Chairman’s Message

Japan’s second hydrogen strategy was decided and announced on June 6th, 2023. The first strategy, formulated in December 2017 by the Japanese Government, was in fact the first strategy released in the world by any national government. Three roadmaps have been prepared to complement the first strategy. Similar strategies were later introduced by other countries. Considering the pioneering role of Japan’s first hydrogen strategy, this second one is also worthy of attention. This month’s message explores some of the details of Japan’s second hydrogen strategy.

<Main Points>

1. The next stage of evolution from the first hydrogen strategy
At a time when hydrogen was barely discussed globally, Japan was the first country to formally highlight the potential of hydrogen with its first strategy formulated in 2017. Its first strategy primarily focused on R&D and the development of a domestic market. As such, the first hydrogen strategy emphasized innovation and focused on internal demand.
After more than five years, hydrogen is now considered and enthusiastically openly discussed globally. The recent G7 Summit Communiqué very often referred to the potential of hydrogen. While innovation is still very much needed, we are now facing the challenge of commercializing hydrogen to the global market with lower prices through economies of scale. Of course, Japan will face international competition in the process.
For these reasons, it is natural for the second hydrogen strategy to focus more on the commercialization of hydrogen. The strategy aims at expanding the global market to reduce costs and is also focusing on areas to ensure competitiveness

2. Demand side challenge 1: Cost
The strategy stresses the necessity to create a demand market for hydrogen. The biggest current challenge is the high cost of producing hydrogen and for this reason, the strategy calls for the development of a framework to offset the gap between the cost of supplying hydrogen and the cost of competing conventional energies. The legislation for this framework could be presented to the Diet as early as this fall. For those interested in the supply of hydrogen, it is now time to provide inputs to the Japanese Government to ensure a framework conducive to private sector business activities.
The strategy makes it clear that the hydrogen qualified for the framework will be decided based on its carbon intensity and not based on its source or “color”. The current thinking is that the threshold for hydrogen will be 3.4 kg-CO2e/kg-H2 on a Well-to-Gate basis, and the threshold for ammonia will be 0.84 kg-CO2e/kg-NH3 on a Gate-to-Gate basis*. The support level could vary depending on the carbon intensity and the threshold is subject to revision in the future.
The strategy also stresses the importance of expanding the global market for hydrogen to lower costs. To this end, the strategy points out the need for standardization and technical assistance to expand the global market.
*Well to Gate boundary:
Direct emissions from hydrogen production process and indirect emissions from supply of feedstock (natural gas, renewable energy, etc.) for production
Gate to Gate boundary: Direct emission from hydrogen production process

3. Demand side challenge 2: Usage
As hydrogen is a new form of energy, innovative usage for it will need to be developed to create demand.
The strategy heavily focuses on the development of usage for hydrogen in several sectors.
The power sector is identified as a major potential market for hydrogen. Co-firing of hydrogen/ammonia with gas or coal in power generation plants is identified as the initial market to ensure stability in power supply while substantially reducing CO2 emissions. 100% burning of hydrogen or ammonia is envisioned as a future step. Innovation in boilers and turbines is highlighted as a crucial step to develop this market.
Through electrolysis, excess power from renewable energies could be used to produce hydrogen which could then be stored and used later by hydrogen fired power plants to address the intermittency of renewable energies.
The transportation sector (including aviation, freight, marine, and rail) is also a sector of great interest. For example, Sustainable Aviation Fuel (SAF) is essential for the decarbonization of the aviation sector. The strategy makes it clear that the Japanese Government will mandate a 10% for SAF in the fuel mix for the aviation industry by 2030. Although SAF could be produced from recycled cooking oil and biofuel, SAF produced from hydrogen will undoubtedly be necessary to ensure the required volume. The prospect for such a regulation should drive the development and production of SAF, especially the one using hydrogen.
Heavy duty/long haul commercial vehicles, such as trucks, are identified as promising users of hydrogen. Compared to passenger vehicles for which batteries can support mobility in most cases, these commercial vehicles require a lot more energy and cannot afford to stay idle during long battery recharging time.
Marine transportation is another potential sector. For trans-ocean shipping, ammonia which can be decarbonized and handled without much difficulties, is recognized as a very useful fuel. Heavy duty machinery supporting port activities are another promising area for hydrogen because the 24/7 nature of port operations is perfect for the use of fuel cells running on hydrogen.
The same is true for non-electrified railways, as fuel cells using hydrogen could replace diesel powered trains. There are many non-electrified railways globally, they should be decarbonized and fuel cells using hydrogen could be the answer.
Many industrial activities require high temperature heat which can be generated right away with the use of hydrogen/ammonia. This demand for heat has been traditionally fulfilled by natural gas or coal. The steel industry is the largest industrial emitter of CO2 and technologies using hydrogen for direct reduction can substantially lower the current CO2 emissions resulting from the blast furnace process. But this technology still requires more innovation.
To develop various usages for hydrogen, the strategy emphasizes the need to conduct many demonstration projects to prove the applicability of hydrogen/ammonia and supports the necessary R&D activities.

