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Part 2

Hy-Politics – political considerations shaping the evolution of clean hydrogen policy

Summary of the use case in Japan

The government of Japan declared its commitment to reach net-zero by 2050 in October 2020 and subsequently issued the Green Growth Strategy on 25 December 2020 and 18 June 2021. The government listed each of hydrogen and fuel-use ammonia as one of the 14 priority sectors in the Green Growth Strategy and positioned the hydrogen as a key technology for achieving the carbon neutrality and aims to reduce the costs for hydrogen power generation down to the level of gas-fired power generation by mass introduction. Specifically, it has set the following targets for the hydrogen:

  • Power generation costs: equal to or less than 30 yen/Nm3 in 2030 and 20 yen/Nm3 in 2050; and
  • Introduction amount: up to 3 million tons per year in 2030 and 20 million tons per year in 2050.

The Green Growth Strategy also identified the following four key use cases for hydrogen:

  1. Power generation through hydrogen-fuelled turbines: the government estimates that the cumulative installed capacity of hydrogen-fuelled power generation turbines will be as much as 30GW with a market size of 23 trillion yen by 2050 in the world, and aims to create hydrogen turbine markets as a first mover with a view to exporting the technology to Asian countries.
  2. Stationery fuel cells: the government estimates that worldwide 1.5 million household fuel cells will be introduced per year by 2050 with the market size of approximately 1.1 trillion yen, and aims to provide support for the investment in the production facilities through tax incentives and other means.
  3. Fuel cell vehicles: the government estimates that the number of FC trucks will be as many as 15 million with the market size of 300 trillion yen around the world in 2050, and aims to develop the domestic market as well as to export them to foreign markets. This will include further development of hydrogen stations and deregulation of Road Transport Vehicle Act and High Pressure Gas Safety Act.
  4. Steel production: the government estimates that green steel production with zero CO2 emission (through production of steels with hydrogen or CCUS) will be as much as 500 million tons per year with the market size of 40 trillion yen per year in 2050, and aims to support the technology development for advancing the steel production through hydrogen.

In response to Net Zero 2050 and changing energy landscape following the Ukrainian crisis, the revised Hydrogen Basic Strategy, which was initially formulated in 2017, was approved by the Japanese government on 6 June 2023. The revised strategy sets new targets for CO2 reduction and outlines comprehensive action plans for both supply and demand sides, key feature of which described as follows: 

  • Supply side

- Introduction amount of hydrogen and ammonia: 12 million tons per year by 2040;

- Low-carbon standards: CO2 emissions of 3.4 kg-CO2e/kg or less (Well to Production Gate method) for hydrogen production and 0.84 kg-CO2e/kg-NH3 (Gate to Gate method)/kg or less for ammonia production;

- Installation amount of water electrolysers: 15 GW of by 2030;

- Establishment of international supply chain: to enhance relationships with resource-rich countries, develop transportation technologies and secure financing.

  • Demand side

- Power generation: development of single or mixed combustion of hydrogen and ammonia;

- Fuel use: application to vehicles, railroads, ships, aircrafts etc.;

- Industrial use: development of boiler technologies and promotion of fuel use; and

- Household use: improvement of residential fuel cells; and

- Regulation: requiring certain business operators to submit plans / reports and set goals on energy transition.

The revised Hydrogen Basic Strategy includes a reference to policy guidelines for safety considerations. With a long-term perspective towards 2050, an interim summary of the hydrogen safety strategy (the “Hydrogen Safety Strategy”) has been developed as an action plan over the next five to ten years. Based on this strategy, various initiatives will be implemented. These include acquiring and sharing scientific data, standardising technical criteria and safety levels, establishing third-party institutions for technology assessment, and training skilled professionals. The interim summary of the Hydrogen Safety Strategy was released by the Ministry of Economy, Trade, and Industry (“METI”) on March 13, 2023.

