How to move forward with green hydrogen

How to move forward with green hydrogen

Vietnam expects that green hydrogen will play a big role in its energy transition, like many other countries. Senior associate Patrick Lenain and research officer Magd Shamashan from the Council on Economic Policies discuss the costs, collaborations, and other factors involved in such a transition.

Produced through the electrolysis of water using electricity sourced from renewables, green hydrogen is secure from trade disruptions (no fossil fuels imported) and clean (no carbon emitted). It is hoped to be a key solution for decarbonising hard-to-abate sectors, notably steel, petrochemicals, and long-haul transport, all large consumers of fossil fuels in Vietnam.

In addition to the local market, green hydrogen is seen as having a great export potential as consumers in Asia, North America, and Europe seek to bolster energy security and reduce their carbon footprint. The key ingredient of green hydrogen is clean electricity. Countries located near the equator are guaranteed to get stable solar radiation throughout the year, making it ideal for solar power generation.

Countries with exceptional wind conditions are also promising, such as southern Chile where wind turbines operate about 70 per cent of the time, compared to just 30 per cent in Germany. Other economies, such as Indonesia, benefit from biomass resources and geothermal potential.

With its significant hydropower, solar, and wind resources, Vietnam is well positioned to supply green hydrogen to the neighbouring Chinese market. The Tra Vinh green hydrogen initiative is a case in point. Already a renewable electricity leader, Vietnam hopes to become a key green hydrogen producer.

Subsidies and costs

In the rush for green hydrogen, all governments want their country to be in lead position. They offer generous subsidies to attract investors and support experimentation through pilot projects. According to the International Energy Agency (IEA), nearly $100 billion in public funding for hydrogen has been announced.

Notable examples of government support include the United States, where the 45V tax credit provides up to $3 per kilogramme of green hydrogen (and 60 US cents for blue hydrogen produced from natural gas). The European Union is supporting hydrogen production with the European Hydrogen Bank, which allocates funding through regular auctions.

Saudi Arabia has directed $2.75 billion since 2023 in below-market-rate financing to the NEOM Green Hydrogen Company, part of a broader $8.4 billion package arranged with 23 international lenders. Germany is investing $5 billion in over 20 projects focused on green hydrogen production and storage.

Meanwhile, Australia and the United Kingdom have launched contract-for-difference schemes worth around $2.5 billion each to support the production of green hydrogen.

Vietnam has also launched a hydrogen energy development strategy, which targets the production of 100,000–500,000 tonnes of hydrogen per year by 2030, rising to 10-20 million tonnes by 2050.

The strategy has a focus on building a full hydrogen value chain for domestic use and export, and integrating hydrogen into key sectors such as power, transport, and industry, while aiming for hydrogen to account for 10 per cent of final energy consumption by mid-century.

The 2024 Electricity Law envisions also that projects producing electricity from 100 per cent green hydrogen or green ammonia and supplying it to the national grid qualify for incentives. This includes three years of exemption on land and sea area use fees, followed by a 50 per cent reductions for up to nine years, as well as a minimum 70 per cent long term power purchase agreement. Electrolysers can be imported duty free.

These provisions effectively reduce upfront and operating costs, enhancing the financial viability of emerging hydrogen projects and attracting investor participation.

Whether these generous subsidies will result in a successful adoption of green hydrogen remains an open question. So far, global results remain unimpressive. Over 99 per cent of hydrogen is still coming from unabated fossil fuel methods (grey hydrogen) and only 1 per cent from low-carbon methods.

According to BloombergNEF, clean hydrogen capacity reached 500,000 tonnes per year in 2024, a small fraction of the total production of hydrogen estimated at 97 million tonnes in 2023. This is a far cry from the IEA estimates that clean hydrogen should account for over 90 per cent of the total to keep the global emissions on a pathway consistent with the Paris Agreement and limit the risk of a much hotter planet.

A key challenge is that low-carbon hydrogen is still too expensive for many customers. A recent techno-economic analysis puts the cost of green hydrogen at $4.50-6 per kilogramme. By contrast, grey hydrogen costs only $1.50-2 per kilogramme. This, for now, makes green hydrogen an uncompetitive alternative in the absence of large subsidies, which cannot be provided forever, or a high carbon tax.

Further declines in the prices of electrolysers would reduce the production cost of green hydrogen. However, this would also lower the cost of hydrogen produced with carbon-intensive electricity, sometimes referred to as “grey hydrogen via electrolysis”. An increase in the use of this technology could be particularly problematic, as hydrogen produced via electrolysis powered by coal-based electricity can emit more CO2 per kilogramme than conventional grey hydrogen generated through coal gasification.

At the core of the problem is that grey hydrogen, produced with natural gas and coal, often escapes the restrictive policies targeting fossil fuels. In many countries, grey hydrogen is not subject to excise taxes or carbon taxes. Even within emissions trading systems, grey hydrogen is often shielded, at least partially, from carbon costs.

For example, under the EU system, grey hydrogen facilities still receive free allowances. The EU, however, also offers free allowances for green hydrogen, thus providing an additional income stream as green hydrogen producers do not need to submit these allowances and can thus sell them. Raising carbon prices on grey hydrogen or, as in the EU, providing free allowances to green hydrogen are important steps to further uptake.

International cooperation

For now, the future of low-carbon hydrogen relies heavily on the provision of public support, such as subsidies and tax incentives. In times of high public debt and shifting priorities, the trajectory of such support measures is highly uncertain.

Several countries, such as Australia, France, and the United States, have already cut down some of their support measures. In Vietnam, fiscal space is also limited, and extending sizeable long-term support is not a viable option.

Instead of a subsidy race, a revival of international cooperation would help to secure the future of green hydrogen. Wealthier countries have much to gain from importing large volumes of green hydrogen to stay on track towards their net-zero targets. Sharing technology and expertise can go a long way in lowering costs and accelerating deployment, if done in a spirit of cooperation.

This effort should be guided by the principle of comparative advantage: green hydrogen should be produced where solar, wind, biomass, or geothermal resources are most abundant. The same logic applies to blue hydrogen, which relies on capturing and storing CO2 from natural gas, an option more viable in countries with ample carbon storage capacity.

With its strong integration into international trade, Vietnam can make a key contribution to international cooperation on green hydrogen, bringing together countries and firms willing to work together to develop a technology crucial for energy security and mitigating climate change.

Building on existing work and initiatives of regional and international platforms, such as the Asian Development Bank, ASEAN, and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership can be a key first step. Establishing further catalysts for collaboration can add further important pillars. Vietnam could also join the Hydrogen Initiative of the Clean Energy Ministerial group of countries.

Meanwhile, Vietnam should tread carefully with fiscal support measures. Allocating scarce resources to green hydrogen in the absence of an international framework is not the best option. Vietnam has a long list of priorities to build its energy future and to provide access to affordable, secure and clean energy.

Replacing coal-fired power plants with solar and wind power is a case in point. Green hydrogen is likely to play a key role in global energy systems in the years ahead. Vietnam is right to plan and prepare for that future. But it should do so with caution.

VIR

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