Japan’s Big Bet on Hydrogen

Going all in on a technology still in its infancy has had some drawbacks for Japan, forcing the government to reassess its hydrogen strategy. 

In 2017, Japan became the first in the world to develop and implement its Basic Hydrogen Strategy, recognising that the technology could have a pivotal role to play in the country’s transition to net zero.  

Since then, several governments in the Asia-Pacific and beyond that have set net zero targets have “also put in place national-level policies and strategies for hydrogen”, notes Anjali Viswamohanan, Director of Policy at the Asia Investor Group on Climate Change (AIGCC).  

Hydrogen comes in many shades, however.  

There is grey hydrogen, which is created from natural gases and commonly used in the chemicals industry to make fertiliser and for refining oil. Blue hydrogen is marginally more environmentally friendly. Although it’s also produced from natural gases, carbon capture and storage (CCS) technologies are then employed to capture the CO2 emitted and store it. 

Green hydrogen is the predominant shade needed in a net zero world. It’s produced when electrolysis – the process of breaking down water into hydrogen and oxygen – is powered by renewable energy. When it’s burned to release the stored energy, the only waste product is water vapour.  

“Japan is now exploring new energy sources such as hydrogen because of a view that further renewables capacity for solar and wind is limited by mountainous terrain, deep coastal waters, and high population density,” says Eric Nietsch, Head of ESG, Asia, at Manulife Investment Management. 

There are a variety of ways in which jurisdictions like Japan are exploring how green hydrogen can be utilised, whether it’s heating homes, powering industrial processes or fuelling vehicles.  

The International Energy Agency’s (IEA) 2050 roadmap calls for 306 million tonnes (MT) of green hydrogen to be produced each year, which it noted will require annual investment in pipelines and hydrogen-enabling infrastructure to increase from US$1 billion today to US$40 billion by 2030.  

However, the development of the needed infrastructure to produce green hydrogen globally has been slow, and it’s China, not Japan, that is leading the way, producing around 33 MT per annum compared to Japan’s 2 MT.  

As other countries channel capital into the upscaling of clean energy technologies like solar and wind, there are concerns that Japan’s big bet on hydrogen – and plans to update its strategy by the end of this month – won’t pay off. 

What has been Japan’s hydrogen strategy so far?  

Japan’s current plan, which was introduced by the Ministry of Economy, Trade and Industry (METI), aims to increase the country’s hydrogen market from 2 MT a year to 3 MT by 2030 and 20 MT by 2050. 

The strategy hinges on sourcing blue and green hydrogen from low-cost, stable producers globally, transporting it back to Japan using hydrocarbons, ammonia or methane as energy carriers on dedicated ships. This hydrogen would then be utilised in industrial processes and by other end-users across the country. 

The government also wants to drive down the costs of hydrogen by a third. Green hydrogen currently costs about 1,100 yen (US$8) per kilogram in the Japanese market, with the strategy targeting 330 yen (US$2.40) by 2030.  

The most notable goals of the country’s 2017 strategy include ambitions for 800,000 hydrogen fuel cell vehicles (FCVs) and 900 hydrogen charging stations across the country by the end of the decade. 

While battery-powered electric vehicles (EVs) have become increasingly popular globally, Japan plans to become a world leader in FCVs.  

Unlike EVs, FCVs don’t require the same scale of new infrastructure, as a single station can support a higher volume of vehicles more quickly. Further, FCVs require smaller batteries, meaning less pressure on resources and supply chains. 

In 2021 alone, Japan spent US$800 million on investments into hydrogen power and fuel cells. The government further subsidises 1.4 million yen (around US$10,000) for FCV purchases and half of the construction costs for refuelling stations.  

Following the launch of its FCV Mirai model in 2014, later this year Japanese automaker Toyota will be launching a new hydrogen-powered Toyota Crown sedan in Japan. The West Japan Railway Company (JR West) plans to introduce zero-emission trains driven by hydrogen fuel cells by the 2030s, as well as constructing an integrated hydrogen fuelling station that can supply hydrogen to trains and other vehicles.  

However, EV sales have far outstripped FCV sales on the global stage, with just 56,000 FCVs sold in 2022 compared to 10.6 million EVs.  

The strategy is also targeting 800,000 tonnes of hydrogen to be used in power generation, accounting for 1% of Japan’s electricity supply by 2030.  

Hydrogen was further identified as one of the 14 growth sectors under Japan’s 2020 ‘Green Growth Strategy Through Achieving Carbon Neutrality in 2050’. It reiterated plans to strengthen Japan’s international competitiveness around hydrogen by accelerating the commercialisation of hydrogen power generation turbines and promoting research and development to improve the power generation efficiency durability of stationary fuel cells. 

Many Japanese companies are embracing the hydrogen path.  