Furthermore, the revised Hydrogen Basic Strategy mentions the establishment of a hydrogen industry strategy (the “Hydrogen Industry Strategy”), which supports the hydrogen market and the enhancement of Japan’s industrial capabilities. The strategy focuses on sectors that are expected to have significant market potential and where Japanese companies have technological advantages. It includes supports in the following areas: (a) hydrogen production, (b) establishment of an international hydrogen supply chain, (c) decarbonised power generation, (d) decarbonised steel production, (e) decarbonised chemical products, (f) fuel cells, (g) fuel ammonia, (h) carbon recycling products. By providing supports in these sectors, the Hydrogen Industry Strategy aims to bolster Japan’s industrial competitiveness and contribute to the growth of the hydrogen industry.

In addition, the government also focused on the transportation and storage of hydrogen. The government estimates that the market size for hydrogen transportation and storage will be 55 million tons (5.5 trillion yen) per year and aims to develop the market through the Green Innovation Funds and other support.

The Latrobe Valley Project illustrated below is envisaging the transportation of hydrogen in a liquefied form which needs to be below negative 253 degrees Celsius. Kawasaki Heavy Industries, Ltd. has launched a dedicated vessel for liquefied hydrogen transportation. In contrast, the Brunei-Kawasaki project mentioned below adopts the chemical carbon hydride which does not require low temperatures but involves additional processes for extracting pure hydrogen from the chemical carbon hydride. Feasibility studies are also being undertaken to transport hydrogen in the form of ammonia to be shipped to Japan in a liquid form. Japanese government identified four major forms of hydrogen transportation, (i) liquefied hydrogen, (ii) ammonia, (iii) methylcyclohexane (MCH) and (iv) synthesised methane. Further development of different hydrogen carriers will continue as the technologies are evolving in this field.

Further, as a supply side initiative, the government featured the water electrolysers. The government estimates that water electrolysers of 88 GW capacity (4.4 trillion yen per year) will be introduced each year by 2050 in the world, and aims to support the development of technologies of Japanese companies through the Green Innovation Funds and other tools.

Examples of demonstration/feasibility projects in Japan

International Project

Supply Chain Commercialization of Decarbonized Hydrogen in Singapore: Mitsubishi Corporation, Chiyoda Corporation and Sembcorp Industries have agreed on 4 October 2021 to explore the feasibility and implementation of a commercial-scale, decarbonised hydrogen supply chain in Singapore by taking advantage of Chiyoda’s proven hydrogen storage and transportation technology SPERA Hydrogen. 

Feasibility Study on Green Hydrogen Production and Development of Supply Chain in Australia: ITOCHU Corporation, Dalrymple Bay Infrastructure Limited, North Queensland Bulk Ports Corporation Limited, Brookfield Asset Management Inc. agreed on 18 August 2021 to conduct a joint feasibility study on the production and storage of green hydrogen in Australia, as well as the establishment of a supply chain including the export of green hydrogen from Australia. The parties will jointly explore the feasibility of producing and storing green hydrogen utilising port land at the Dalrymple Bay Terminal and of establishing a supply chain including exporting green hydrogen. The feasibility study will be conducted in phases up to the final commercial production phase, with Phase I scheduled to begin during 2021.

Study on Commercial-Scale Hydrogen Imports to the Netherlands: The Port of Rotterdam Authority, Koole Terminals, Chiyoda Corporation and Mitsubishi Corporation have agreed on 30 July 2021 to conduct a joint-study of commercial-scale imports of hydrogen to the Port of Rotterdam utilising Chiyoda’s hydrogen storage and transportation technology SPERA Hydrogen. Such hydrogen technology is expected to assist the Port of Rotterdam to achieve its vision of developing green hydrogen supply chains for Northwestern Europe and becoming a hub for hydrogen imports. 

Feasibility Study on Establishing a Clean Fuel Ammonia Supply Chain from Australia to Japan: Woodside Energy Ltd., Japan Oil, Gas and Metals National Corporation (JOGMEC) , Marubeni Corporation, Hokuriku Electric Power Company and The Kansai Electric Power Co., Inc have agreed on 20 July 2021 to undertake a joint feasibility study on the development of a clean fuel ammonia supply chain from Australia to Japan. This feasibility study will cover the entire supply chain, including the production of clean fuel ammonia in Australia from natural gas with CCS/CCU and bio-sequestration; marine transportation to Japan; utilisation of ammonia as a fuel for power generation and marine use; and financing of the supply chain project.

