Clear guidelines, formation of CfD schemes likely to unlock Asian hydrogen market in 2024

Major challenges for the hydrogen industry to overcome in 2024 are a lack of clarity on regulations, support schemes and the price gap between hydrogen, its derivatives and existing commodities such as coal and LNG, according to industry experts. The finalization of contract for difference (CfD) schemes in Japan and South Korea could help hydrogen project developers, targeting these markets, sign offtake agreements with potential buyers.

With 2024 in view, hydrogen project developers are aware that they need to sign offtake agreements to reach final investment decision (FID) at least for the projects planning to start production by 2027.

"Approximately 1.7 million mt of low-carbon hydrogen capacity has been announced in Japan and South Korea thus far, with the vast majority of this being in the early stages of development... Only 1% of the announced capacity has reached FID as project developers seek clarity on production rules and also await public funding announcements," said Matthew Hodgkinson, hydrogen analyst with S&P Global Commodity Insights.

"The CfD schemes will aim to bridge the cost gap between unabated fossil-based production and low-carbon production in order to bring some of this capacity to market," Hodgkinson added.

Price gap between hydrogen and counterfactuals

In December, blue ammonia was $29/MMBtu more expensive than CFR Kinuura coal that Japan currently imports for using in power plants and proton exchange membrane (PEM) hydrogen costs were $49/MMBtu higher than JKM spot prices, S&P Global data showed.

Blue ammonia prices are calculated by adding blue ammonia premiums to the grey ammonia market prices.

The price gap reflects the premium that the governments need to pay to support the hydrogen market, according to analysts with S&P Global. Both the Japanese and South Korean governments are counting on a CfD scheme to bridge the price gap and kickstart their hydrogen economy in 2024.

South Korea, Japan finalizing CfD schemes in 2024

Japan's Ministry of Economy, Trade and Industry defined a carbon intensity threshold of 3.4 kgCO2e/kgH2(opens in a new tab) well-to-gate target for 2030 as part of the CfD scheme to match international standards, while South Korea has defined a 4 kgCO2e/kgH2 well-to-gate threshold for now, analysts with S&P Global said in Hydrogen Policy Tracker report.

A clear definition of clean hydrogen will set the stage for the launch of the South Korean CfD scheme, which market participants expected to be issued in 2024 and allow for clean hydrogen bidding for power generation by making the costs of hydrogen competitive.

Under proposed South Korean clean hydrogen bidding system, the levelized cost of electricity (LCOE) will be used as the basis for bids and will comprise of system marginal price (SMP) and CfD, analysts with S&P Global said.

Dr Attilio Pigneri, founder and CEO of H2U the Hydrogen Utility, developer of H2-Hub Gladstone green hydrogen and green ammonia project said: "South Korea will launch the first round of auctions under the Clean Hydrogen Power Standard (CHPS), a CfD scheme designed to subsidize imports of zero or low-carbon hydrogen and derivatives for co-firing in existing coal power plants or new-build gas power plants."

"In Japan, a similar CfD scheme focused on ammonia co-firing in existing coal power plants is expected to be finalized by the end of the current financial year -- sometime in March 2024 -- with the first round of auctions to start in the following financial year," Pigneri added.

Japan's CfD scheme aims to pay the difference between strike and reference price, with the reference price reflecting the price of counterfactuals such as coal and LNG, while the strike price will be the agreed price for supply costs of hydrogen and ammonia.

Singapore puts plan in place for hydrogen market

Apart from Japan and South Korea, Singapore's government is starting to outline its policies on hydrogen. The city-state has placed high hopes on hydrogen, the clean fuel, expecting it to account for around 50% of the country energy mix by 2050.

On the policy front, the Energy Market Authority (EMA) and Maritime and Port Authority of Singapore (MPA) shortlisted six candidates to progress to the next stage of a closed request for proposal(opens in a new tab) for Singapore's ammonia power generation and bunkering project on Jurong Island. Results of the RFP process will be announced early 2024 and will see a clearer view on the city-state's plan for hydrogen and ammonia.

Besides Singapore's government policies, the local maritime sector is accelerating efforts to develop ammonia as a bunker fuel(opens in a new tab). The Global Centre for Maritime Decarbonisation has started conducting studies on ship-to-ship ammonia cargo transfer pilot in Singapore and is actively contributing to the local and international standards development to support the drafting of technical guidelines for ammonia bunkering.