4. Supply side challenge 1: Technology
An electrolyzer is one of the known core technologies needed to produce hydrogen. It requires electricity to split water molecules into hydrogen and oxygen through a process called electrolysis. As we produce more hydrogen, demand for highly efficient electrolyzers will rise substantially. Reflecting the limited potential for domestic renewable energies, the Japanese manufacturers of electrolyzers have so far played a rather modest role in the global market.
However, Japanese companies have developed significant technologies related to electrolysis, in particular concerning cells. They have been leading the world in fuel cells technologies which technologically presents synergies to manufacturing electrolysers. The process of producing water and energy from hydrogen in fuel cells is the opposite process of producing hydrogen from water and energy in electrolysis. The strategy recognizes the growing importance of electrolyzers as one of the key technologies to be promoted. We expect more substantial support through R&D, demonstration projects and incentives to deploy electrolyzers in the future.
The limitation of available excess domestic renewable energies will continue to be a constraint. For this reason, the strategy stresses the need to develop a global market. The goal for Japanese companies (including suppliers of parts and materials) is to install 15 GW of electrolyzer globally, by 2030.

5. Supply side challenge 2: Infrastructure & Supply Chains
One of the biggest challenges is in the transportation of hydrogen. The strategy stresses the need to realize efficient means to transport hydrogen by sea, an area in which Japan leads. Simultaneously, efficient means to transport hydrogen within Japan will need to be developed. To minimize the need for transportation, it would be more efficient to aggregate various activities and develop hydrogen hubs to provide for such a concentration. The strategy calls for the development of three major hydrogen hubs and five medium scale hydrogen hubs within Japan. As this is the first time that specific numbers are given by the Government, an acceleration in proposals for possible locations for hydrogen hubs is expected.
 Considering that the majority of the hydrogen used in Japan will be coming from overseas, long distance supply chains will also need to be developed. Coordination of the multiple layers and players in the supply chains will be required, otherwise, the absence of one layer could block the whole supply chain from functioning properly. On the other hand, the considerable uncertainty surrounding the pace of the hydrogen market growth could impede the timely development of a comprehensive supply chain. The strategy suggests the need to introduce a framework to alleviate such uncertainties through risk sharing.

6. Way forward
The GX (Green Transformation) Roadmap announced by the Japanese Government in December 2022 envisioned that in the next ten years a total of 150 trillion yen would be invested in the energy transformation, of which 20 trillion yen will be provided by the Government. At the time of the announcement, the breakdown of the fund was not clear.
 Even though many details still need to be worked out, the Hydrogen Strategy sheds light on how and where the money could be spent. One example is in the design of a framework to offset the cost disadvantage of hydrogen.
To induce private sector investment decisions, specific information on the various policies supporting hydrogen will need to be announced as early as possible. Speed is important if the objectives are to enhance competitiveness globally and reduce GHG emissions as soon as possible.
While the lack of specific designs may be of concern for some of the players, this strategy should provide a window of input opportunities to influence and make the policies much more conducive to private sector investment decisions. The private sector can and should engage in a constructive manner in policy making and not just wait for the policies to come out. Afterall, the private sector understands what would be necessary for making their investment decisions.