Using clean power resources for hydrogen production makes sense in the Chinese market, given the country’s massive power resources and the looming power waste issue. China’s current research and demonstration projects for green hydrogen electrolysis, however, focused on the utilization of renewable.
But how about hydro and nuclear?
The high curtailment of hydropower and the dependence over long-distance transmission are two main background for growing interests in looking into hydro-to-h2 solutions.
Sichuan province—the home base for China’s largest hydro resource—right now appears to an ideal market to set off the demonstration. Yunnan province, of abundant wind power and hydro resources, is another potential option.
Green H2 in China: Status Quo
As we have summarized in our 2019 Hydrogen Market Summary:
- China stands as the largest H2 production nation in the world, with over 20 million tons of production in 2019. Hydrogen production capacity has far exceeded 25 million ton per year.
- Cheap hydrogen supply is not an issue. But these supply remains to be “grey hydrogen” from coal gasification and as the byproducts of the chemical process.
- More regional governments show interest in R&D and demos of green hydrogen production based on electrolysis, which accounts for just 3% of the total supply now and is expected to take up 15% by 2030.
- To cater to that electricity demand, China needs some 5.25 million ton green hydrogen produced annually or roughly 262.5 TWh clean power generation.
The discussions so far focused on renewable-to-gas, with a handful of pilots already kicked off, as China faces mounting issues of renewable curtailment. Moreover, some renewable power sources (wind, offshore wind, solar) are close enjoy to the potential FCV markets at coastal regions.
However, the potential of hydropower and nuclear power perhaps has been overlooked.
Hydro to Hydrogen: the Logic in China
The logic to use hydropower for H2 production is a similar severe electricity waste in China’s hydropower market.
China has a long-standing issue of clean power curtailment, caused by the combined effects of out-of-sync China’s power capacity building and (lack of) power demand, centralized and remote energy production locations, and the slow grid construction.
The problem of wasting hydropower seems more severe during the 12th Five-Year Plan period (2011-2015), triggered by the rapid burgeoning of small-size hydropower plants.
Following that period, Beijing put a brake of the small-hydro development and tighten the grip of green-lighting large hydropower dams during 13th FYP (2016-2020). Consequently, the absolute amount of hydro new build capacity declined sharply. And the share of hydro in China’s new build power mix continues to shrink, falling from 19% in 2016 to 17% in 2017.
These measures did alleviate the hydropower waste problem. Curtailment rates have been gradually coming down, and the average utilization time of the units have been mildly climbing up.
But in the long run, the curtailment problem and risk is here to stay, as the root cause of the problem could not easily find cures:
- Fundamentally, China’s highly-regulated and government-interest-driven power market would still suffer from the out-of-balance of energy capacity planning/building and the progress of power demand.
- Seasonal hydropower curtailment remains a lasting issue: amidst global climate change, the fluctuation of hydropower’s annual outputs have become more extreme and challenging to predict. As a reason, curtailment could easily creep up in some year. A total amount of 69.1TWh hydropower was generated but then curtailed in China in 2018, jumped from 17.6TWh in the previous years.
- Production launches of several mega hydro new builds will add to the challenge: China has planned 13 hydropower complexes. Several of the jaw-dropping mega hydropower projects will add to the curtailment stress—i.e. the Wudongde (10 GW) and Baihetan (16 GW) hydropower projects. Some larger river dams are also in the planning stage, i.e. Nu River (17.72 GW), is like a cloud hanging.
- Grid Connection is not only an investment issue in China: it is also a political issue among different regional government’s interest.
Provinces and Companies with Hydro-to-H2 Potential
Hydro rich areas may be up for long battle with the looming curtailment risks. As a result, local governments are in urgent need to develop energy storage and local consumption measures for their clean power offers.
Hydrogen production seems to offer both—storage and consumption—opportunities at the same time. In the long run, Sichuan and Yunnan governments would likely to grow even more substantial interest in green H2 projects.
- Sichuan: by the end of last year, Sichuna’s hydro installed capacity has been 41.9GW, covering more than 70% of its electricity portfolio. The firm has curb hydropower curtailment in the past year, but the coming online of Baihetan and others imposed new threads.