Feasibility study on CO2-free hydrogen supply chain between Malaysia and Japan: ENEOS Corporation, SEDC Energy Sdn Bhd and Sumitomo Corporation have agreed on 23 October 2020 to consider collaboration for the establishment of a CO2-free hydrogen supply chain using renewable energy, to commence a feasibility study in January 2021. The CO2-free hydrogen supply chain under consideration involves production of several tens of thousands of tons of CO2-free hydrogen using renewable-energy-derived electric power generated at hydroelectric power stations in Sarawak, Malaysia, conversion of the hydrogen into MCH and marine transport to markets outside Malaysia using chemical tankers. 

Latrobe Hydrogen Energy Supply Chain Project (“Latrobe Valley Project”): this is a pilot project for development of the hydrogen energy supply chain between Japan and Australia by producing hydrogen through a coal gasification and gas-refining process without CO2 emission by carbon capture and storage (CCS) and export/import the liquefied hydrogen by a special vessel from Australia to Japan. In this project, the consortium of industry partners including Kawasaki Heavy Industries, Ltd., J-Power, Iwatani Corporation, Marubeni Corporation, AGL Energy and Sumitomo Corporation have been undertaking the processes for the brown coal gasification in Latrobe Valley, liquefied hydrogen marine transportation from Victoria, Australia and to Kobe, Japan. The Japanese portion of this project also involves companies such as ENEOS Corporation and Kawasaki Kisen Kaisha, Ltd. (K-Line) and Royal Dutch Shell Japan among others. This pilot project is supported by funding from the Japanese Government through NEDO and both the Australian federal government and the Victorian state government.

Brunei-Kawasaki Hydrogen Supply Chain Project (“AHEAD Brunei Project”): this is a pioneering project for demonstrating the viability of hydrogen energy supply chain between Japan and Brunei with the funding from NEDO. Mitsubishi Corporation, Chiyoda Corporation, Mitsui & Co. Ltd., and Nippon Yusen Kabushiki Kaisha have established the Advanced Hydrogen Energy Chain Association for Technology Development (AHEAD) for this project. In this project, hydrogen is manufactured from LNG in Brunei (210 tons annually at full capacity) and then imported into Japan by utilising the organic chemical hydride method and consumed as fuel for thermal power generation facility. According to AHEAD’s announcement, MCH, a chemical compound of hydrogen and toluene produced in Brunei, has arrived in Japan in December 2019 and the supply of hydrogen separated in a dehydration plant to the fuel gas turbines of a local power generation plant has been commenced and under stable operation since May 2020.

Feasibility Study Program for Ammonia Co-firing in Thermal Power Generation Facility: IHI Corporation, JERA Co., Inc. and Marubeni Corporation, in consultation with Woodside Energy Ltd., participated in NEDO’s feasibility study programme for application of the ammonia as fuel for a co-firing thermal power generation plant in March 2020. In this project, the ammonia will be produced from renewable energy and/or natural gases and transported to thermal power generation facilities where the ammonia is applied as fuel for thermal power generation. Ammonia does not emit carbon dioxide when combusted, and therefore would be useful for reducing the emission of the greenhouse gases.

Blue Ammonia Development Project in the United States: CF Industries and Mitsui & Co. Ltd. form a joint venture for production of blue ammonia more than 1 million tons per year in Louisiana, the United States. CF Industries has signed a CO2 offtake agreement with ExxonMobil to convert an existing plant to a blue ammonia production plant. The FEED was agreed in November 2022, aiming at the FID in 2023 and the commencement of production in 2027.

Domestic Project

Fukushima Hydrogen Energy Research Field (FH2R): FH2R is a research field with a renewable energy-powered 10MW-class hydrogen production facility implemented by NEDO, Toshiba Energy Systems & Solutions Corporation, Tohoku Electric Power Co., Inc. and Iwatani Corporation in Namie town, Fukushima Prefecture. FH2R started operation in March 2020 and can produce as much as 1,200 Nm3 of hydrogen per hour by utilising the solar renewable energies.

