(Parveen Arora & Shloka Vaidialingam)
On January 4, 2023, the Union Cabinet approved the landmark National Green Hydrogen Mission with a total budget outlay of INR 19,744 crore. This mission was a much-awaited step and has the potential to transform India into a global leader in production and export of green hydrogen, an alternative fuel tipped to address the problem global warming. After the issuance of green hydrogen policy by the Ministry of Power, Government of India last year on February 17, 2022, this is another important milestone in the journey to achieve net zero by 2070.
The green hydrogen mission is a program to incentivize the commercial production of green hydrogen and make India a net exporter of the fuel. The initial outlay includes of Rs.17,490 crore for the SIGHT (Strategic Interventions for Green Hydrogen Transition) programme, Rs.1,466 crore for pilot projects, Rs.400 crore for R&D, and Rs. 388 crore towards other mission components. The Ministry of New and Renewable Energy (MNRE) will soon formulate the scheme guidelines for implementation of the respective components.
The passing of the Energy Conservation (Amendment) Bill, 2022 by the Indian Parliament on December 12, 2022, had also set the stage for a targeted set of policy measures and incentives in 2023 to promote establishment of such projects, manufacture of electrolyser equipment and measures to regulate demand for and use of alternate fuels for certain industrial sectors.
Green hydrogen is extracted by splitting water into oxygen and hydrogen gas, by passing renewable electricity (i.e., a ‘green’ source) through water via electrolyser equipment. Hydrogen produced from biomass is also ‘green’ hydrogen. This ‘green’ classification also applies to ammonia produced via such means.
National Green Hydrogen Mission and the Green Hydrogen Policy
The green hydrogen mission defines its main outcome as development of green hydrogen capacity of at least 5 million metric tonnes per annum by 2030, with an associated renewable energy capacity addition of approx. 125 GW. This is forecasted to significantly reduce fossil fuel imports and abatement of almost 50 million metric tonnes of greenhouse gas emissions. Prior to this, the green hydrogen policy emphasized assuring supply of renewable energy for the manufacturing of green hydrogen, measures to bring down cost of production and additional benefits such as land availability and regulatory permits. Many green hydrogen projects were announced based on the below key features, which we expect to align with the recently announced mission:
25-year waiver of inter-state transmission charges for green hydrogen/ green ammonia projects that are commissioned before June 30, 2025;
Land allotment in dedicated renewable energy parks, and identification of manufacturing zones for production;
Guaranteed procurement of renewable energy for production, via open access mechanism and connectivity to be granted on priority. Distribution companies can charge such projects only procurement cost, wheeling charges and a small margin as determined by the relevant state electricity regulatory commission;
Setting up of bunkers near ports for export of the end-product.
At present there are no specific rules or regulations pertaining to the set-up of green hydrogen/ green ammonia/ electrolyser manufacturing units, and such projects will be governed primarily by the existing legal and regulatory framework keeping in mind the various requirements of the green hydrogen project. The set-up process will broadly involve:
Formation of a project entity (if separately required) and raising finance for the project
Land procurement for the manufacturing facility
Procurement of electrolyser equipment and installation
Labour/ employees to operate the facility
Procurement of regulatory permits/ licenses/ approvals (central and state)
Procurement of electricity from renewable sources such as solar, wind etc.
Storage of hydrogen / ammonia
Transportation of hydrogen/ ammonia to the end-user
Phase 1: Project Entity, Financing, Preparation for Bidding
A physical presence is required to carry out manufacturing activities in India. A manufacturing facility may be set up either by a company or a partnership firm (including an LLP), with a limited company (private or public) still being the most popular form. A foreign company may either decide to set up a wholly-owned subsidiary in India (as per foreign exchange regulations, foreign investment in hydrogen sector falls under automatic route and up to 100% investment is permissible) or enter into a joint venture (JV) with a local partner. A company may then be incorporated under the provisions of Companies Act, 2013, with a general timeline of 4-6 weeks.
Identification of the relevant Indian State in which the project is to be set up, is important as a starting point, and measures such as specific incentives offered (such as power at a concessional tariff, land in designated zones), labour availability, proximity to ports etc., will have to be considered and assessed. Certain Indian States such as Tamil Nadu and Assam have been very pro-active in facilitating some green hydrogen manufacturing facilities. Almost all Indian States offer rebates on stamp duty (beneficial and cost-reducing for land transactions), concessional rates for electricity and pre-identified industrial zones. With the approval of the national green hydrogen mission, we anticipate that more Indian states will soon announce specific policies in relation to establishment of green hydrogen projects similar to various State-level solar or wind policies. For instance, Uttar Pradesh has already released a draft green hydrogen policy in November 2022 with a 5-year horizon, focusing on nitrogenous fertilisers and refineries as hydrogen consumers aiming for 20% blending of green hydrogen in their hydrogen consumption by 2028 for existing units and 100% by 2035 and has expressly extended incentives in existing state investment policies and energy policies to green hydrogen and green ammonia projects, offering benefits (in addition to those announced by the central government) such as 100% exemption from payment of land use conversion charges, 30% one-time grant to support technology acquisition, electrolyser subsidy, reimbursement of 50% of employer’s contribution of employee benefits etc.
