COMMODITIES 2025: Japan set to enter year of decisions over hydrogen

This is part of the COMMODITIES 2025 series where our reporters bring to you key themes that will drive commodities markets in 2025.

Japan is set to begin a year of decision-making with regard to its hydrogen and ammonia ambitions in 2025, effectively marking a new phase in the country's development of a pathway toward decarbonization.

After years of feasibility studies and pilot projects, and despite prolonged cost issues, the new year will be the moment of truth for Japan, with the government finally selecting the first set of projects for its price gap subsidy and with companies also having to decide on whether to proceed with their own projects, as the country steps closer to realization of a large-scale deployment of the decarbonization solutions.

"Certainly, hydrogen and ammonia is about to take off from laboratory and make a step-up to a phase of decarbonization fuel businesses at a time when there are bold supports getting started for hydrogen production and facility investments for commercialization, in addition to technological developments, around the world," Daisuke Hirota, director of the Hydrogen and Ammonia Division at the Ministry of Economy, Trade and Industry, told S&P Global Commodity Insights.

"In particular, 2025 will be an important year for use-case supply chains being developed at the dawn of the market from such coordinated supports for the [hydrogen and ammonia] price gap with fossil fuels and development of hubs on the receiving front based on the Hydrogen Society Promotion Act," Hirota said.

"To avoid our supports being temporary for up-front investments, we will advance our regulatory and systematic measures altogether, with an eye to developing independent and strong supply chains as well as creating new markets and its expanded use."

Japan has earmarked Yen 3 trillion ($19.16 billion) for a support framework -- similar to the international contract-for-differences arrangement -- covering the price gap between hydrogen and its derivatives' output and transportation costs, and conventional fuel prices, based on the Hydrogen Society Promotion Act that took effect in October.

Policy support

Starting after Jan. 31, Japan will start examining the first set of applications for its newly established price gap support framework.

The application process to select low-carbon hydrogen and derivatives supply projects started Nov. 22 and it is set to run until March 31, 2025.

"With the applications being closed at end-March, we expect to see multiple plans being approved by the METI minister following the screening in FY 2025-26," said Satomi Takeshita, director of the hydrogen project support division at state-owned Japan Organization for Metals and Energy Security.

"We are hopeful that 2025 will be an important year for model cases being selected for the deployment of hydrogen in the society," said Takeshita. JOGMEC will administer support for the price gap and the hub development in cooperation with METI, with the ministry working to start its support for hub development in FY 2025-26.

The subsidies are designed to cover the gap between a "base price" covering project costs for imports and domestic production and a "reference price" such as the CIF import price for existing fuels -- LNG and coal -- that will be replaced by low-carbon hydrogen and its derivatives.

Eligible companies can receive subsidies for 15 years from the start of low-carbon hydrogen supply. However, after support ends, companies must continue supply for another 10 years.

Project implications

Japanese companies see the hydrogen price gap subsidy as being essential to proceeding with their projects, underpinning their decision-making, according to industry sources and experts.

"[The framework] aims to assist both large-scale imported and small-scale domestic supply chains, and is designed to promote the transition to clean fuels in hard-to-abate sectors such as steel, industry, and transport," said Anri Nakamura, hydrogen associate director at Commodity Insights.

"However, initial consumption in the power sector, which is not classified as hard-to-abate, is expected to be necessary to help increase scale and reduce costs," Nakamura added.

Nobuo Tanaka, former executive director at the International Energy Agency, said that a project being developed by power generator JERA involving ammonia cofiring at the Hekinan thermal power plant "should be considered as the first possible project", following its completion of a 20% cofiring test.

JERA is among the companies that have planned for their final investment decisions on ammonia supply projects to be made in 2025.

"Of course, this is based on an assumption that the country's systematic price gap support measures to be undertaken," JERA President and CEO Hisahide Okuda said Nov. 27. "For now, we do not have any change in our principle to proceed with our project after making a FID on the upstream side in 2025."

Most use cases for low-carbon hydrogen in Japan are not expected to be profitable by 2030, based on projected hydrogen and carbon prices, Nakamura said.

"However, some projects, particularly smaller domestic hydrogen production initiatives using electrolyzers, may proceed due to strong support from city councils or prefectural governments," Nakamura said, adding that "large import-based supply chains are unlikely to move forward" if they do not secure the price gap subsidy.

Needing support

Tanaka, who is currently chairman of the Steering Committee of the Innovation for Cool Earth Forum (ICEF), said that the number of projects awarded could end up being lower than earlier expectations as a result of the Yen 3 trillion price gap subsidy, given the current cost of hydrogen.

"This price gap measure should make the supply chain of hydrogen possible and future investment by the private sector to the hydrogen supply chain, the more projects being selected, the better," Tanaka said.

"So how the Japanese government, especially METI, decides on the project is a very, very important implication for the future of the hydrogen economy," Tanaka said.

"Yen 3 trillion in fact is not enough. It's just a first disbursement, but if it is only limited to some projects, I don't think that can really trigger the huge energy transformation toward the hydrogen economy," he said, adding that additional funds would be needed.

Meanwhile, the draft of the 7th Strategic Energy Plan, released Dec. 17, has "taken the industry by surprise by reversing specific targets for hydrogen and ammonia in power generation [in FY 2040-41]," Nakamura said, marking a shift from the 6th Strategic Plan's objective of generating 1% of power from these sources by FY 2030-31.

"I interpret this shift not as a rejection of hydrogen for power generation, but as an acknowledgment of its potential along with other decarbonization options" for thermal power, Nakamura said.

In June 2023, Japan set a goal of 12 million mt/year of hydrogen use by 2040 in connection with amendments to the national hydrogen strategy to bridge the gap between its initial target of 3 million mt in 2030 and 20 million mt in 2050, as part of efforts to accelerate the development of low-cost hydrogen supply.