Kawasaki Heavy Industries, a Japanese manufacturer of industrial equipment, has developed the means to produce, store and transport hydrogen. Kawasaki aims to be able to transport 225,000 tonnes of hydrogen a year and cut its CO2 emissions by 1.6 million tonnes through the use of hydrogen energy by 2030.  

The company built the Suiso Frontier, a liquified hydrogen carrier. It completed its first 9,000-kilometre international voyage to Australia last year, demonstrating the technical and commercial viability of safely transporting the highly flammable substance.  

Why hasn’t Japan’s plan worked?  

A 2022 report published by Tokyo-based think tank the Renewable Energy Institute (REI) challenged Japan’s 2017 hydrogen strategy, claiming it was “misguided”.  

“The scope of applications where energy demands can be met with electrification has grown, and the range of areas that need hydrogen have decreased,” the report said. 

“This has led to a common understanding worldwide that hydrogen should be limited to applications where it would be difficult to achieve decarbonisation with other methods.” 

REI noted that Japan’s strategy has a number of “bad idea applications”, with 70% of the country’s hydrogen budget focused on FCVs, refuelling stations, and residential power systems, rather than upscaling the integration of green hydrogen into hard-to-decarbonise industrial processes like steelmaking. 

REI has estimated that FCV sales will fall far short of 800,000 by 2030. 

Further, take-up of residential power systems (EneFarm) has been disappointing. The government was targeting five million EneFarm units by 2030, but since 2017 only 40,000-50,000 units per year have been sold, with the total sales volume reaching 433,000 by the end of 2021, REI said.  

Japan is also falling behind in its development of electrolysers, which are needed to produce green hydrogen.  

While European and Chinese companies are “already developing electrolysers as a business”, having delivered between 1,000-3,500 units, many Japanese companies are still in the demonstration stage, or delivering at a scale much smaller than Europe and China, REI said. 

However, REI’s biggest concern is that the 2017 strategy paves the way for grey and blue hydrogen, rather than strictly prioritising green hydrogen.  

The report said: “Until at least 2030, the main supply source in the government’s strategy is grey hydrogen, which does not contribute to reducing CO2 emissions at all. The strategy also does not clearly define standards for blue hydrogen that indicate the acceptable impact on reducing emissions to be eligible for government assistance.” 

Japan’s policy does state that the government aims to set “some sort of threshold for CO2 emissions” and will conduct “a detailed review” on hydrogen, yet REI has pointed out that the government has not indicated when it will set such standards. 

In contrast, the EU provides subsidies for using hydrogen to the industrial sector through its Carbon Contracts for Difference (CCfD) programme, with subsidies only granted to projects that use renewable-based green hydrogen and renewable energy with additionality.  

What is missing from Japan’s hydrogen strategy? 

To keep up in the green hydrogen race, the Japanese government has announced plans to revise its hydrogen strategy by the end of this month.  

“The strategy needs to be clear on where and how hydrogen is planned to be used for achieving decarbonisation objectives and it should also set clear standards on incorporating low-carbon hydrogen or green hydrogen for transition plans to be credible,” says AIGCC’s Viswamohanan.  

Investors are equally keen to support the energy transition in Japan and want to see government leadership that will enable billions of dollars of investment in the net zero transition,” she adds. 

It appears the government plans to double down, setting an ambitious target of producing 12 MT of hydrogen a year by 2040 and boosting output from its electrolyser manufacturers to win 10% of global market share by 2030, which is expected to require around US$112.8 billion in public and private investment over the next 15 years.  

The government is also considering new legislation to better financially support industries involved in the production and establishment of hydrogen and ammonia supply chains and infrastructure, introducing regulations to exclude businesses intending to produce hydrogen or ammonia using environmentally hazardous methods from accessing government subsidies.  

“We hope that updates to the hydrogen strategy will be more nuanced and focused on the most promising areas in terms of viable economics and emissions reductions,” Nietsch from Manulife Investment Management tells ESG Investor. 

“This could include hydrogen applications in hard-to-abate sectors like steel, chemicals, and cement instead of light weight passenger vehicles or power generation.”  

He also emphasises the importance of Japan exploring opportunities beyond hydrogen, noting that, while the country has “done well with energy efficiency and the deployment of renewables, these have not reached full capacity and still need to be pushed further”.  

A report published by consultancy firm McKinsey has envisaged a carbon neutrality by 2050 scenario for Japan within which renewables will provide nearly 80% of power generation by the mid-century, up from around 20% today.  

“This would reduce the need for expensive hydrogen and CCS technologies, saving US$24 per tonne of emissions reduced, which would lower the costs by about a third,” says Nietsch, adding that the remaining 20% of energy needs could largely be met by nuclear, further reducing Japan’s reliance on imports.  

Japans net zero transition will require a combination of approaches,” he says.  

“While hydrogen will likely play a part by 2050, near term action through to 2030 should concentrate on low-carbon technologies that are commercially available today and can be deployed at scale.” 

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