2019 China Hydrogen Market Review: Investment & Production

production and sales fluctuation

China’s hydrogen industry started 2019 on a high note, but the end result unexpectedly fell short. 

And as the coronavirus outbreak appears to bring a headwind against China’s economy in 2020, the nascent hydrogen industry, which depends heavily on government subsidy and Beijing’s policy, now face even more uncertainty.

Our review on the 2019 hydrogen market in China shows:

  • FCVs production number reached an all-time high but fell short from market expectation
  • There is a looming policy risk, as MoF signals to limit national subsidy
  • China’s hydrogen deals in 2019 registered a total ¥100bn investment (based only on public announced deals)
  • But the booming investment scene is based on regional government policy, which is of high risk
  • Hydrogen production is sufficient in China, but green hydrogen is inadequate. PEM electrolysis is the technology direction, with a dozen Chinese companies already involved.

China Hydrogen Market “Fell Short” in 2019 

In 2019, the Chinese market produced 2833 fuel-cell vehicles, an all-time high record, as we mentioned in Energy Iceberg Syndicate on 20 Jan.

China’s 2019 Fuel Cell Vehicle Production & Sales Data Month by Month

The result looks positive, with a 75% YoY growth and meaning that more than 6000 FCVs have been in operation in China. 

However, that result still fell short from previous expectations. Earlier last year, the market was bullish and projecting some 5000 FCVs alone launched in 2019, amidst heated market scene boosted by Beijing’s promises for stable subsidy. 

Unfortunately, that promise did not materialize. And regulators appear to have changed their mind over the subsidy. In March last year, Ministry of Finance (MoF), MIIT, NDRC, and NEA set off a national subsidy (80% of 2018 subsidy rate) for FCVs between then to 25 June, and said to offer another subsidy rate after June.

But since then, no subsidy decision was made ever since. 

Due to the uncertain subsidy scenario, manufacturers paused development and were waiting for clarity. In fact, about half of China’s 2019 FCV were produced in the last month. 

China Fuel Cell Value Chain Decisive Moment in 2020

Looking into 2020, the Chinese hydrogen sector is in a critical juncture, with subsidy policy a decisive factor for its development. 

Unlike EVs, the fledgeling fuel-cell value chain still requires subsidy to kick start development. 

The industry needs to quickly lower cost—but that takes time. And subsidy appears to be a must right now before the learning curve starts.  

  • The average cost for a 10.5M fuel-cell bus is now estimated at ¥1.95mn, of which national subsidy used to pay for ¥0.5mn and different local subsidy schemes could provide for ¥0.5mn, meaning the actual cost of ¥0.95mn/v for buyers. However, the industry set to lower cost to ¥1.4mn/v by 2025 and ¥0.8mn by 2030.

However, officials of the subsidy “provider”, the MoF, revealed their growing scepticism (or changing mentality) for the financial supports to the “new energy transportation sector”.

Prolonged (subsidization) policy will lead to unhealthy dependencies on government supports and low-level expansion without technology innovation.

Song Qiuling director of the economic construction department of the MoF said in an Aug 2010 speech.

That reasoning has some merit. But a more decisive factor is MoF’s changing financial policy. The ministry, facing mounting deficit issue in new energy subsidization, is under pressure to take a more cautious approach. 

Moreover, China’s economy is up for a tough year in 2020, amid a coronavirus outbreak that is yet to be tamed. The ministry may be in a more difficult position to swiftly provide sufficient subsidy.

The booming hydrogen scene, as we warned previous, in fact, face many risks. 

China Hydrogen Market Investment 2019: Heated but Risky 

The Chinese market has seen at least 49 investment, merger & acquisition deals announced in 2019 regarding hydrogen and fuel cell businesses. [READ MORE: Who Are Investing in China’s Hydrogen Market]

  • The total funding involved in these deals exceeded ¥100bn, compared to an overall ¥85bn investment in the sector in 2018.
2019 Deals of Hydrogen in China (Only Based on Public Announced Deals)

The growing investment is mainly supported by local governments’ ambitious plans. By Nov last year, 14 provincial governments and over 30 municipal governments announced their hydrogen development plans, all looking to build some hydrogen “valleys.”

In China, industry booms based on the provincial policy are often risky of building on shaky ground, we previously warned. And clearly, the “collective ambitions” of the regional rulers have way exceeded the intention of the central government, underlining the policy risk.  [READ MORE: Chinese regional government’s subsidy promises]

Hydrogen Production Supply Chain 2019: Not Yet Green

China stands as the largest hydrogen production nation in the world, with over 20 million tons of production last year. Hydrogen production capacity has far exceeded 25 million ton per year. 

Cheap hydrogen supply is not an issue. But these supply remains “grey hydrogen” from coal gasification and as the byproducts of the chemical process. The industry made limited progress last year to advance the development of “green hydrogen,” the gas from renewable sources. 

  • Electrolysis contributed just 3% of the total hydrogen supply. And only a handful of renewable-to-hydrogen projects exist for research or demonstration purposes.  
  • While policy advisories hope to achieve 15% of hydrogen production from renewable by 2030 (and 40% by 2040), it is still a long way to go.  Hydrogen demand, in the previous bullish view, is estimated to hit 35 million ton at 2030. That means a market of 5.25 million ton green hydrogen or roughly 262.5 TWh renewable generation. 

In an absolute sense, China’s renewable power capacity is more than sufficient to support that demand. But the critical factor behind commercialization is the electricity price. 

  • Currently, average solar and wind on-grid prices are around ¥0.3-0.6/kWh. Still, it estimated that renewable-to-hydrogen needs ¥0.1/kWh to become competitive—then the gas production cost would be similar to those from coal gasification. 
Limited Renewable-to-Hydrogen Distributed Projects in China

We summarized existing renewable to gas products. Most of these commercial projects rely on special renewable prices offered by the local government to develop their business case. Moving on, commercialization of such projects still need to seek cooperation with the low-price or curtailed renewable energy.

Energy Iceberg believes that PEM electrolysis based on wasted renewable power will be the main commercial direction in the coming years in China. Technology to improve PEM cost efficiency could seek opportunity in the market. 

China is also looking into SOEC technology, but the interest remains on academic and R&D level. [READ MORE: Chinese Hydrogen Technolgy compared to Global Leading Practices. ]

China’s Renewable-to-hydrogen Electrolysis Technology and Companies

We will soon release the second part of our review about the hydrogen market 2019, focusing on charging, storage, and equipment technology.