Chairman’s Message

　In contrast to the significant number of project announcements to supply clean hydrogen, the official number of offtake agreements has remained very limited. Japan’s Hydrogen Promotion Act (HPA), authorized by Japan’s Diet on May 17, could be the trigger to create a global demand for clean hydrogen, contributing to the development of a global hydrogen market.

<Main Points>

HPA to overcome impediments for market creation: Cost and Infrastructure.

Framework to offset cost differentials between hydrogen/LNG, ammonia/coal

15-year long government support to offset cost differentials

Broad scope: domestic/import, color agnostic, includes ammonia, e-fuels, e-NG

Need to start supply by 2030, requires committed industrial users

Support to develop necessary infrastructure to receive hydrogen

3 trillion yen (20 billion US dollars) pledged for support

Very competitive process: Need to enhance appeal of projects

1. HPA: the trigger to create a market for clean hydrogen

With the global excitement about clean hydrogen and the many announcements of supply projects, the demand side for hydrogen is lagging behind with very few offtakes officially decided. In fact, the announced volume of offtakes is just about 10% of the expected supply.
　What are the impediments for offtakes? The single most important obstacle is that low carbon (clean) hydrogen is just too expensive today. Market mechanism alone will not justify procurement of clean hydrogen. Policies need to be introduced to create the initial market for clean hydrogen.
　Carbon pricing through EU ETS can narrow the cost differential between clean hydrogen and grey hydrogen. The current level of carbon price is far too low to replace conventional energy, such as natural gas or coal. Many policy measures such as the European Hydrogen Bank and H2 Global have been introduced in Europe. While these measures should help create the initial market, it is unclear if a sufficient budget has been set aside to create the market, especially for imported hydrogen.
　The US IRA is very powerful. It could help replace grey hydrogen by clean hydrogen. Furthermore, the draft for 45V[1] which determines the criteria for eligible green hydrogen is viewed as too stringent to support broad introduction of clean hydrogen while its objective is considered to be legitimate. For the time being, blue hydrogen utilizing 45Q will probably be the leading means to introduce clean hydrogen in the US. This will help the replacement of grey hydrogen by clean hydrogen but not powerful enough to replace conventional energies, such as natural gas or coal.
　The second impediment is the lack of infrastructure to receive clean hydrogen. To keep hydrogen liquified, it must be cooled down to minus 253℃, much lower than the minus 161℃ required for LNG. Existing tanks cannot be used “as is”. Even if ammonia is used as a carrier to avoid the need to cool down so much, safety measures need to be introduced to deal with its toxic nature. Cracking facilities to turn ammonia back to hydrogen must also be developed.
　Japan’s Hydrogen Promotion Act (HPA) which was recently authorized by Japan’s Diet (May 17) is designed to overcome these two major impediments to create the market for clean hydrogen.

2. HPA introduces a framework to offset cost differentials

HPA introduces the framework to offset cost differentials. The strike price will be determined to cover the cost of supplying clean hydrogen for the next 15 years. The reference prices for hydrogen and ammonia will be the cost of LNG and the cost of coal, respectively. As Japan will introduce carbon pricing, first with the formal introduction of ETS in 2026, followed by the introduction of carbon surcharge in 2028, the effect of carbon pricing will be reflected in the reference prices.
　The Government of Japan will provide subsidies to offset (in full or in part) the difference between the strike price and the reference prices. As you can see from the design, this framework should help replace LNG with clean hydrogen and replace coal with clean ammonia.

3. HPA has a broad scope: Color agnostic, domestic/import, hydrogen derivatives

HPA is “color agnostic”. A threshold for carbon intensity will be introduced to define low carbon or clean hydrogen. But as long as the threshold is satisfied, the energy source to produce hydrogen is not limited to only renewable energies. The difference in carbon intensity will be considered in the evaluation process of the projects.
　HPA can be applied to both domestically produced hydrogen and imported hydrogen. As the HPA highlights the importance of energy security, it is recognized that domestically produced hydrogen would receive preference. But due to an expected limited scale of domestically produced hydrogen, I believe that imported hydrogen will play a greater role, in volume, under HPA.
　HPA coverage extends beyond hydrogen. In addition to ammonia, which is generally considered as the cheapest means to transport hydrogen, e-fuels, i.e. synthetic fuels produced from hydrogen, and e-NG (or e-Natural Gas), i.e. synthetic methane produced from hydrogen, are both understood to be covered. e-fuels can be part of SAF to fly airplanes and they can also run vehicles in a decarbonized manner to complement EVs. e-NG has the advantage of utilizing the existing infrastructure to supply natural gas or LNG and is considered as a pragmatic pathway to decarbonize city gas which is widely used in Japan for industrial and residential use.

4. Qualification for support: timely supply, long term commitment, secured users

To be qualified for the support to offset cost differentials, the projects need to satisfy several qualifications.
　First, the projects will have to supply clean hydrogen by 2030 which is the target year for the current energy strategy of Japan.
　Second, the project operators will have to commit to continue supplying clean hydrogen for 10 years after the initial 15-year support by the government.
　Third, the projects will have to secure users of the clean hydrogen. Industrial users must be part of the committed users. Power companies can also be part of the user group. I have to stress this point as some potential project operators appear to be just forming a team from the supply side only without securing the user side. The absence of committed Japanese users will disqualify such projects for support.