Financing and funds required by the entity will depend on the type of green hydrogen project proposed to be established - i.e., whether the green hydrogen plant is a private initiative to support an existing manufacturing facility or to replace a fossil-fuel based manufacturing facility, or whether the green hydrogen plant is set up independently pursuant to a state tender to supply green hydrogen generally.
The green hydrogen production process is both land-intensive and water-intensive, in addition to the complexity in storage and transportation so that it can be used in a non-captive scenario. Existing hydrogen pipelines are also limited, whereas shipping would require prior liquification of the gas in order to be safe to transport and then convert it back into a gas at the point of consumption. Since the project may involve building of pipelines, liquefaction plants and even an onsite solar or wind project to be the renewable energy source, the scale of the project will determine the level of finance required.
As the sector expands, Indian financial institutions will also further develop their own assessment mechanisms to provide loans to green hydrogen projects – for example, the Indian Renewables Development Agency has announced special financing facilities for green hydrogen projects up to maximum 70% of the project cost. The national green hydrogen mission has also clearly identified two distinct financial incentive mechanisms targeting domestic manufacturing of electrolyser and production of green hydrogen, whose details are expected to be announced shortly.
Phase 2: Land
Land with clear title and proper access is the most critical aspect in setting up a factory/ manufacturing facility. It may lead to significant monetary loss if subsequent deficiencies are found in title or approvals which were to be taken prior at the time of acquisition or initiation of construction. Local state and district level laws still restrict use or transfer of agricultural land for non-agricultural use and it takes lot of time and effort to get land use converted from agricultural to non-agricultural. To overcome this, the industrial parks where land is ready for industrial use and title is clear, are a viable alternative. Once land is identified, a full title due diligence should be carried out to ensure that title is clear and the land is free from encumbrances such as mortgages and litigations.
For green hydrogen projects, both land and water must be in plentiful supply. We also anticipate that the announcement of ‘green hydrogen hubs’ under the national green hydrogen mission will operate similar to industrial parks dedicated to the green hydrogen ecosystem.
Phase 3: Construction of facility, regulatory and employee-related approvals
Every factory in India has to comply with the Factories Act, 1948 (“Factories Act”). A manufacturing unit is considered as a ‘factory’ if 10 or more workers undertake manufacturing process with power, or 20 workers manufacture without power. The Factories Act applies to all manufacturing establishments in India, and various Indian States have also introduced their own rules to implement its provisions. Factory licenses may be procured online and depending on the product proposed to be manufactured, further requirements such as approvals for use of hazardous substances, plastics, chemicals etc, may be required.
Other approvals which may be required include a building plan, power and water connections, clearances from pollution control board, export registrations to procure equipment from abroad etc. Similarly, after completion of construction and installation of equipment, once a factory is operational, there are ongoing compliances including in relation to health and safety.
India has also notified 4 new labour codes which seek to streamline multiple legislation and almost all existing labour laws will subsumed in these labour codes, but these are yet to be implemented. Once effective, compliances in respect of all employee/ labour working at factories or manufacturing facilities will have to be re-assessed. It is expected that the code on wages will be the first to be introduced, which will also impact project finances. For green hydrogen projects in particular, employee, labour skilling and training in the new technology and plant management will be an important project cost.
Phase 4: Procurement of green energy source, electrolyser
Priority granting of electricity clearances and access to a steady supply of renewable energy is critical for any green hydrogen project. The Electricity (Promoting Renewable Energy through Green Energy Open Access) Rules, 2022 will aid in such procurement of green energy including for hydrogen projects, which inter alia provide that any such approval for open access to be granted within 15 days. Many hydrogen projects may also establish a captive solar or wind project, which may be established as per applicable existing policies and procedures.
It has been reported that, as part of the national green hydrogen mission, a production-linked incentive scheme of Rs. 6,000 crores each for electrolyser manufacturing and green hydrogen manufacturing for a 5-year period is in the works and expected to be announced very shortly. Such favourable policies are critical to bring down the cost of hydrogen manufacturing.
Phase 5: Storage, transportation
Rules issued by the Petroleum and Natural Gas Regulatory Board, responsible for regulating the use of pipelines for the transportation of fuel, as well as those of the Explosives Safety Organization, responsible for regulating explosive substances (including gases) and its storage, will apply to green hydrogen projects especially for transportation of hydrogen. There are also prescribed Indian standards applicable to the material, design, construction, and testing of transportable hydrogen gas storage systems, as well as other related technical standards for equipment used in the manufacturing process. All such prescribed rules, regulations and standards will require compliance by the green hydrogen project. The emphasis on developing India as a green hydrogen export hub will necessarily involve fast development of green hydrogen storage and transport infrastructure.
What lies ahead:
The hydrogen value chain from production to use is vast. Budget 2023 is expected to contain a slew of additional and targeted measures to attract investment in green hydrogen, including a production-linked incentive scheme for electrolysers. All eyes will now be on the awaited guidelines from the MNRE to implement the components of the national green hydrogen mission.