Green hydrogen development in India has gained momentum, supported by policy initiatives, growing investment interest and an expanding project pipeline. However, despite these developments, the sector continues to face challenges related to production costs, financing, offtake arrangements and commercial viability. While green hydrogen is increasingly being considered for industrial decarbonisation, its adoption remains dependent on achieving greater cost competitiveness with conventional hydrogen.
The focus is gradually shifting from establishing the policy and manufacturing ecosystem to ensuring that projects are commercially viable and financially bankable. This requires improvements in renewable power costs, electrolyser performance, long-term demand visibility and access to affordable financing. Furthermore, the development of carbon markets and certification mechanisms could play an important role in improving project economics and attracting investment.
At the Green Hydrogen in India conference, organised by Renewable Watch, in Mumbai, Girishkumar Kadam, Senior Vice President, ICRA; and Siddharth Gauba, Executive Director, Eversource Capital, discussed production cost sensitivities, project bankability, financing structures and the role of carbon markets during a session titled “Cost Economics, Financing and Market Mechanisms”. Key takeaways from the session…
Cost competitiveness
Green hydrogen remains considerably more expensive than conventional grey hydrogen despite improvements in renewable energy costs and electrolyser technology. The estimated levellised cost of green hydrogen production using alkaline electrolysers currently ranges from $3.50 to $4.50 per kg, compared to approximately $2 per kg for grey hydrogen, depending on natural gas prices. Although recent tender discoveries in India have indicated declining green hydrogen prices, the cost differential continues to constrain commercial adoption.
Globally, green hydrogen costs vary significantly depending on renewable energy availability, project scale, financing conditions and the cost of technology. India’s relatively competitive renewable energy market provides an advantage, but further reductions in production costs will be necessary to achieve parity with grey hydrogen. Moreover, the competitiveness of green hydrogen must be assessed against the prices industrial consumers currently pay for conventional alternatives, rather than solely against international green hydrogen benchmarks.
Renewable power costs
Renewable electricity is the largest component of green hydrogen production costs, accounting for 60-65 per cent of total costs. Consequently, access to reliable and affordable renewable power is critical to improving project economics. While solar and wind tariffs in India have declined substantially, securing round-the-clock (RTC) renewable electricity at competitive prices remains a challenge.
The availability of renewable energy banking arrangements, storage solutions and transmission infrastructure has a significant bearing on electricity procurement costs. Restrictions on banking in certain states can increase the cost of providing a consistent power supply to electrolysers. Furthermore, the integration of solar, wind and energy storage systems involves additional expenditure for green hydrogen developers seeking to ensure an RTC renewable energy supply. Delays in the development of transmission infrastructure add to their woes.
Policy measures, including exemptions from transmission and open access charges, electricity duty waivers and state-specific fiscal incentives, can help reduce the delivered cost of renewable electricity.
Electrolyser costs and utilisation
Electrolyser capital costs in India are estimated at $350-$500 per kW. However, the economics of these assets depend not only on their procurement cost but also on how intensively they are operated. Increasing utilisation from 25-35 per cent to 60-80 per cent can spread capital expenditure across a larger volume of hydrogen output, reducing the production cost per kg. Solar-wind combinations, storage and improved scheduling can raise utilisation, but their additional costs must be considered alongside efficiency gains. Electrolyser degradation and future equipment replacement requirements also influence long-term operating costs.
Project viability and financial returns
The financial viability of green hydrogen projects is highly sensitive to variations in production costs and offtake prices. Assessments indicate that relatively small changes in electricity tariffs or hydrogen selling prices can significantly affect debt servicing capacity and project returns. For a green hydrogen selling price of Rs 350 per kg and renewable electricity at roughly Rs 4.50-Rs 5 per kWh, the average debt service coverage ratio during the repayment period is around 1.5 times. Reducing the selling price to Rs 300 per kg at comparable electricity costs can bring the ratio close to or below 1, or to approximately 1.2 times under alternative assumptions.