- Yunnan: Yunnan has abundant wind power, hydro resources, and even some local coal mines. It used to be the power export region in China to provide electricity to Guangdong. But in recent years, the province has precise planning to develop local heavy industries to utilize its cheap energy sources, eyeing especially on phosphorus and aluminium productions.
Seven state-owned enterprises currently control more than half of China’s hydropower projects. By 2018, CTG, Huadian, Datang, Huaneng, SPIC, Guodian (CEIC), and SDIC installed hydropower capacity 449.44GW, 27.22GW, 27.04GW, 26.07GW, 23.85GW，18.54GW, and 16.72GW.
Two players already show special interest in hydrogen technologies:
- SPIC: set up a hydrogen affiliate last year and invest in key equipment R&D, including fuel cell stake. More than 50% of the firm’s power portfolio is clean sources (wind, solar, hydro). It has kicked off a wind-to-hydrogen demonstration in Jilin.
- CEIC: similar to SPIC, the firm shows a keen interest in H2. So far, the investment interest appears to be combining its coal mining portfolio with H2, as the principal subsidiary Shenhua is China’s largest coal miner. But its Sichuan-based project company has already looked into the economics of hydropower to gas.
More information of these seven companies can be found in our previous reports: power utilities’ 2019 performance summary; a brief introduction of China’s power utilities and their market position.
Electricity Price the Key, Subsidy the Necessary Steps
Electricity price is the decisive factor for the realization of such projects. It is also the key metric for developers to compare it to other hydrogen production projects—either the conventional petrochemical processing projects or the renewable-to-gas projects.
In Sichuan, the regional regulator has unleashed several policies to introduce low hydroelectricity prices to stimulate hydrogen production projects.
introduced an electricity price (user-end) at not more than ¥0.3/kWh (based on a fixed transmission price of ¥0.105/kWh, generation-side electricity price is at ¥0.15/kWh)
set up six hydropower consumption demo regions (Ya’an, Leshan, Panzhihua, Ganzi, Aba, Liangshan), where big electricity consumers could enjoy a fixed electricity transmission cost of ¥0.04/kWh and an annual average (retail) price at ¥0.22/kWh
As our previous analysis mentioned, the electrolysis production would become competitive to coal-gasification units, when the electricity cost approached ¥0.1/kWh.
That means the special pricing offered by Sichuan is approaching the competitiveness benchmark. In reality, however, the policy still faces some fundamental technical and market challenges.
In 2018, CEIC analyzed two economic cases of hydro-to-H2 in Sichuan, both of which is hardly profitable:
- Scenario-1: to build H2 production facility next to the hydropower site. Pros: in theory, the H2 project could enjoy the cheapest electricity cost (¥0.15/kWh). Cons: there is no precedent for bypassing grid transmission fee for hydroelectricity consumption, which requires political coordination and the support of the grids. Secondly, hydrogen gas, previously tagged as a hazardous chemical product in China, is challenging to seek construction permit outside of the industrial complex.
- Scenario-2: to build H2 production facility near the consumption side. Pros: it will face less challenge in terms of government approvals and coordinations. The project needs to secure an electricity direct purchase contract with the generators at a retail price of ¥0.3/kWh.
Overall, S-2 appears to be a possible option. But so far no H2 production projects as such secure that required price benchmark. This is because the on-grid price of electricity has been found lower than the break-even point for the hydro generators.
And even in that case, S-2 is estimated to lead to only 1% internal return (while 8% IRR is a benchmark for Chinese energy companies to invest in an energy project). The economic motivation is still lacking.
Some demonstration phase hydro-to-gas projects are still likely, but without an electricity price suitable for both the generator and the production, the model remains far-fetch.
However, there is still reason to be optimistic about the development in the long run.
Sichuan and others are hoping to foster local development in fuel cell vehicle manufacturing and infrastructure building. Economic interests may trigger unique policy measures–such as direct subsidy. More supporting measures, if any, would provide some initial push for the market to kick start.