Feasibility Study Program for Establishment of Large Scale Supply Chain: This program includes (i) the research and development project for establishment of the liquefied hydrogen supply chain from hydrogen production, liquefication, transportation, importation and storage by Japan Hydrogen Energy Corporation, a wholly owned subsidiary of Kawasaki Heavy Industries, Ltd., ENEOS Corporation, (ii) the technology development project for the direct MCH electrolysis production by ENEOS Corporation  Iwatani Corporation and (iii) the technology development for the pure or mixed hydrogen combustion by JERA Co., Inc., The Kansai Electric Power Co., Inc. and ENEOS Corporation. This program has been commissioned by NEDO in August 2021 with the financial support from the Green Innovation Funds up to 300 billion yen.

Feasibility Study Program for Technology Development regarding Hydrogen Production by Water Electrolyser: This program includes the technology development project for development of a large-scale alkaline water electrolyser producing hydrogen using renewable energies by Asahi Kasei Corporation and JGC Corporation, with a view to reducing the costs for the alkaline water electrolyser down to 52,000 yen per kW by 2030. This program has been commissioned by NEDO in August 2021 with the financial support from the Green Innovation Funds up to 700 billion yen.

Study Program on fuel ammonia supply chain: This a joint-study for development of fuel ammonia supply chain for the purpose of expanding the use of ammonia, securing a stable supply and reducing supply costs. It includes projects that establish the technologies to reduce the supply costs down to the higher 10-yen level per Nm3, implemented by Chiyoda Corporation, JERA, TEPCO Holdings, Idemitsu Kosan, and other multiple universities. It also includes projects that establish technologies for high-temperature combustion of ammonia for power generation with a view to introducing 30 million tons of ammonia per year in 2050, implemented by IHI Corporation, JERA or Mitsubishi Heavy Industries. This program has been commissioned by NEDO in January 2022 with the financial support from the Green Innovation Funds up to 59.8 billion yen.

Hydrogen-based steelmaking process: This is a pilot project for establishment of technology to use hydrogen instead of carbon in steelmaking process ("hydrogen-reduced steelmaking”) implemented by Nippon Steel Corporation, JFEE, JFE Steel Corporation and Kobe Steel, with a view to a reduction of more than 50% of CO2 emissions in the steelmaking process. The research on hydrogen-reduced steelmaking is conducted around the world, but yet to be put to practical use. This program has been commissioned by NEDO in January 2022 with the financial support from the Green Innovation Funds up to 193.5 billion yen.

Part 4

Hy-Achieving – creating a suitable incentive regime

Incentives provided by ECAs

In Japan, funding and financing support for clean hydrogen projects are available from key government organisations. Funding for hydrogen related research, feasibility studies and pilot projects is provided by NEDO and Japan Oil, Gas and Metals National Corporation (JOGMEC). NEDO has been supporting various energy related pilot projects in Japan and overseas including the Latrobe Valley Project and the AHEAD Brunei Project. JOGMEC has introduced some new financial support schemes for the production and storage of hydrogen and fuel ammonia by way of (i) making equity investments in and/or (ii) providing guarantees for project companies, in accordance with the revised JOGMEC Act which came into effect in November 2022.

It is anticipated that financing support from JBIC, Nippon Export and Investment Insurance (NEXI) would be available to support commercial scale hydrogen projects where Japanese companies are involved having significant roles including sponsors, contractors or off-takers.

JBIC’s statutory law was amended in January 2020 to specifically include hydrogen as an eligible sector for JBIC’s export credits and overseas investment loans to projects in developed countries in addition to developing economies such as Australia. It is also notable that JBIC set up its Energy Transformation Strategy Office in July 2022 which is focused on financing across the whole developing supply chain for hydrogen and fuel ammonia. NEXI also launched its “Loan Insurance for Green Innovation” in July 2019, which provides an increased commercial risk coverage rate of 97.5% compared with that of its usual loan insurance. Projects utilising hydrogen related technologies may be covered by this new insurance.

As a part of Green Growth Strategy, JBIC created the “Post-corona Growth Facility” of up to 1.5 trillion yen. NEXI also announced on 4 October 2021 its new approach for risk assessment under which transactions promoting environmental protection and climate change initiatives may be assessed with a higher credit rating and lower insurance premium.

