In Depth: Why Making Green Hydrogen Is Keeping Producers in the Red

China's green hydrogen industry is encountering significant challenges despite substantial investment and development activities. A major issue is the high cost of green hydrogen, which has hindered its market penetration. The production costs remain high due to expensive processes and a lack of widespread adoption, which prevents economies of scale from being realized [para. 1][para. 2]. Moreover, China's heavy reliance on coal power to produce hydrogen poses a substantial hurdle, with green hydrogen accounting for only 1% of the 35.5 million tons produced in 2023 [para. 3]. This contributes to green hydrogen being far more expensive than gray hydrogen, which is derived from fossil fuels [para. 4].

The cost of green hydrogen in regions rich in renewable resources, such as Xinjiang and Inner Mongolia, ranges from 20 to 40 yuan per kilogram, while gray hydrogen costs between 10 to 20 yuan per kilogram [para. 6]. Many hydrogen energy companies, including Beijing SinoHytec Co. Ltd., have reported continuous losses, attributed to a small market size and high research and development expenses [para. 7][para. 8]. Nevertheless, efforts to mitigate costs are evident, as demonstrated by Sinopec's Kuqa plant, which aims to be the world's largest solar-to-green hydrogen facility [para. 9]. Operating for over a year, it intends to produce 20,000 tons of green hydrogen annually by using locally generated renewable energy [para. 10].

China's commitment to green hydrogen is reflected in its 2022 plan outlining development targets through 2035, sparking a wave of investments, primarily in regions abundant in renewable resources [para. 12]. The price decline of photovoltaic modules has further facilitated momentum, with substantial investments made in related manufacturing [para. 14][para. 15]; however, profitability remains an issue [para. 16]. The lack of downstream demand, leading to higher costs, is one major barrier [para. 17]. For instance, Sinopec's Kuqa project sells hydrogen at around 17.24 yuan per kilogram, while production costs remain higher, attributed partly to minimum pricing policies for green electricity [para. 19].

Reducing upstream costs emerges as a necessary, albeit insufficient, measure to break this cycle. The electricity used in hydrogen production is a significant expense, which Sinopec's Kuqa aims to reduce by leveraging direct renewable energy sources [para. 22][para. 23]. The facility is enhancing its photovoltaic capacity and incorporating wind power to offset peak electricity costs [para. 27]. Additionally, China's extensive production of electrolyzers has led to cost reductions, driven by intense market competition [para. 29][para. 30]. The hydrogen price index shows a decline due to such trends, with predictions that green hydrogen could reach cost parity with gray hydrogen by 2027 [para. 32][para. 33].

Despite plans to establish 10 million tons of green hydrogen production capacity by 2030, current demand for such capacity is limited [para. 35]. Geographic mismatches between production sites and markets amplify the problem, as green hydrogen production facilities are often distant from major consumption areas [para. 39]. Blending hydrogen with natural gas in existing pipelines could potentially reduce transportation costs, presenting another avenue to address logistical challenges [para. 43]. The high production costs underscore the critical need to create demand, which could be stimulated by expanding China's carbon market to include more industrial sectors [para. 48]. By doing so, green hydrogen projects might become more economically viable, leading to increased adoption [para. 52].

The national carbon emissions trading market has seen rising carbon prices, yet it currently includes only the power generation sector. Future plans to broaden this scope could significantly benefit green hydrogen projects, rendering them more financially attractive [para. 54][para. 56].