GLOBAL ESG TREND HAS POTENTIAL TO BOOST THE GREEN HYDROGEN ECONOMY

GLOBAL ESG TREND HAS POTENTIAL TO BOOST THE GREEN HYDROGEN ECONOMY

Author: Arundhati Mukherjee, DGM(C&I),

Damodar Valley Corporation

ABSTRACT

The Net Zero commitment and climate change are accelerating the shift from fossil fuels to alternatives like clean hydrogen. Hydrogen is not a direct substitute to coal, oil and natural gas but parts of the economy can be decarbonized with the help of clean hydrogen.

India has become the fifth largest economy in the world after US, EU, China, Japan. Indias starting position in the race to reach Net-Zero is not comparable to the other four large economies. It will need to invest USD 12.7 trillion to reach net zero emission by 2050. As of now, coal accounts for 44% of India’s major energy sources and 70% of its power generation. The power sector is a significant contributor to greenhouse gas emissions that have far-reaching effects on the environment and health. As one of the leading CO2 emitters, coal-based power generation causes significant environmental damage. In addition, greenhouse traps heat causing climate change and contributing to air pollution and smog. India is expected to be the fastest growing large economy in this decade, driving increased energy demand. India’s Prime Minister during his COP26 address in Glasgow, has demonstrated India’s commitment with a five-point sustainability agenda, Panchamrit.

1.     India will take its non-fossil energy capacity to 500 GW by 2030

2.     India will meet 50% of its energy requirements from renewable energy by 2030.

3.     India will reduce the total projected carbon emissions by one billion tonnes from now till 2030.

4.     By 2030, India will reduce the carbon intensity of its economy by more than 45%.

5.     By the year 2070, India will achieve the target of Net Zero.

In line with the sustainability goals ,and the global trend  for developing and creating the fundamental  hydrogen eco system and hydrogen economy, India has launched the ambitious Green Hydrogen Mission as hydrogen is the prospective key element to unlock a carbon free future in our global economy. To support the development and deployment of infrastructure the regulatory framework support is inevitable and policies and incentivization , providing subsidy is part of government support to build the hydrogen economy. According to report by IRENA (International Renewable Energy Agency),the countries that are way ahead in developing  policy initiatives, technology and export facilities to promote clean hydrogen value chain are China, European Union and India. Other countries who have detailed road map and set aggressive goals are   France, Germany and the Netherlands – and Australia, Chile, Japan and the U.K., USA. All of these are needed if the world is to decarbonize   sectors like steelmaking, shipping and road haulage. The climate change agenda globally has conceptualised the  Environmental Social Governance trend. With the SDG goals   and Net Zero commitment by 2070, companies are adopting cost-effective, measurable Environmental, Social, and Governance (ESG) solutions to meet global decarbonisation goals. With the use of renewable energy sources, companies are consciously transitioning from carbon-intensive to carbon-neutral technology. In the financial community Environmental, social, and governance (ESG) investing is rapidly becoming one of the most visible and durable megatrends. ESG refers to corporate activities that would maintain or enhance the ability of a company to create value over the long-term. Apart from Profit maximization, value creation is being emphasized as utmost important. It includes both financial and non-financial aspects of a business, such as environment, human capital, social capital, innovation, leadership, and governance.

This  global ESG trend has the potential to boost the hydrogen economy. The paper is based on literature review and latest articles and news about the changing scenario in ESG and the Green Hydrogen landscape. Effort has been made to find out the corelation of the rising ESG trend to the evolving Green Hydrogen landscape.  From the findings it is inferred that the role of corporate in integrating ESG in their business strategy will help the green hydrogen eco system to evolve . So that development of   infrastructure, adoption of technology and implementation  is planned to reach the target set for green hydrogen by 2030 .India has set a target of producing 10% of its hydrogen from renewable energy sources by 2022 and 25% by 2030. India is all set for  “quantum leap” to energy independence by 2047, according to PM Narendra Modi, with green hydrogen playing a key role in achieving this goal .To meet this target ESG compliance by corporates is a must and this will further give a boost to the adaptation of Green Hydrogen across the value chain.

