China is at risk of overbuilding green hydrogen projects which could leave the country with a glut of renewable H2, investment bank Citigroup told Hydrogen Insight yesterday (Wednesday).

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Based on Citigroup’s data on announced projects, certain provinces are already poised to outstrip green hydrogen production targets set by central government in Beijing, but there is as yet not the midstream infrastructure to transport it, nor an established green hydrogen customer base.

In June, China’s state-owned Sinopec began production at the world’s largest green hydrogen plant, the 260MW Kuqa facility in Xinjiang, a feat that is likely to be eclipsed in the coming months only by the company’s other giant project, the 360MW Ordos scheme in Inner Mongolia.

“The momentum this year, particularly in some provinces in China are quite significant,” says Maggie Xueting Lin, a Hong Kong-based global commodities researcher at Citigroup. “In the next two to three years there could be too much green hydrogen production without the necessary capability to take it away, or find the new demand for it.”

As of early this year, in the province of Inner Mongolia alone, there have been 37 new projects approved by the local government, with a total green hydrogen production capacity of 650,000 tonnes.

Inner Mongolia is aiming for 500,000 tonnes of green hydrogen production by 2025 — when this figure is combined with targets from Qinghai and Gansu it rises to 740,000 tonnes.

This far exceeds Beijing’s national target of producing 100,000 to 200,000 tonnes of green hydrogen per year by 2025.

But although China already has robust demand for hydrogen — using 33 million tonnes of H2 per year for refining, methanol, ammonia and chemicals production, much of it from coal gasification — the price premium for green hydrogen is still too high to motivate customers to switch, Lin told Hydrogen Insight.

Moreover, central government in Beijing is keen to foster a green hydrogen economy based on new users in the transport sector, targeting 50,000 new hydrogen fuel cell vehicles (FCEVs) nationally by 2025 — a target that Citigroup expects it to miss, based on annual sales data over the past few years.

Although sales doubled in 2022 to 3,367, they would need to increase by 3.7 times to 12,500 in 2023 and continue at that level for another two years in order to meet the target.

State-owned enterprises (SOEs) are being encouraged to cultivate customers among new users in transport, and “hard-to-abate” sectors such as steel production.

This exacerbates the overbuild problem for green hydrogen producers, which are situating their projects close to China’s best renewables resources in the country’s north and west — such as Xinjiang and Inner Mongolia — far away from potential transport customers in the cities in the east, Lin explained.

For this reason, China is already planning a 6,000km hydrogen network that will carry H2 from west to east, including Sinopec’s 400km, 100,000-tonne pipeline from Ulanquab in Inner Mongolia to an industrial complex in Beijing.

However Sinopec’s pipeline is not due to come on stream until 2027, and the full 6,000km network is not planned for operation until 2050.

But even if transportation were not a problem, demand remains the most important factor, Lin warned.

“We are questioning whether there is enough demand from new sectors that can actually catch up to all this supply by 2025, because it is actually quite soon, even if the infrastructure is there to take the hydrogen to demand,” said Lin.

But rather than shut off production in the event of a bottleneck, SOEs, many of which are often also oil companies, are likely to simply take a financial hit and use it in place of cheap fossil-based hydrogen in their existing industrial infrastructure.

“My impression is that that for now, [Inner Mongolia’s projected] 650,000 tonnes is a drop in the ocean compared to the existing [national] 33 million tonne demand,” Lin told Hydrogen Insight. “So in the worst-case scenario, they’ll just absorb this 650,000 tonnes in Inner Mongolia in the local refineries, the chemical plants, but in hope that in the coming years, as the policies bear fruit, then they can ship this hydrogen out of the province.”

“It will depend how the end demand goes and then there will be more pipeline projects,” she explained, adding: “This is why most of these projects are headed by SOEs rather than the smaller-sized private companies because they have the solid financial resources to back these projects for demonstration purposes.”

But the oversupply of green hydrogen will only materialise if they actually manage to build their projects on time — in the face of significant headwinds, Lin said.

“We’ll have to see how many actually get built and how many go into operation on time,” she warned. “We may also see delays to the projects as well.”

The pipeline of projects in Inner Mongolia are targeting commercial operation by 2024 — which is a tight schedule, especially in the face of global economic turbulence pushing up both the cost of materials and the cost of borrowing on international markets.

“A lot of the projects, not just in China but in Europe and in the US, could experience some delays already because interest rates are rising so fast, and the inflation issues [too],” she said, adding that there also remain significant questions about whether the Chinese government can deliver on its promises to subsidise green hydrogen demand in transportation.

“By looking at projected capacity, it’s quite significant if they all fall in place at the same time but we’ll see if they go as planned.”