Implications for downstream industries
Improvements in green hydrogen economics will have direct implications for industries such as fertilisers, refining and steel, which are expected to account for a significant share of future demand. These sectors currently depend heavily on conventional hydrogen or fossil fuel-based production processes, making the cost differential an important consideration for transitioning to greener alternatives.
In green ammonia production, hydrogen costs have a significant influence on the final product price. Even under favourable renewable power procurement assumptions, green ammonia remains more expensive than conventional ammonia. Achieving greater parity would require green hydrogen production costs to decline towards $1.5-$2 per kg.
Similar considerations apply to steel manufacturing. Hydrogen-based direct reduced iron production using electric arc furnaces currently involves a considerable cost premium over conventional blast furnace-based production. Reducing hydrogen costs could narrow this gap and improve the competitiveness of green steel. Furthermore, carbon credit revenues could partially offset the additional costs.
Demand creation and policy support
Demand visibility remains an important consideration for green hydrogen development. Although refining and fertilisers represent established hydrogen-consuming industries, the transition towards green hydrogen will depend on its relative cost and the availability of suitable policy support. Despite having established a target of 5 million tonnes of annual green hydrogen production by 2030 under the National Green Hydrogen Mission, the proposed consumption obligations for industrial users are yet to be notified.
India also has the opportunity to cater to international markets through green ammonia exports. Converting hydrogen into ammonia can address some of the transportation challenges associated with hydrogen and enable access to established international commodity markets.
Bankability and financing constraints
One of the central challenges facing green hydrogen projects is the allocation of risks among developers, buyers and financiers. While capital availability is not necessarily the primary constraint, investors require commercially viable projects supported by predictable revenues and clearly defined contractual obligations. Offtake contracts spanning 10-15 years, with minimum-volume commitments, take-or-pay provisions, price indexation and credible payment security, can improve revenue visibility. The creditworthiness of buyers also influences lender confidence, particularly for projects that depend on a limited number of industrial consumers.
Pooled procurement arrangements could help aggregate demand and facilitate standardised contracts, drawing on approaches adopted in the renewable energy and electric mobility sectors. However, the effectiveness of these arrangements will depend on contractual enforceability, payment security and the ability of buyers to maintain commitments as market prices evolve.
Project execution and risk management
Beyond offtake arrangements, project bankability depends on the reliability of power supply and the ability to deliver projects within their assumed cost and performance parameters. Delays in renewable generation, transmission infrastructure or hydrogen production facilities can affect utilisation levels and cash flows.
Technology performance is another important consideration. Electrolyser efficiency, degradation, equipment replacement requirements and operating performance must be assessed over the project life cycle.
Financing structures must also reflect the underlying project risks. Aligning debt repayment schedules with contracted revenues, securing appropriate guarantees and incorporating realistic operating assumptions will be necessary for achieving financial closure and attracting long-term investment. Looking ahead, concessional finance, blended funding structures and viability gap support could help reduce financing costs and improve project returns. Such mechanisms can also address specific risks that commercial lenders may be unwilling to undertake independently. Development finance institutions and other long-term investors could play an important role in supporting early projects and establishing operating track records.
Carbon markets and certification
Carbon markets, certification frameworks and traceability standards could provide an additional means of improving green hydrogen economics. Establishing credible mechanisms to verify the renewable origin and emissions attributes of hydrogen will be important for domestic consumption as well as international trade.
For exporters, certification can help demonstrate compliance with sustainability and emissions-related requirements in overseas markets. It can also support the differentiation of green hydrogen and downstream products from conventional alternatives, potentially creating opportunities to realise a green premium.
However, uncertainties surrounding carbon credit prices, eligibility criteria and future market conditions limit the extent to which carbon revenues can currently support project financing. Developing transparent certification systems and predictable market frameworks could help improve the commercial value of these revenues and strengthen investor confidence.
Future outlook
India has established an initial policy and manufacturing framework for green hydrogen, but the next stage will depend on project-level financial viability. Lower-cost renewable power, greater electrolyser utilisation, firm long-term offtake and more affordable capital must develop together. Furthermore, carbon market revenues and export demand could improve returns, but neither can replace the need for dependable project cash flows. The transition from initial tenders to commercially viable projects will therefore be an important test for the sector.