INTRODUCTION

With the commitment to Net Zero globally due to rising Climate Change alarm. global warming mitigation and carbon dioxide (CO2) emissions reduction has become an absolute necessity. It is urgent to combat climate change and many nations have announced net-zero emission targets as a commitment  to rapidly reduce greenhouse gas emissions. Low-carbon hydrogen has received renewed attention as a potential low-carbon fuel and feedstock under these decarbonization frameworks, especially for “hard to abate” sectors such as heavy-duty transportation (trucks, shipping) and heavy industries (e.g., steel, chemicals, cement). Hydrogen produced from water electrolysis with zero-carbon electricity, is called Green hydrogen.GH has  significant potential in helping countries transition their economies to meet climate goals. Today, green hydrogen production faces enormous challenges, including its cost and economics, infrastructure limitations, and potential increases in CO2 emissions ie grey hydrogen from fossil fuels.

Globally the role of key low carbon technologies in decarbonizing the entire energy system is being explored. Renewable electricity, electricity storage, and hydrogen, along with biomass-based electricity and fuels, are the most viable energy options for India in a zero-carbon emissions economy.

Green hydrogen (produced from renewable electricity) has huge potential in India’s energy transition  in  transport sector & hard to abate industrial sectors.GH can be used to fuel longer-range vehicles and heavier-duty trucks, in industry largely as a chemical feedstock, and in the power sector, to provide longer-term energy storage.

With COP 26 commitment of India for Net Zero by 2070 and combating climate change agenda in priority, there is a paradigm shift in the way the industries will operate in this changing transition scenario. Not only profit is the goal of an organization but creating value with employee wellbeing and engagement being of paramount importance as well as the environment in which the entities are operating is of utmost importance. This has led to the emergence of Environment, Social, Governance compliant organization in order to attract investment for future expansion and growth. The importance of ESG has taken the front stage in the current decade. Sustainable investing is becoming increasingly relevant to the mainstream financial markets as ESG data are pertinent not only for the ethical principles but also from a rational investment perspective. The Global Impact Investing Network (GIIN) defines impact investing as investing with the intention to generate positive, measurable social and environmental impact alongside a financial return. As investors demand ESG products and data from organizations ,focus on ESG has dramatically elevated. As the globe grapples with climate and sustainability challenges, ESG is not just a business mandate but a duty for companies as a corporate entity. all countries are gearing up for implementation of ESG regulatory policies for disclosure. ESG is being embedded in the business practices as regulatory norms become stringent and mandatory. Multiple consultancies as well as financial institutions have conducted studies that show how ESG funds have outperformed other funds ever since the pandemic hit the world.

The major technology trends for net zero target and Environmental compliance for decarbonization has Green Hydrogen as a major technology trend apart from, Renewables, Energy storage, Electrification, and Carbon Capture and Storage.

For climate-focused economic progress ,the development of the hydrogen economy (HE) has become a priority. The global trend of environmental, social, and corporate governance (ESG) is expected to have a significant impact on the emerging hydrogen economy. ESG considerations could foster the adaptation and developing hydrogen technology. Exploring the literature in this topic ,it is inferred that ESG as a new institution in the economy might be in line with national and international policies, but role of  corporate cannot be undermined towards improving environmental performance by further orienting directly or indirectly toward hydrogen technologies, for example, through cost reduction initiatives, favourable taxation, or specific requirements for sustainability reporting.

The role of corporate in collaboration with governments for regulatory frame work will drive down the cost of hydrogen and it will plummet the cost of  hydrogen by 50% by 2030 making it a cost competitive substitute for natural gas due to  the continuous and fast development of  production infrastructure.

GREEN HYDROGEN PROSPECTS IN INDIA

India has also started to work on industry transition, particularly in the ‘harder-to-abate’ sectors including iron and steel, cement, and other industry sub-sectors

Green hydrogen could play a major role in a decarbonized economy: Green hydrogen and fuels derived from it (e.g., ammonia, methanol, aviation fuels) can replace higher-carbon fuels in some areas of the transportation sector, industrial sector, and power sector. They can serve as low-carbon feedstock ,provide low-carbon heat, and reducing gas for chemical processes, and act as an anchor for recycling CO2.