5. Support to develop the necessary infrastructure

Hydrogen and ammonia require new infrastructures. Tanks, pipelines and cracking facilities are all needed. To help the introduction and distribution of hydrogen and ammonia, HPA provides a financial framework to support the development of the necessary infrastructures. The current vision is to develop hydrogen hubs, typically building upon the existing industrial complexes with steel mills, chemical plants and power plants. In many cases, the committed users for the cost differential support will most likely overlap with the industrial and power sector users located in such industrial complexes. In this manner, there will be a synergy between the two pillars of support, i.e. cost differential support and infrastructure support, under HPA.

6. Three trillion yen (20 billion US dollars) support for hydrogen

Prime Minister Kishida has pledged 20 trillion yen of government budget to support the 150 trillion yen in new investments required for the energy transition over the next ten years. Investments are expected from both the public and private sectors. The policy package named “GX Promotion Strategy”, adopted one year ago, aims to accelerate the Green Transformation. Out of this whole package, PM Kishida has pledged 3 trillion yen (about 20 billion US dollars) of government money to support the introduction of clean hydrogen under the HPA.
　The scale of government subsidy is substantial and most probably larger than any other country/region’s dedicated support to hydrogen. The allocated budget to cover the cost differentials will be committed for 15 years and may not be sufficient to provide support for all the projects currently under planning. This long-term framework for the initial 15 years is longer than the 10-year support program under the US IRA. This long-term framework will greatly help the projects receiving support, but at the same time, will limit the number of projects that can be financially supported.
　I understand there are many projects, both domestic and international, aiming to receive the support under HPA. The process to select those projects will have to be very competitive, especially for international projects.

7. Highly competitive process and the need to enhance appeal of the projects

HPA is legally bound to be enacted within 6 months after the authorization by the Diet. The Japanese Government will try hard to enact HPA earlier than the legal requirement. The actual enactment will take place as early as the end of this summer, but by this fall at the latest, when the formal process of selecting the projects will start.
　Assuming the domestically produced hydrogen will receive preference due to energy security considerations, the selection process will be highly competitive especially for international projects. The expected lack of scale of domestically produced hydrogen should provide substantial room for imported hydrogen. The large number of international projects under planning will lead to an intensive competition among all projects.
　To win within the selection process, the projects will have to enhance their appeal in the eyes of the Japanese Government. What will be the key factors?
　While HPA does not yet go into details, we can reasonably identify several major and relevant factors.
　First, cost is essential. The cost assessment may incorporate the amount of carbon to be abated. The support provided in the exporting country will certainly have an impact on the cost. Our institute, IEEJ, conducted a study in 2021 which showed that blue ammonia from Saudi Arabia would be the lowest cost supplier to Japan. IEEJ revised its study in December 2023 to reflect the impact of the US IRA and the new results show that blue ammonia from the US, would now be the lowest cost supplier. As it is strategically important for the international projects to be in the first group to be selected by Japan, it is now the appropriate time to strengthen support in the exporting countries. Any additional support provided by the exporting countries would enhance the appeal of their projects, but such support must be in place before the official Japanese selection process proceeds.
　HPA specifically states that the projects will have to contribute to the competitiveness of Japanese industries, both in the supply side and in the user side. While the exact meaning is not fully articulated in HPA, I believe that the committed users of clean hydrogen must be part of the industries important for Japan. I also believe that the technologies/players used in the production and transportation of clean hydrogen will enhance the appeal of the projects if they are associated with Japanese industries.

8. The opportunity

To sum up, with its total budget of three trillion yen (roughly 20 billion USD), the HPA could be the trigger of substantial offtakes and a major contributor to the development of a global market for clean hydrogen. The framework for clean hydrogen, under HPA, is probably the most powerful one in the world. It provides support for cost differentials for 15 years. While being color agnostic, it is designed broadly enough to cover imported hydrogen as well as ammonia, e-fuels and e-NG. HPA provides a great opportunity for the creation of a global clean hydrogen market.
　HPA also stipulates that, in addition to budget measures, regulatory reform will be pursued to expand the hydrogen market. Carbon pricing will be introduced to incorporate externalities of fossil fuels which will incentivize the use of clean hydrogen. Other regulatory reform specific to sectors, such as the power sector, will be considered to expand the use of clean hydrogen in such sectors. Based on HPA, the Japanese Government is committed to introduce multiple measures to expand the market for clean hydrogen.
　To be a global player in the supply of clean hydrogen, I believe that it is strategically important to be selected in the first group of projects to be supported. As the selection process will be highly competitive, the appeal of the projects will need to be “as enhanced as possible” before the formal process proceeds. While the enhancement may require substantial policy support from the exporting countries, consideration of technologies/players used in the production and transportation will also play significant roles. Joining the first group of clean hydrogen suppliers with commercial scale will give those projects the strategic advantage to be leaders in an emerging clean hydrogen market. This opportunity cannot be missed.