Hydrogen and Ammonia: The Keys to Japan’s Energy Security

Welcome to the summary of Hydrogen and Ammonia: The Keys to Japan’s Energy Security briefing of our Policy Deep Dive series.

It wouldn’t be an exaggeration to say that Japan is one of the most advanced countries in the world when it comes to hydrogen. It was the first country to create and announce a comprehensive hydrogen policy. You might also know that Toyota’s Mirai, the world’s first commercially successful hydrogen fuel cell car, hails from Japan. While many countries have since turned their focus to hydrogen for decarbonization, climate change measures, economic security, and energy security, Japan remains at the forefront of its utilization as a viable source of clean energy. Therefore, we believe that Japan’s strong position ensures that the Japanese market and partnerships with Japanese companies will soon offer numerous business opportunities in the hydrogen sector.

2024: Pivotal year for Japan’s Hydrogen Policy

2024 marks a turning point in Japan’s hydrogen policy. In the first half of this year, Japan enacted two significant hydrogen-related laws: the Hydrogen Society Promotion Act and the CCS Business Act. These laws have enabled government support for hydrogen on a scale previously unseen in Japan or elsewhere. This support also encourages participation by foreign companies.

In the second half of this year, Japan will revise its core energy strategy, the Basic Energy Plan, which is updated every three years. The key focus will be on how hydrogen will be positioned within this new strategy.

Classification of “Clean” Hydrogen

Hydrogen is generally classified into three categories: gray, blue, and green. 

Gray hydrogen

It is currently the type most commonly in use today. Although it emits CO2, it is inexpensive and easy to use. It plays a crucial role in expanding hydrogen use, serving as a vital first step toward more environmentally friendly hydrogen solutions in the future. Currently, gray hydrogen is viewed as the essential bridge to a cleaner, hydrogen-powered world.

Blue hydrogen 

It is produced similarly to gray hydrogen, by reforming coal or natural gas. However, the key difference is that the CO2 emitted during this process is captured and stored underground instead of being released into the atmosphere. While blue hydrogen can be considered nearly CO2-free, the technology for carbon capture and storage (CCS) isn’t perfect. That being said, blue hydrogen significantly reduces CO2 emissions compared to gray hydrogen.

Green hydrogen

It is produced by electrolysis of water using electricity generated from renewable energy sources. Therefore, green hydrogen is 100% CO2-free and thus the most environmentally friendly hydrogen. Green hydrogen has another advantage: its lack of reliance on natural gas or coal. Fossil fuel-based energy sources are regionally concentrated and come with inherent geopolitical risks. In contrast, green hydrogen is produced from water, which is available everywhere, thus avoiding these risks. For two reasons, I believe green hydrogen will hold a central position in the future: it does not emit CO2 and it has little to no geopolitical risk.

For the time being, the expansion of gray hydrogen use remains significant due to its low cost, and the role of blue hydrogen is expected to grow as CCS technology advances. Among these three types of hydrogen, the Japanese government is planning to support developments in generating blue and green hydrogen. The government refers to this support as “Green Transformation (GX)” and specifically focuses on hydrogen with low CO2 emissions. Thus, the concept of “clean hydrogen” includes both of these types of hydrogen. 

The Process of Producing Green Energy Using Hydrogen

Currently, Japan lacks the means to transport hydrogen in its original form. In the future, once hydrogen tankers become practical, we’ll be able to transport liquid hydrogen to Japan. But for the time being, we will have to rely on ammonia as a hydrogen carrier. As such, converting hydrogen into ammonia and transporting it to Japan is the simplest and most obstacle-free method available today.

In order for this process to be environmentally friendly, CO2-free hydrogen must be created using renewable energy and water, which will then be mixed with nitrogen to produce CO2-free ammonia that’ll be sent to Japan. 

Government support extends to ammonia produced from hydrogen, not just hydrogen itself. For example, CO2-free green ammonia can be co-fired with coal in coal-fired power plants, allowing for efficient use of ammonia. These types of projects are also eligible for government support.

Primary Energy Supply and Power Generation Mix in Japan

This is the energy mix target for 2030 according to the Sixth Basic Energy Plan. On the left side, you have the Primary Energy Supply, which includes all energy used in Japan, from electricity sources to fuel for automobiles. It encompasses all energy beyond just power generation. On the right, you have the Power Generation Mix, which focuses specifically on the energy used for power generation.

The target for 2030, labeled FY2030, shows hydrogen at 1%, including both hydrogen and ammonia. In 2022, it was nearly zero, but the goal is to reach 1% by 2030. However, in the upcoming Seventh Basic Energy Plan, which targets around 2040, this figure is expected to be significantly higher.

Goal Towards Decarbonization: The Key Is “Hydrogen”

One of hydrogen’s major advantages is its versatility, allowing it to be used in various applications.