According to an article in Economic times, India aims for annual production of 5 million metric tons of green hydrogen by 2030, which would cut about 50 million metric tons of carbon emissions and save more than $12 billion on fossil fuel imports. Many Indian companies including, Indian Oil, ,Reliance Industries NTPC, Adani Enterprises , JSW Energy, Acme Solar  and ReNew Power have made announcements for setting up a cumulative annual green hydrogen manufacturing capacity of 3.5 million metric tons.

India is all set to become a hydrogen super power by leveraging its resources for green hydrogen production and it will be a major player in the export corridor as well develop the local market.

CHALLENGES OF GREEN HYDROGEN GLOBALLY AND IN INDIA.

1.     The primary challenge to green hydrogen adoption and use is the cost of Green Hydrogen    The initial capital expenditure for electrolyzers and infrastructure is very high making it a deterrent for a head start.:. . Green hydrogen produced with renewable resources costs between about $3/kg and $6.55/kg, according to the European Commission's July 2020 hydrogen strategy. Fossil-based hydrogen costs about $1.80/kg, and the commission estimated the cost of blue hydrogen, which pairs carbon capture with steam methane reformation of natural gas, at about $2.40/kg. Zero-carbon electricity is the primary cost element of production (50–70 percent) even in geographies with significant renewable resources, with electrolyzers and the balance of system as secondary costs. It needs policy support from regulators.

2.     Access to low-cost renewable electricity will be the most important factor in driving green hydrogen costs down to $1.50/kg, according to Everett Anderson, vice president for advanced product development at NEL Hydrogen AS.

3.     Electrolyzer operators not only need access to low-cost renewable energy but high capacity factors — in other words, a steady supply of wind, sun or water flow

4.      The absence of a robust certification system for GH.

5.     Infrastructure for the storage and transportation of GH is also a concern

6.     Green hydrogen commercialization is also limited by existing infrastructure. Growing demand of green hydrogen will require enormous investment and construction of electricity transmission, distribution and storage networks, and much larger volumes of zero-carbon power generation, as well as electrolyzer production systems, some hydrogen pipelines, and hydrogen fueling systems. An 88 million tons per annum (Mtpa) green hydrogen production by 2030, corresponding to the Stated Policies Scenario from the International Energy Agency (IEA) for that year, could cost $2.4 trillion and require 1,238 gigawatts (GW) of additional zero-carbon power generation capacity.

7.     Though first production of green hydrogen is expected in 2026 in India, it is in talk with Europe, Korea and Japan, being renewable resource-deficient, and likely to be the key markets for green hydrogen but trade barriers are a major worry.

8.     India also faces competition from heavily subsidised markets like China and the United States.

POSSIBLE SOLUTION OR WAY OUT

1.     India could adopt subsidy models similar to those in the US to encourage the adoption of GH technologies.

2.     India can draw options from Australia’s certification mechanisms and EU’s simplified regulatory approach, to ensure quality assurance and attract investment.

3.     Development of hydrogen hubs by Australia, which serve as centralized points for hydrogen production, storage, and distribution, could serve as a model for India.

4.     In the manufacturing side, costs will and also have come down as plants scale up to larger capacity and adopt automation and continuous manufacturing processes.Industry level scaling will drive down the cost further. The supply chain has broadened to include established companies involved in other synergistic industries, who are new players entering the market, and are now focusing their product development efforts into green hydrogen.

5.     Policymakers should take into consideration green hydrogen benefits outside of carbon abatement, while crafting policies.  It includes reduction of criteria pollutants (e.g., sulfur, particulates, and nitrogen oxides) and grid reliability and resilience.

6.     Some nations have developed hydrogen road maps with large green hydrogen components. Formal road maps for hydrogen production, use, and growth  has been made by the governments of Japan, Canada, and the EU (including some member nations, notably Germany) have published. These plans include industrial policy (e.g., subsidies for manufacturing electrolyzer and fuel cells), port infrastructure (e.g., industrial hubs), and market aligning policies. These plans may provide these nations a competitive advantage in scaling, using, and adopting green hydrogen.