Government support

Price support for establishment of supply chain / development of infrastructure

The Japanese government also plans to introduce a new strategic support for investment in hydrogen and fuel ammonia. On 4 January 2023, Agency for Natural Resources and Energy (“ANRE”), an external bureau of the Ministry of Economy, Trade and Industry, released an interim report summarising feedback on its consultation regarding Japanese government policies supporting the establishment of the hydrogen and fuel ammonia supply chains (the “Interim Report”). The Interim Report outlines two major policies to support the nascent industry:

  • Price support for the supply chain: price support for suppliers representing the difference between (i) the strike price (to be determined on a project-by-project basis based on forecasted production, transportation and/or storage costs and to be reviewed periodically (e.g., every five years)) and (ii) a market-based reference price (natural gas price for hydrogen and coal price for fuel ammonia), which is similar to the CfD-based support scheme under UK’s Low Carbon Hydrogen Business Model. If the reference price is higher than the strike price, suppliers will be required to pay back the difference to the government. Price support is currently not expected to be subject to a cap, but in respect of overseas projects eligible for support, the support is expected to be provided in proportion to the amount of hydrogen / fuel ammonia exported to Japan.
  • Development of hydrogen/ammonia hubs: the government plans to establish and develop approximately eight hydrogen / fuel ammonia hubs (three large-scale hubs targeting urban consumption areas and five medium-scale hubs for local areas) over the next 10 years, where the infrastructure for storage, transportation, regasification or cracking of hydrogen / fuel ammonia as well as carbon capture facilities are expected to be constructed.

While the timeline of implementing these support plans has not been finalised, it is expected that a bill setting out the support scheme will be passed by around June 2024 and the legislation will be implemented in the first quarter in 2025.

The proposed price support for is expected to be available during the operational period, but ANRE recognises the importance of the governmental support in accordance with the lifecycle of the projects with an emphasis on the design and construction period.

GX Promotion Act

In addition, the “Act regarding the Promotion of Smooth Transition to Decarbonised Growth Industrial Structure” (“GX Promotion Act”) was enacted by the National Diet on 12 May 2023. A key feature of the GX Promotion Act is a 20 trillion yen fund to be raised by the government by issuing “GX economy transition bonds” ("GX Bonds”) backed by the future revenues from carbon credit and carbon surcharges, the proceeds of which will be deployed by a new agency to provide guarantees and equity for decarbonisation projects. 

The details of the support will be provided in secondary regulations to be drafted by ANRE after the promulgation of the GX Promotion Act. At this stage, though, various conditions are contemplated for the agency to use the proceeds of the GX Bonds for a project:

(a) an investment decision for the project would be difficult for the private sector to achieve alone due to innovative technological aspects and/or the nature of the project.;

(b) the project contributes to the enhancement of industrial competitiveness, economic growth and emission reductions, and, is a high priority project (considering the size of relevant markets and emission reductions, and the necessity for domestic supply);

(c) the support is to be implemented together with other regulatory and support measures to foster changes in corporations’ investments and demand side behaviour; and

(d) projects which contribute to the expansion and increase of the investments in domestic human and physical capital will be prioritised.

GX Bond is planned to be issued on an annual basis for ten years starting from 2023. The pricing support discussed in section 4 is expected be funded by the proceeds of the GX Bond.

Other incentives

Alongside the regimes and legal frameworks described above, there are some other incentives led by the government. Within FY 2023, the new bidding system will be introduced, that will provide successful bidders with capacity income for recovering fixed cost for the term of 20 years (the "Long-term Decarbonised Power Capacity Auction”). This auction system will be managed by Organization for Cross-regional Coordination of Transmission Operators, JAPAN, with the purpose of securing new investments that will contribute to an extension of the existing capacity market. It will cover a broader range of new investments in renewable resources including hydrogen/ammonia combustion at thermal power plant, which is not targeted by the prevailing feed-in tariff/premium schemes.

Also, the revised Act on Rational Use of Energy and Act on the Promotion of Environmentally Sound Energy Sources have become effective since 1 April 2023. With a view to promoting the use of non-fossil energy resources, hydrogen is explicitly categorized as a “non-fossil energy” under the revised laws, and certain business operators are required to publish a basic plan for transitioning to no-fossil energy.

