China Fuel Cell “Subsidy” Policy: Game Plan Breakdown

Game on. Authority in Beijing launched the highly-expected hydrogen & fuel-cell “reward” policy last week, as we mentioned in this week’s syndicate. [Official Release of China Fuel Cell Subsidy Policy from the Ministry of Industry & Information Technology (MIIT)]

In the awakening of the release, applications for the demonstration & subsidy have begun. Cities that hope to get into the first array of fuel cell “demonstration” regions could already apply. And many will start the applications in the coming weeks.

Deadline of the application is at mid November. 

Several regional governments have taken swift measures to prepare their gameplans. These include provincial governments of Shandong, Zhejiang, and Jiangsu. But we are fully expecting Guangdong, Shanghai and Sichuan would be among the applicants and they are likely to succeed, too. 

[READ MORE: Full Review of Regional Government’s Policymaking Activities–as Preparation for the Subsidy/reward]

The policy is a final and an “upgrade version”—in our view— of the previous draft, which was sent three months ago to several provinces for feedback.

We have broken down the key detailed of the renewed version and explained the significance for foreign investors by the following analysis.

China Fuel Cell Subsidy Policy: City Based Reward

The city-based demonstration is the main feature of China’sChina’s new hydrogen and fuel cell subsidy policy.

  • City-based demonstration (城市示范):Financial supports are provided to cities or city alliances (城市群) that successfully implement hydrogen & fuel cell industry development and demonstration. Individual cities or alliances are required to meet conditions set by the central government.  
  • “Reward Instead of Subsidy” (以奖代补): It is essentially a financial reward provided by the central government. The selection and reward process is administrated by five ministries.  
  • Indirect Reward (间接性奖励): the Reward is provided to city-level local governments, but not directly to hydrogen industry or companies. The policy target is to kick start the industry by regulating local governments’ activities.  
  • Local Governments are the Key Players (地方政府): given the indirect Reward set up, local governments become the key players responsible. 
  • Whole-value-chain-focused instead of consumption-focused (产业链财政支持,而非消费补贴): the policy is different from the previous fuel cell vehicle subsidy, which is offered to entities or individuals that purchase FCVs.

The total time frame for the demonstration is four years. It is worth noticing that the policy has set up a mid-term review system to check results after the first two years. And penalties system is also introduced. 

We believe the implementation of the check&review system would be critical to the policy’s result. In the past, there are several similar policies (in solar and EV sectors, especially) have failed to deliver due to the poor execution after companies or governments receiving financial supports. 

Final Decision for the Fuel Cell Demo Policy: an “Upgraded”

The fuel cell subsidy policy is an improved version from a previous feedback-inviting draft released on May, as we believe.  [READ MORE: A Breakdown of the Feedback-asking Draft’s design]

The “upgrades” are reflected in four dimensions: 

  • New Policy Targets: cost-efficient hydrogen gas supply and downstream applications are included in the policy. 
  • Higher tech requirements: Several technology standards and requirements (on fuel cell, vehicle operation) have been elevated. 
  • Stronger financial support: The ministries decided to provide a larger reward amount for each demonstration region
  • Better defined conditions: the final draft set up more detailed criteria for the different industry demonstration areas (esp. in fuel cell system components).
Critical Changes in the Final Policy Version

Gas Production: New Priority in China’s Fuel Cell Subsidy Policy

The previous draft focused on cities’ infrastructure set up—meaning, the amount of FCVs and hydrogen refuelling stations—as the main selection criteria.

The final policy, on the other hand, emphasized on “safe” and “cost-efficient” H2 gas supply capacity. The policy also provides extra financial supports for low-carbon hydrogen sources.  [READ MORE: China’s green hydrogen market development ]

The “Additional” and The “Cut-back” Areas

Notably, cities are also judged based on whether they have established a “suitable” market for the commercialization of FCVs. In that sense, regional economic centres have a higher chance to secure the funding.  

Shanghai, Foshan-Guangzhou, Suzhou, Weifang-Qingdao, and Chengdu are among the most likely to become the selected demonstration regions. Then, Beijing-Zhangjiangkou, Hangzhou-Jiaxing, and Wuhan could follow suits. 

Energy Iceberg’s View

Higher Tech and Economics Criteria in the Reward System

The overall policy targets are set in a higher standard. 

The minimum requirement for cities eligible for the demonstration has been increased. Cities would need to have 100 FCV and 2 refuelling stations in operation, instead of 50 FCVs and 2 stations as the previous draft suggested. 

Most critically, the policy raise the tech specs required for the fuel cell system technology by a great deal.

The policy also set higher bars for FCV operational range and vehicles’ warranty period compared to the previous draft.  

We expect that companies with better technology and cost-effectiveness would benefit from the new policy. It would also partially limit regional governments’ tenancies to foster their separate local technical suppliers who may not have the best tech offer. [READ MORE: China’s local-government-driven hydrogen boom and the potential drawbacks. ]

Stronger Financial Incentives Aiming at Gas Production & Fuel Cell Stake

The final verdict provides a higher reward amount for each region. 

In the previous version, one city (or city alliance) could secure at best ¥1.02b funding, based on the total score for each demonstrative region was 10200. (Central government provides ¥100,00 for each 1 point.)

The final decision is out of expectation as the total reward amount jumped by 68% to 1.7b for each region. 

Taking into account that most of these cities would also provide local subsidies to the FCV industries. And in the past, most have established a 1:1 subsidy ratio. That means the local reward amount would be 3.4b for each city/region. 

As Beijing intends to select ten demonstration areas in the first phase, the total funding could be as high as ¥34b.

The increased financial funding aims mostly at hydrogen production and fuel cell system R&D sectors. 

  • Hydrogen production: the final policy provide Reward for regional hydrogen production activities. Extra financial supports are provided for hydrogen production value chain that is under given cost and carbon emission levels. Green hydrogen and chemical by-product gas producers would benefit from the new set up.  
  • Fuel Cell System R&D: while the technology requirement for fuel-cell demonstration has been increased, the ceiling reward amount has been more than doubled to ¥15b—from ¥7bn in the previous feedback-asking draft. 

Opportunity for Foreign Suppliers

The policy did not mention any target for local contents or barriers for foreign suppliers. However, in our view, Bejing’s priority in the policy is to spur local value chain development. In practices, domestic suppliers are still more likely to gain the favour of the local government. 

That being said, the policy reflects Beijing’s eagerness to catch up in hydrogen fuel cell system technology quickly. International players with critical technology offer in fuel cell system, gas production optimization and fuel-cell truck technology are up for exciting opportunities. 

Energy Iceberg’s View

In the past years, Beijing’s industry and energy regulators show a clear preference to involve regional governments in various industry reforms. The heavy role of local government, however, could be a double-edged sword in China’s hydrogen & fuel cell demonstration. On the one hand, strong local policy and political supports are ideal for spurring industry development in a speedy manner. But on the other hand, cost-effectiveness and over-investment (supply) had been a common issue. 

Energy Iceberg’s View

The detailed implementation of demonstration selection, check & review systems would be critical for the final result of the written policy of China fuel cell subsidy’s game plan.   

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