GREEN HYDROGEN INITIATIVES IN INDIA.

In the race for decarbonization Green Hydrogen from renewable energy is an attractive carrier with high potential in transport sector and other industrial processes. India is a key player in this  Green Hydrogen space.

The initiatives of GOI are:

1.     The National Green Hydrogen Mission launched in August 2021, an integral part of India’s GH roadmap, aims to incentivise the commercial production of GH with an aim to make India a global GH hub. The mission seeks to decarbonize sectors where direct electrification is challenging, such as heavy-duty transport and industry. The objective of the mission is “To make India the Global Hub for production, usage and export of Green Hydrogen and its derivatives. This will contribute to India’s aim to become Aatmanirbhar through clean energy and serve as an inspiration for the global Clean Energy Transition. The Mission will lead to significant decarbonisation of the economy, reduced dependence on fossil fuel imports, and enable India to assume technology and market leadership in Green Hydrogen.”

2.     Strategic Intervention for Green Hydrogen Transition Programme : This consists of :Incentive scheme for electrolyzer manufacturing & incentive scheme for green hydrogen production.

3.     The Ministry of Power (MoP), the Government of India, on February 2022,notified the ‘Green Hydrogen Policy’ as the first leg of policy instruments to further bolster efforts in this direction.

4.     The GH Standard a minimum standard for GH as having a well-to-gate emission of not more than 2 kg CO2 equivalent per kg of H2 produced, encompassing water treatment, electrolysis, gas purification, drying, and compression of hydrogen.

5.     The economic implication of these two initiatives is profound  as it will plummet the cost of  hydrogen by 50% by 2030 making it a cost competitive substitute for natural gas due to  the continuous and fast development of  production infrastructure.

6.     By 2050 the demand for hydrogen in India will quadruple accounting to one tenth of the demand globally.For fulling the demand by GH  the aggregate market value for GH in India is estimated to be around $8 billion by the year 2030. 

7.     .India will be a potential exporter of hydrogen due to the abundant resources  of renewable. India will have a lucrative export opportunity as the global GH export market is projected to reach $300 billion by 2050.

8.     Countries energy security will enhance as  India’s heavy reliance on oil imports, which  currently stands at around 85% of its crude oil needs, may be significantly reduced. Industrial applications of GH in sectors such as steel, cement, and chemicals could revolutionize production methodologies. For instance, it can eliminate the need for carbon-intensive coke by serving as a reducing agent in steel production. This not only reduces greenhouse gas emissions but also lowers long-term operational costs for industries.

GLOBAL INITIATIVES IN THE GREEN HYDROGEN SPACE

The moves in the US, EU, and Australia show a unified push to boost the GH sector through financial incentives and regulatory adjustments.

1.The United States (US) has introduced tax credits to make GH cheaper, offering up to $3 per kilogram for low-carbon variants.

2.  In the European Union (EU), recent changes aim to simplify regulations for production of GH, making it easier for GH projects to get off the ground.

3. Australia has allocated A$2 billion for its Hydrogen Headstart program focusing on research and commercialization and plans to introduce a certification scheme to verify GH production.

HOW ESG WILL DRIVE THE HYDROGEN ECONOMY

1.     Evolution of ESG reporting in India

It is found that ESG reporting in India started in 2009 with the Ministry of Corporate Affairs (MCA) issuing the Voluntary Guidelines on Corporate Social Responsibility as the first step towards mainstreaming the concept of business responsibility. The reporting landscape started with the introduction of Business Responsibility Reporting (BRR), Corporate Social Responsibility (CSR), IR, National Guidelines on Responsible Business Conduct (NGRBC) and now Business Responsibility and Sustainability Report (BRSR) (introduced through a SEBI circular dated 10 May 2021) As per SEBI’s circular dated 10 May 2021, entities already preparing and disclosing sustainability reports based on internationally accepted reporting frameworks (such as GRI, SASB, Task Force on Climate-related Financial Disclosures (TCFD))  . Keeping In mind the dynamic global trends in sustainability reporting, BRSR has been prepared as a standard and consistent framework. It is evident that the Indian reporting scenario is evolving rapidly in line with international norms and regulations where corporates are expected to run businesses conscientiously and maintain transparency and accountability in reporting. BRSR is expected to be used as a single source for disclosing sustainability-related information in India. For various stakeholders, especially investors, to bring about comparability amongst companies, it would also serve as a base document. As the next step in mandatory ESG reporting in India, BRSR is an effective compliance and communication tool for a company’s non-financial disclosures . BRSR has identified 49 KPIS across Environmental, social and governance factor. Out of the  KPIs in Environmental factors the one with Energy and GHG/scope emissions  is vital for all hard to abate industries, transport sector and Power sector.