For instance, the transportation sector. While electric vehicles are likely to increase, hydrogen is also being used in Japan for passenger cars, trains, and trucks. 

In the industrial sector, one promising application, still in the research stage, is in iron production. Currently, coal is used to reduce iron, but hydrogen could replace coal in this process, known as Hydrogen Reduction Iron Manufacturing, and there is great anticipation for this technology. 

Then there’s the residential sector. In homes, hydrogen can be used in appliances like heat pumps, which function as residential fuel cells. Hydrogen will generate electricity for household use, making this technology more common in the future.

In the field of power generation, one of the most realistic near-term applications is co-firing hydrogen with coal in power plants. Burning coal alone emits a large amount of CO2, but mixing it with green ammonia can significantly reduce these emissions.

Japan’s CfD Scheme’s Provisions for Imported Hydrogen (From:  Interim Report January 2024)

Japanese policy documents emphasize the importance of producing hydrogen domestically. However, they also acknowledge certain limitations in this approach.

Limitation #1: domestically produced hydrogen is likely to be expensive. Japan’s renewable energy scale is relatively small. As a result, economies of scale are limited, leading to higher electricity costs and, consequently, higher costs for domestically produced hydrogen. 

Limitation #2: the supply volume will be insufficient. If society begins to widely use hydrogen, domestic supply alone won’t be enough. 

Japan’s Contract for Difference (CfD) for Low-Carbon Energies

Therefore, to mitigate these risks and ensure the feasibility of initial large-scale hydrogen supply projects, the Japanese government prepared a CFD arrangement to include imported hydrogen.

The strike price, shown as red lines in the slide is the price at which hydrogen suppliers need to sell to make a profit and sustain their business. If the price falls below this, their business becomes unsustainable. The Japanese subsidy system is designed to support hydrogen suppliers, not consumers.

On the other hand, the reference price, shown as the blue line here, is what consumers consider when deciding whether to buy hydrogen or gas. It represents the price of cheaper alternatives like gas or coal. If the reference price is low, consumers might prefer gas over hydrogen, hindering the widespread adoption of hydrogen.

The basic idea of the Japanese government is to subsidize this gap to ensure hydrogen’s adoption. This means suppliers can sell at the strike price, with the subsidy making up the difference. As a result, consumers can buy hydrogen at a price comparable to gas, while suppliers receive a subsidy to cover the gap between the lower market price and the higher strike price necessary for their business.

Japan’s CfD scheme is very similar to the one used in the UK, having been modeled after it. If the situation reverses, suppliers might have to repay the subsidies. This could occur if gas prices rise significantly due to geopolitical risks, as seen with the current high gas prices. Conversely, if hydrogen supply costs decrease due to project scaling, the strike price might fall, altering the dynamics. However, at present, this subsidy system is necessary to bridge the gap.

Project Evaluation Criteria Under Consideration

A draft of the selection criteria has been released, although it’s still provisional and the details will be finalized later. There are specific elements the government will likely look out for in these proposals; we’ve outlined some, not all, of the key criteria here:

One important criterion is securing an off-taker. Overseas hydrogen suppliers must ensure there is a buyer in Japan for their hydrogen and present this in their project proposal. Additionally, the project must include proper risk-sharing between the government and the company. Projects that push all risks onto the government will not be selected. Sound financial management is essential, and attention should also be paid to geopolitical risks within the project.

Another mandatory criterion is the production of at least 1,000 tons of hydrogen, considered a low threshold. Post-support autonomy is also essential. Subsidies are not provided indefinitely; they are available for a specific period, after which the project must be self-sustaining, with an expected decrease in costs by that time.

Projects in sectors that are hard to decarbonize will be prioritized. For instance, projects using hydrogen for iron reduction or in the chemical industry are likely to be favored. 

The Future of Hydrogen and Ammonia in Japan

This past May, Minister of Economy, Trade and Industry Saito stated: “Applications for subsidies to bridge the price gap with fossil fuels will begin this summer.”

Based on the information we have currently available, it will likely be on a first-come, first-served basis. Companies that apply early will be prioritized for subsidies. Of course, the subsidies are limited and cannot be given to all projects. Those that meet the criteria and apply early will receive preferential treatment.

Let me reiterate that 2024 marks a significant turning point for Japan’s hydrogen market and policies. This also presents a major opportunity for businesses related to hydrogen, including hydrogen supply and technologies like electrolyzers, water electrolysis, and CCS. These developing technologies will also be eligible for subsidies.

If there is anything we can assist you with, do not hesitate to reach out. Hydrogen is on the cusp to become a major energy source in Japan and many other countries within the next decade. This means that there will be enormous business opportunities in the coming years. 

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