Part 5

Hy-ly Volatile? making it safe, sustainable and transportable

Regulatory Framework

Liquefied or high-pressured hydrogen is regulated under the High Pressure Gas Safety Act and related regulations in a similar manner as liquefied natural gas. The Act provides that (a) permission from the local authority is required for substantial production, (b) importers must receive inspection by local authority before imports, (c) containers must conform to designated standards, (d) safety measures must be taken for transportation and (e) a permission is required for mass storage. Additional regulations may apply in the supply chain – for example, a hydrogen station is subject to the regulations under the Fire Service Act and the Building Standards Act. Prefectural or municipal governments may also apply additional local regulations to the extent not in conflict with the national regulations.

In terms of the health, safety and environmental regulations, general health and safety regulations under the Industrial Safety and Health Act apply to the industrial use of hydrogen. Construction of a large facility for hydrogen would require an environmental assessment under the Environmental Impact Assessment Act, and regulations under the Air Pollution Control Act, Noise Regulation Act and Vibration Regulation Act would need to be observed.

The Japanese Government has been working for years on deregulating the hydrogen supply chain with a focus on the FCV industry. METI has set up a taskforce to improve FCV-related regulations which resulted in a number of deregulations and improvement. For example, the unmanned hydrogen charging stations were not previously permitted, but the regulations under the High Pressure Gas Safety Act have been amended such that they are now made available with enhanced safety regulations, e.g. remote surveillance in August 2020. Further, FCVs have been regulated by the regulatory framework under the High Pressure Gas Safety Act as well as the Road Transport Vehicle Act, but to streamline the regulations METI’s taskforce recommended that the High Pressure Gas Safety Act should not be applied to FCVs that can ensure safety through the regulations under the Road Transport Vehicle Act in June 2021. Aside from FCVs, METI has developed the safety regulations for hydrogen-fuelled drones which have been garnering increasing attentions for the use cases such as short distance transportation or rescue operation in mountain areas.

Hydrogen may be contained in other chemical forms such as ammonium or organic hydride (MCH). In the case of the ammonium, an approval is required for commercial production, imports, distributions, storage, transportation or exhibition under Poisonous and Deleterious Substances Control Act.

Gas Grid Distributions

The existing industrial scale pipeline network for natural gas distribution covers the connections among the cities with large consumptions. The transportation through these existing pipelines is regulated by the Gas Business Act. The “standard calorific value system” under the Gas Business Act requires that the calorific values per volume of the gases to be transported through the pipelines is fixed at a certain value, which requires the adjustment of the calorific values by mixing high or low calorie gases. Hydrogen gas contains fewer calories compared to natural gases in commercial use (e.g. methane gas) and transportation of hydrogen gas through the existing pipelines therefore is available only to the extent of limited volumes.

In light of this, the Government has considered the introduction of a “calorie band system”. The calorie band system aims to deregulate the standard calorific value system by widening the requirement for the calorific values to be in a certain range rather than to be pegged at a certain value. However, the working group for review of gas business system chaired by the Agency for Natural Resources and Energy concluded in March 2021 that (i) the calorie band system will require substantial costs for introducing the equipment to deal with the range of calorific values which exceeds the benefits to be gained from the introduction, and (ii) lowering the standard calorific value to the level of 40MJ/m3, which enables synthesised methane with lower calorific values can be injected into the existing gas pipelines, will be less costly and achieve sufficient reduction of CO2 emissions. Based on these observation, the standard calorific value system will be maintained, and the standard value will be lowered during the transition period of 15-20 years by 2045-2050.

There are only a limited number of inter-site pipelines that are dedicated to transportation of the hydrogen. ANRE reported only three inter-site hydrogen pipeline projects in 2016 where the length of the pipelines is in the range of 150 meter to 1.2 kilometres.

Capturing the hydrogen opportunity for Japan and Australia

Now is the time to look for future global opportunities. Japan and Australia have begun initial collaborations, but we see significant potential in building this relationship and fostering a new wave of growth for both the Australian and Japanese markets.

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