Fitch expects hydrogen to be increasingly used as an energy source as part of wider efforts to meet China’s net-zero climate targets. China is the world’s largest hydrogen producer, with an estimated production of 22 million tonnes in 2019. While hydrogen is mainly used as a feedstock in industrial processes, efforts to decarbonise, driven by the government’s net-zero emission pledge and climate strategy, are spurring interest in the use of hydrogen for energy.
Hydrogen is a potential route to cut carbon emissions for hard-to-abate sectors, such as heavy transport and industrials, where direct renewable energy use or electrification is not technologically feasible. Hydrogen can also act as a store of energy for use in transportation and heating and a means to capture excess energy from more volatile energy sources, such as wind and solar. Hydrogen fuel cells have a competitive advantage over batteries when greater energy density is needed, for instance, for heavy-duty commercial vehicles. Tightening fuel standards, including the recent China6/VI to limit emissions from diesel and gasoline vehicles, could drive demand for fuel cells in transport sectors.
However, as hydrogen is predominately produced with fossil fuels, the government is driving investment in carbon capture and storage (CCS) to produce ‘blue’ hydrogen and the use of renewable energy to produce ‘green’ hydrogen. Hydrogen produced with fossil fuels without using CCS is known as ‘grey’ hydrogen. Green hydrogen only contributes 3% of China’s total hydrogen supply, as production costs are considerably higher than for other methods.
We expect pressure to decarbonise to drive a shift to blue and green hydrogen over time, but the pace of transition will depend on cost dynamics and the progress of technology. Blue hydrogen, on average, can be produced at a lower cost than green hydrogen, but the ability to use CCS depends on cost dynamics and the viability of expanding technology on a large scale. The falling price and greater availability of renewable energy, along with cheaper and more efficient electrolysers, could help green hydrogen reach cost parity with grey hydrogen by 2030 globally.
China’s policy environment has been supportive for hydrogen at the central and local government levels, particularly in the transport sector, which receives extensive subsidies and tax benefits to develop fuel-cell electric vehicles (FCEV). China has become the world’s largest FCEV producer, with total production reaching 7,200 by June 2020.
In 2015, the central government published the Made in China 2025 initiative, a 10-year plan to upgrade the country’s manufacturing industry. The use of hydrogen was identified as a key technology to upscale the new-energy vehicle market. In 2018, the Hydrogen Fuel Cell Vehicle Technology Roadmap was released, listing specific targets for the broader application of hydrogen in the transport sector by 2030. For the first time, the 2019 State Council’s Government Work Report incorporated a national mandate to ‘promote the construction and charging of hydrogen refueling facilities’, indicating an increased focus on the development of hydrogen infrastructure. Various ministries have also introduced subsidies to support storage, transportation, refueling services, hydrogen production and the application of fuel cells in vehicles.
We expect further policy announcements in subsequent months, including a national hydrogen development strategy as part of China’s 14th Five-Year Plan. Policy is likely to expand beyond fuel cells in the transportation sector to the development of transport and storage infrastructure. We believe support for investment in CCS and electrolysis technology will also form a part of policy plans.
Local governments have followed the supportive policy direction set by the central government, with 23 provinces and municipalities listing hydrogen as a key economic priority or developing hydrogen development plans as of April 2021.
We expect the increased adoption of hydrogen technology and usage across a range of sectors to require additional capital expenditure. Adoption of hydrogen as an energy source is most advanced in the transportation sector. FCEVs are included in the central government’s New Energy Vehicle Plan (2021-2035) and qualify for credits under the new energy vehicle dual credit system. The plan aims for the broader commercial use of FCEVs by 2035.
Fitch thinks it will take time for FCEVs to reach the same cost-competitiveness as battery electric vehicles for passengers, but fiscal support and subsidies should boost expansion. Five ministries jointly launched a four-year pilot programme in 2020, which focused on the research, development and application of fuel-cell vehicles and aimed to maintain fiscal subsidies for fuel-cell vehicles. Meanwhile, subsidies for electric vehicles have started to be phased out. We expect the use of hydrogen fuel cells for large vehicles that cover long distances, such as public buses, trains and trucks, to be more popular given the need for higher energy density.
The increased use of FCEVs will necessitate greater infrastructure development across the country. National oil companies have been expanding the number of refuelling stations, which reached 88 in November 2020, although this scale only accounts for a small portion of the companies’ overall capex.
We expect steel and other industrial sectors to also utilise hydrogen to support decarbonisation efforts. Pilot programmes have been launched by China Baowu Steel Group Corporation Limited (A/Stable) and HBIS Group to adopt green hydrogen to produce ‘green’ steel. In addition, the first renewable-powered hydrogen petrochemical park was launched in 2020 in Gansu province to test the feasibility of using solar to produce methanol.
However, such developments remain in the early stages and have limited commercial viability. State-owned and government-related energy companies are the main hydrogen producers. These entities would benefit from rising hydrogen demand and are also facing a push for blue and green hydrogen technology investment, which is being supported by policies, such as tax credits. The People’s Bank of China’s 2020 green bond guidelines also allow green hydrogen projects to be financed via green bond issuance.
We expect a limited credit impact of expanding hydrogen use in the medium-term, as the transition to blue and green hydrogen will be gradual, with investment costs supported by government policy. The longer-term impact will depend on policy evolution and technology.
Marina Petroleka, Global Head of ESG Research at Sustainable Fitch, will be speaking with Hugh Wheelan in the keynote opening session for RI Asia 2021 on Monday November 8.
Tune in and register here.