Our green energy policy needs a close relook

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The ministry of power (MoP) announced a much-awaited green hydrogen policy (GHP) on 17 February. Industry participants have largely welcomed it, for it fits in well with the climate-action thrust of India’s budget for 2022-23. The policy has set a target of 5 million tonnes per annum (MTPA) of green hydrogen production by 2030, more than 80% of the current hydrogen demand in the country. The question is whether the GHP contains sufficient measures to achieve this ambitious goal.

As per the International Energy Agency (IEA), oil-refining is the largest consumer of hydrogen today. Our largest refiner, Indian Oil Corp (IOC) estimates that GHP measures will reduce the cost of green hydrogen production by 40-50%. Producing 1kg of it takes about 50kWh of electricity, assuming electrolyser efficiency of 70%, with renewable energy (RE) the biggest cost component. While India boasts one of the world’s lowest average cost of RE generation, it levies a plethora of charges on wheeling and transmission of electricity between the points of generation and consumption. The GHP envisages green hydrogen production using power supplied by a co-located RE plant or sourced from a remotely-located one. In case of the latter, the landed cost of power would determine the cost of output. As per a recent Mercom India report, the landed cost of solar power in most states is in the range of ₹3.70 and ₹7.14 per kWh. IOC estimates that with landed cost of ₹4-7 per unit, green hydrogen can be made at a cost of ₹500 per kg, which is nearly 3.5 times the cost of grey hydrogen. So the landed cost of RE from a distant source will need to at least be halved (with a corresponding reduction in electrolyser capex cost and increase in efficiency), to make green hydrogen competitive vis-a-vis grey.

Thus, a mere waiver of inter-state transmission system (ISTS) charges announced in the GHP may not suffice to make green hydrogen competitive. For open-access RE projects, a cross-subsidy surcharge and additional surcharge constitute a big component of the landed RE cost. The Mercom India report says that cross-subsidy levies in states range from ₹1.71 to ₹2.23 per kWh. A waiver or substantial reduction in these two charges would make the use of RE more attractive to producers of green hydrogen.

The GHP allows the banking of RE used to produce green hydrogen and ammonia for 30 days, and seeks to cap the charges on this to the difference between the discom’s last-year average tariff for RE procurement and the average market clearing price in the day- ahead market during the month that RE is banked. Under the Electricity Act, 2003, the power to allow RE banking is held by State Electricity Regulatory Commissions (SERCs). Many RE-rich states are either moving away from allowing RE banking or introducing regulations to restrict this facility. Gujarat, for example, allows settlement for banked solar power only between 7am and 6pm and levies ₹1.5 per unit as its banking charges for ‘high-tension’ consumers. Rajasthan permits banking of up to 25% of RE generation and settlement on an annual basis, but levies a 10% charge, among the highest in India. Tamil Nadu and Andhra Pradesh do not allow RE banking. Moreover, most states do not permit banked energy to be drawn during the peak hours. So, unless RE-rich states implement the GHP’s banking provisions and levy uniform charges, it may not help green hydrogen producers much.

While permitting a waiver of ISTS charges for hydrogen projects commissioned before 30 June 2025, the GHP omits to mention any waiver of ISTS losses for green hydrogen and ammonia projects. The GHP lets discoms procure and supply RE to makers of green hydrogen/ammonia at the cost of procurement with a small margin determined by the SERCs. This margin may not be enough incentive for discoms to procure and supply RE to green hydrogen makers on a long-term basis.

Many of the measures announced in the GHP would require the active cooperation of state governments (including allotment of land in RE parks and proposed manufacturing zones) and the relevant SERCs. To get the cooperation of RE-rich states, the Centre may consider providing concessional finance to the discoms in such states to clear their dues to power generators, and in return require them to waive the aforementioned surcharges for open-access RE projects and cap RE-banking charges at the level specified in the GHP.

While the GHP measures aim to enhance the supply of green hydrogen at competitive rates, moves to stimulate demand are completely missing. It was widely anticipated that the policy would mandate hydrogen-purchase obligations for the petroleum refining and fertilizer sectors to begin with. While large refiners like Reliance and IOC have plans to set up green-hydrogen production facilities, other manufacturers and RE developers would be hesitant to commit large-scale investments in the absence of demand generators. While the success record of renewable purchase obligations in India’s energy sector has been less than satisfactory, this mechanism does provide a boost to the nascent RE sector and lower RE project costs through economies of scale. Hydrogen-purchase obligations or other demand boosters would support the creation of a green hydrogen ecosystem. For example, the Centre may consider incentivizing petroleum refiners and fertilizer makers to make and use green hydrogen by offering subsidies linked to their level of its utilization as feedstock. This would further India’s goal of achieving its net-zero emissions target by 2070.

Ramanuj Kumar & Priyal Modi are, respectively, partner and associate, Cyril Amarchand Mangaldas