHC (中天合创). These principal shareholders invest not solely based on long-term vision but also driven by their own incentives. RE producers as project owners, endeavor to optimize the utilization of regional renewable energy sources to drive profits, and actively pursue downstream consumers, such as local chemical companies.
 
A prominent state-owned energy corporation has disclosed in an industry forum that projects incorporating green chemicals as downstream hydrogen scenarios facilitate the acquisition of substantial wind/PV bids. Similarly, companies like Envision and Mingyang have expanded their operations into the chemical sector by establishing a dedicated green chemical company to advance commercial efforts.
 
Figure 5: ZTHC's coal chemical plant in Inner Mongolia 
Source: Inner Mongolia Daily
 
Companies like Baofeng and China Coal are inclined toward decarbonizing their current ammonia business, envisioning a gradual shift to green hydrogen as their production feedstock. This incentive is underscored by the anticipation that the chemical industry will likely be incorporated into the CEA (Chinese Emission Allowances) system after the year 2025. With the projected rise in costs associated with grey hydrogen, transitioning to green feedstocks would assure these companies of offering reasonable pricing to their existing customer base while expanding to other applications. (Learn more about CEA, please check out our article "China's Emissions Trading: The Opportunities Ahead" )
 
It is also noticeable that participation from the local government’s side, in the forms of direct investment in the projects, financial subsidies to green hydrogen production, and collaboration with these SOEs to guarantee a smooth project landing, etc., making these projects more feasible before the breakeven of economic green hydrogen. Particularly ambitious governments like those in Inner Mongolia and Jilin directly offer subsidies for local green hydrogen production while other places might provide preferential electricity fee to the production. These regional administrations aspire to make full use of their renewable resources and enhance their strategic energy stance in the future by expanding the scope of green hydrogen projects and downstream green chemical applications to eventually become a major exporter of green energy and green chemicals in China. Jilin government demonstrates its ambition to become a key green ammonia producer in the future, by providing a direct subsidy of at most 15 RMB/kg to green hydrogen production.
 
Currently, government subsidies are essential to aid downstream sectors in absorbing the increased costs. Similarly, the economic feasibility of green ammonia production isn't achievable without subsidies for green hydrogen. In the case of caprolactam, an value added downstream product of ammonia, yielding a production margin of about 20%-30% based on a grey ammonia cost of around 2500 RMB/ton, the shift to green ammonia priced at approximately 3500 RMB/ton (assuming a production cost of 14 RMB for green hydrogen in regions like Ordos, compared to the usual 10 RMB for grey hydrogen) could notably diminish this current margin. However, when factoring in subsidy support in regions like Jilin, the cost of green ammonia could become competitive against grey ammonia, ensuring the profitability of these key stakeholders.
 
 
What drives the emphasis on ammonia?
Figure 6: Ammonia Market Outlook in China 2050
Source: INTEGRAL's analysis
 
Ammonia as the biggest hydrogen consumer now and possibly future, in agricultural, industrial fields, as well as emerging new application sectors.
 
  • Agricultural: Ammonia currently stands as the primary hydrogen consumer within the chemical industry (figure 6), largely due to its use in agricultural fertilizers. Demand for the agricultural sector is expected to shrink in the future, as the population growth slows down while fertilizer efficiency improves in the future years. However, it will continue to be a promising and stable market in the future. Currently, there isn't a specific government action plan for utilizing green ammonia in agricultural fertilizer due to its weak economic feasibility, especially within the fertilizer industry. However, there have been initial steps toward small-scale green ammonia demonstrations by industry leaders like Xinlianxin, indicating a gradual scaling up in the mid-to-long term.
 
  • Industrial: Currently, industrial applications account for a quarter (25%) of products derived from ammonia. This trend in industrial usage is anticipated to align with the growth seen in the industrial contribution to the national GDP in the next decades. Within the industrial domain, surge in demand particularly in sectors such as caprolactam, is projected in the future. This surge is fueled by the promising rise in demand for nylon fibers and their utilization in a wide range of downstream applications. Under the guidance from the policy of "Implementation Plan for Peak Carbon Emissions in the Industrial Sector” 《工业领域碳达峰实施方案》, issued by MIIT (Ministry of Industry and Information Technology National Development), NDRC (National Development and Reform Commission) and MEE (Ministry of Ecology and Environment), in which green hydrogen used for ammonia and methanol is mentioned for industrial feedstock replacement.
 
  • Emerging new applications: The use of ammonia as a maritime fuel has become a worldwide trend, started by the EU's "FuelEU Maritime" regulation focused on emissions, which will greatly boost the scale of use of green ammonia. Major shipping companies like Maersk have already unveiled their long-term strategy centered around adopting green ammonia fuels. Development of ammonia-powered vessels is also clearly mentioned in China’s "Green Development Action Plan for the Shipbuilding Industry (2024-2030)” 《船舶制造业绿色发展行动纲要(2024—2030年)》, which was jointly issued by the major five ministries in December 2023. Additional emerging applications include power generation, a sector currently under detailed planning in countries like Japan. Moreover, there's a growing focus on using ammonia as a carrier for hydrogen, facilitating long-term storage and transportation over extended distances, such application is also planned by multiple Chinese provincial governments. This development is expected to gain momentum once substantial production of on-purpose green hydrogen begins to surge upon achieving cost-effectiveness.
 
 
In response to the rising demand for ammonia, key investors in major green ammonia projects have diversified their presence across multiple application domains. For instance, SPIC's green ammonia project in Daan, Jilin, claimed to have secured supply contracts with five domestic chemical firms, covering agricultural and industrial product sectors. Additionally, they inked agreements with international trading entities for export endeavors. Meanwhile, Envision has also unveiled their vision on decarbonizing conventional agricultural uses, while also foreseeing potential growth in the maritime fuel market in the long term.
 
 
Recap
 
In a discussion between the author and a green chemical project manager from one of China's top coal chemical groups, a resolute commitment was evident from the corporate side to realize these green chemical initiatives. This commitment aims not only to align with national carbon neutrality targets but also to venture into new sectors with future opportunities. The above-mentioned chemical giant is currently engaged in two green chemical projects in Ordos—one for ammonia and another for methanol—both expected to commence operations within the next two years. Moreover, its joint venture with Sinopec will serve as an offtaker for Sinopec's green hydrogen, utilizing it in polyolefin production.
 
Despite the ongoing challenge of economic feasibility, the expansion of green hydrogen production in China is poised to continue, driven by robust incentives brought by rising carbon emission costs and promising market prospects, particularly in green ammonia. While hurdles and uncertainties persist, the evolving landscape in downstream sectors and the unwavering dedication of these influential Chinese major stakeholders, are set to advance the achievement of tangible economic feasibility for green hydrogen and to elevate the rise of green ammonia in the landscape.
 
 
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