2.     The Transportation Sector: An important part of the transformation towards 100% renewable energy is Green hydrogen which is considered as a promising source of energy. The transportation industry has shown a keen interest in the potential of green hydrogen, and it has created a novel requirement to initiate the development of cost-efficient extraction methods.  towards transition to hydrogen economy.

3.     Industrial Sector: The leading hydrogen consumer, with 87.1 million tonnes of hydrogen consumed in 2020 is the industrial sector . Hydrogen is used in refineries, chemical industry, and steelmaking, all categorized as “hard to abate” sectors. The industrial sectors in the coming days have to be ESG compliant, thus pushing them towards hydrogen ecosystem.The industrial sectors in the coming days have to be ESG compliant, thus pushing them towards hydrogen ecosystem.

4.     Industrial gas players are likely to be among the earliest to benefit from increased outsourcing and demand for clean H2, given their established logistics capability along the hydrogen chain. The early adopters of clean H2 will be the exiting end markets, such as oil refining, chemicals, and later on possibly fertilizer. 

5.     Green Hydrogen as Feed Stock:The following industrial sectors are likely to adopt green hydrogen as feedstock and drive demand in the long term.

·        Ammonia production

·        Iron and steel production

·         Crude oil refining

·         Methanol production

6.     Sector coupling (German: Sektorkopplung) refers to the idea of interconnecting (integrating) the energy consuming sectors - buildings (heating and cooling), transport, and industry - with the power producing sector.

Modeling H2 use exclusively for grid-scale energy storage, often referred to as “power-to-gas-to-power (P2G2P)”, overlooks the cost-sharing and CO2 emission benefits from using the deployed H2 assets to decarbonize other end-use sectors where direct electrification is challenging.

7.       Green Hydrogen in Power Sector: To meet vital sustainability targets, and increase demand for greenhouse gas reduction, companies are looking to adopt hydrogen as a flexible renewable energy source. The right technologies can help validate the sustainability of operations across the value chain by improve productivity, reduce variability, decrease energy usage, lower emissions . The adoption of ESG principles will play a crucial role in shaping the future of the hydrogen economy. Companies need to put the correct regulatory framework in place ,as they look to adopt hydrogen as a flexible, renewable energy source to meet increasing demand for greenhouse gas reduction and vital sustainability targets, which can dramatically swing the economics of projects and make countries more competitive in this rapidly growing market .

8.     Prospect of exporting green hydrogen: According to PWC, By 2050, green hydrogen production costs in some parts of the Middle East, Africa, Russia, China, the US and Australia will be in the range of €1/kilogram. In regions with limited renewable resources, such as parts of Europe, Japan and Korea, will be more than €2/kilogram, making it likely these markets will import green hydrogen from elsewhere. India has great prospect for exporting Green Hydrogen.

9.    Green Hydrogen will be imported by even densely populated regions with    good renewable resources, as land constraints limit the production of green electricity for direct use and conversion to hydrogen.

Thus we see that ESG compliance trends and  standards being in rise globally in European Union, US, China, Japan ,Korea  and other countries along with India, has a potential to drive Green hydrogen initiatives across the value chain by public, pvt partnerships, partnerships between governments and sector coupling.

