Japan is set to spend ¥3trn ($19.2bn) on Contract for Difference (CfD) subsidies for clean hydrogen in order to reduce the cost gap with fossil fuels. However, until now, the government has been vague on which fossil fuels will be used as a “reference price” for payments.
The funding for the CfD scheme, which was announced in December, will subsidise the difference between the fluctuating reference price, and a guaranteed “strike price” that the winning developer would receive for every kilogram it produces.
The strike prices are likely to be determined according to the lowest bids at auction, much like similar schemes in the UK and elsewhere.
It now seems that the Japanese government is considering setting two separate reference prices — one for grey hydrogen, and the other for coal or natural gas — as seen on a slide (see below) presented to the Connecting Green Hydrogen MENA conference in Dubai last week by Hiroshi Hasegawa, a special advisor to the minister at Japan’s Ministry of Economy, Trade and Industry.
Insiders suggest that this split is down to whether projects will supply hydrogen or ammonia as an end-product.
“What I can confidently say now is there will be two reference prices, one for the ammonia and one for the hydrogen,” said Kenny Kitamura, the chief representative in the Middle East for the state-owned Japan Bank for International Cooperation (JBIC).
However, he also noted that “those details are now being discussed and agreed”.
The choice to set coal or natural gas as a reference price for ammonia could suggest an extra incentive for volumes of NH3 to be co-fired with these fossil fuels for power generation, rather than used to displace the 200,000 tonnes of grey ammonia Japan already imports per year.
Many analysts have criticised co-firing ammonia with coal, in particular, for being not only a lifeline for highly polluting power plants, but being a significantly more expensive carbon-reduction method than almost any other option.
The choice of coal as a reference price also means that the Japanese government would likely pay out much more for the difference with the price of clean ammonia than if the reference price was grey NH3.
Coal has a higher energy content by volume and weight than ammonia, and is also far cheaper, meaning that there would be a greater gap between coal and clean ammonia than there would be between grey and clean ammonia. And the bigger the gap between the reference price and the strike price, the greater the cost to the government on a per-kg basis.
And if these subsidies are higher than they need to be, fewer projects will be subsidised and the amount of clean ammonia produced will be less than it could have been with the same amount of money.
Hasegawa noted during his presentation that a bill for the hydrogen subsidies is currently being debated in the Diet, the national legislature, and could be authorised as soon as this summer in order to support a “very limited number” of pilot projects.
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