The hydrogen hype in China today, deja vu of the electric vehicle boom a decade ago. The question is which direction should the country opt for hydrogen. Key takeaway this week:
- current hydrogen market in China shows an over-heated sign, despite its infancy
- hydrogen development would still go through a prolonged “hype cycle”
- China should consider developing hydrogen in new sectors instead of urban transportation where the nascent technology would face intense competition from EVs
This year, for the first time, the annual government work report mentioned hydrogen as one of the clean energy sectors that the country will promote.
Before that, Beijing has delivered various plans that provide policy leverage and financial incentives to the hydrogen fuel-cell and hydrogen vehicles. But the new public statement has proved itself to be more than just some empty phases by a scorching hot market created.
Green Hydrogen, A Heating Market
Used to be a game played mostly by the private companies, the hydrogen value chain all of a sudden attract the attention from various state-owned “big names,” including metal, oil&gas giants, generation powerhouses, car producers, transportation and electronics manufacturers. Some fifth companies have set up a China Hydrogen Alliance earlier this year, showcasing the public sector’s commitment.
Then the regional government quickly follow suits. They are hungry for new industrial projects to boost local GDP, as under Beijing’s deleveraging policy amidst the general overcapacity in various sectors. In just a year fourteen provinces kicked off plans to develop hydrogen value chains, supporting all sorts of capacity-building schemes. I recently wrote a piece in Recharge on one of the recent examples in Jilin Baicheng. The local government there is ambitious to build from scratch a value chain inclusive of wind power plants, hydrogen production facility, charging infrastructure, and hydrogen fuel-cell vehicle factories.
In the Chinese energy market, the participation of the state-owned players and provincial government signals the landing of a specific national-level policy or strategy, and, this way, often the herald of a heating market. (* In our article next week we will be discussing the major state-owned enterprises who are investing in Chinese hydrogen market & their different focus. )
But many now argue that hydrogen development is already overheated, despite being in an infancy stage. While all the regional government rushes to build up their “hydrogen valley” and strive to become the hydrogen production centers, such plans often lack the support of sustainable and mature market demand.
Already experts warn that the capacity built up in the past two years has “exceeded the technology progress” and face low utilization for the years to come.
China Hydrogen Fuel Cell Market, in “Hype Cycle” Theory
How to look at China’s hydrogen market development going forward then? Is it just a bubble? Or would it, like many experts say, give birth to the most significant clean hydrogen and fuel cell market in the world soon?
To predict is always tough. But the past experience could provide some reference.
In the past, China witnessed many other energy hypes as well. To list a few: electric vehicle and electric charging (2009-2010), shale gas (2011-2012), retail electricity trading (2016-2017). And, perhaps, the list also includes photovoltaic production and carbon trading.
A side note here: when I started my career in China’s power industry—10 years ago, it happens to be the start of electric charging hype, when similar industry alliance is formed, and many energy SOEs (such as China National Petroleum Corp, or PetroChina) revealed bullish plan to cross over to EV charging business.
My 10-year career path in analyzing the Chinese energy market has been freight with the ups and downs of the energy hypes. I consider them to share these similarities:
- Policy-driven: kicked off due to major policy changes
- Financial incentive: supported by new subsidizing schemes or business models
- Potential “Game-Changer”: with potentials to disrupt existing market structure that are of high-barrier, and often controlled by monopolies
- The explosive growth of investment enthusiasm (both primary and secondary)
- Unconventional Players: attracting not only the traditional incumbents but also other new players to “cross over” to the new area to seek opportunities
The development path of these hypes are the living proofs of the “hype cycle” theory, and with some outstanding Chinese features.
Firstly, a great promise/vision was introduced, which attracted a wide range of players to enter the new areas for opportunities. In 2011, several power utilities were bullish enough to start upstream gas drilling. And in 2016, tens of thousands of retail power companies were set up like bamboo shoot after the rains. Then, the supporting policy triggers over investment; over-promise market gives birth to immature products and business failure, resulting in overall pessimism — the “bubble” bursts. A case in my mind is the rapidly cool-down of shale gas investment. And then after a period of struggle and plateau, the industry shall develop again based matured business models and technology.
Hydrogen’s Positioning in Chinese Energy Market
Today’s hydrogen especially reminds people of yesterday’s EV. The hydrogen industry is still in an early stage and is likely to go through a boom and bust process before mature models appear. Secondly, for large-scale development, the industry is necessary to find out its position in China’s energy system.
A commentary from Dietmar Oeliger in Chinese industry media discussed that issue. I could not find out the English version of this article. But the most interesting takeaways of the article, in my opinion, are that:
- globally, there was a hydrogen bubble burst before
- in China, hydrogen fuel cell should consider developing in a second road different from that of electric battery (for EVs), which is the urban transportation—cars, buses, etc
- instead, China should consider incorporating hydrogen storage technology with intercontinental transportation—shipping or maybe even aviation
- China is the largest shipbuilder in the world, and hydrogen offers a unique chance to decarbonize the shipping industry
Unfortunately, so far, the regional development plan does not reflect any consideration of using green hydrogen in the shipping industry. But in the drafting of the 14th five-year plan and mid-to-long-term development plan for the energy sector, this is undoubtedly a concept Beijing could consider.
A thing to add would be the fact that China is building a massive offshore wind capacity along the coastline now—likely the largest in the world by 2025. A wind-to-gas solution is an option now for Chinese inland provinces mainly because curtailment occurs mostly in the onshore wind market. But, in the future, the overcapacity problem may strike offshore wind projects in China’s eastern coastal area.
But that is also a significant opportunity to use the wind to produce hydrogen or even become a primary green hydrogen fuel offshore charging hub for the shipping industry!
For hydrogen as long-distance shipping green fuel, my colleague in Recharge Leigh Collins recently has a nice piece.
I am Yuki, and I have been a researcher & reporter in the Chinese power industry for ten years. Currently, I am building a newsletter of insights to help foreign researchers, investors, and companies to understand Chinese energy policy and market. The content is based on my research, my talks with industry insiders, and my weekly reading of various industry sources.
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This article will be part 1 of my current reads of the hydrogen development in China. The next one will be an analysis of company strategies.