Role of Corporate Sectors in shaping the Hydrogen Economy by ESG:

The demand for hydrogen is growing and the market is evolving. However the infrastructure development will take time and has to be planned. The need of the hour is that industries and corporates should capitalise on the emerging opportunity, in partnership with governments and they need to start implementing pilot projects .This will help them in gaining experience and generate efficiencies through learning curves and scale effects. On the part of Governments they should put the correct regulatory framework in place, which can dramatically swing the economics of projects and make India  more competitive in this rapidly growing market. The ESG framework should be made mandatory to give a push to take sustainability agenda seriously. The ESG trend is in rise globally and India is coping up with the trend. Corporate governance should implement and integrate it in the business strategy, which will further boost the hydrogen economy by the following ways:

·       Scaling competitive supply; India being a hydrocarbon rich country should leverage the hydrocarbon resources, access to abundant renewable energy, geographic location to grab the opportunity with the adoption of technology and development of infrastructure .Industries in the hydrogen value chain can come together. This will help in scaling the green hydrogen production and export opportunity.

·       Stimulating local demand: Parallel to the development of export corridors, ,there is a need to develop the local market to create the foundation of a strong hydrogen ecosystem. This can be done by sector coupling. The role of corporate governance for the industries is large in this for developing the business strategy.

·       Developing transportation technology: This is crucial to the hydrogen economy as the transport sector is the largest contributor to green house gas emissions.

·      Facilitating corporations across value chains, customers, and countries: Cooperation across value chains can be facilitated by corporates to develop clean hydrogen value chain. This can be done by identifying key sources of value and fixing their role in the value chain.

Hydrogen value chain

Source: Internet

ESG FACTORS AFFECTING THE HYDROGEN ECONOMY

The ESG factors that has the potential to affect the Hydrogen Economy are:

1.Environmental: The rising trend in environmental concerns that will impact the internal and external stake holders is taken care of by finding the factors which aligns with the SDG goals as well as the industry or organization goal. Thus the industries in the Hydrogen value chain needs to identify the KPI or Key Performance Indices that will have an impact on the environment and means to measure the impact. Monitoring the parameters at the board level and assigning responsibility for reporting and auditing the actions taken and implementation report is the part of corporate governance. Environmental  compliance on these factors will ensure that the standards are  met which will attract low interest loan from ESG funds in the market , thus providing support for further investment and development of infrastructure and adaptation of new technologies for Green Hydrogen thus boosting the hydrogen economy.

2. Social: Green Hydrogen has potential risk of being socially accepted due to the challenges associated with production, storage and transportation and social impact of public perception concerning safety. The social impact needs to be measured and action to be taken for implementation of safety measures and public awareness to be created for acceptance of the technology taking in to consideration all hazard risk and safety practices .Thus pilot projects are required for assurance of social acceptance. The social compliance aspect of ESG will help corporates to integrate this into its business strategy   and so GH adaptation concerns will be taken care of .

3. Governance : The industries and corporates in the GH value chain should build a strong governance policy to monitor the plan, from conception to implementation with proper regulatory framework and ESG matrix. Ensuring ESG compliance by the governing body will further enhance the effort to meet the target of 2030 for GH and scaling the production of GH with adequate support by creating a hydrogen eco system and development of infrastructure at a faster pace.

So we see that proper ESG compliance which if made mandatory by government regulatory bodies will ensure and expedite the GH production, transport and distribution process requirements, thus boosting the Hydrogen Economy.

CONCLUSION

So we see that Green Hydrogen is an important component towards Net Zero commitment . According to S Santanu Roy in an article on ET Energy World  about the adoption of Green Hydrogen in India “Green Hydrogen (GH2) should be viewed as a complement to other alternative energy sources rather than a standalone solution. Despite the challenges of high production costs and the need for regulatory support and large-scale investment, green hydrogen is a vital element in India’s shift toward clean energy.” It is vital towards the clean transition globally also . As discussed the ESG rising trend has the potential to complement the efforts towards the Green Hydrogen landscape by attracting investment and impacting  all internal and external stakeholders in the GH value chain. James Gifford who first coined the word ESG while working for the United Nations said “ESG is a journey, we are all on it together. If all goes well, we’ll never reach the destination. Over time, it will become integral to everything we do.” Thus it is concluded that “  Global ESG trend has the potential to boost the Green Hydrogen Economy.”

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