Why Is Beijing Taking a Hands-Off Approach to Green Hydrogen?

For all the talk of China’s aggressive industrial policy, it is remarkably muted in the green hydrogen industry. In a twist of irony, it’s the United States and Germany that are aiming to propel their green hydrogen industries with hefty federal investments and subsidies. 

To wit, the Biden administration just announced a $7 billion investment in seven regional hydrogen hubs to jumpstart commercialization of “clean hydrogen.” This comes on top of a significant decade-long subsidy in the Inflation Reduction Act for clean hydrogen manufacturers. Germany, too, has poured federal funding into green hydrogen over the last couple years, including recently allocating ~$10 billion to support dozens of electrolyzer and pipeline projects. 

Yet Beijing has only released a 2035 hydrogen development plan with little muscle behind it so far, certainly nothing on the scale of the industrial policy pursued by Washington and Berlin. So what gives? We believe there are three reasons Beijing has adopted a “wait-and-see” approach on supporting green hydrogen.

Reason One: Private Sector Enthusiasm Is Already Stirring Up Froth

The purpose of state capital is typically to pave the way for private capital that’s unwilling to bear the initial high costs. For example, Germany hopes that every dollar of its hydrogen subsidy will drive roughly four dollars of private investment ($38 billion) in green hydrogen. 

In the Chinese market, however, the private sector appears to be racing ahead on hydrogen. Between 2018 and 1H2021, more than 1,200 new hydrogen firms registered, up nearly 180% annually (see Figure 1). The number of electrolyzer manufacturers, for example, jumped from ten in 2020 to more than 100 in 2022, accounting for over 60% of global electrolyzer shipments. 

Figure 1. Chinese Hydrogen Companies Have Skyrocketed Since 2016 

Source: QCC.

Growing private sector interest was evident well before the central government issued its long-term hydrogen plan, suggesting that policymakers were playing catch-up and formalizing a trend that had already been materializing. Moreover, this rush into hydrogen is showing signs of production overcapacity in the electrolyzer realm, where China will have a harder time finding foreign demand in an external environment less receptive to its exports. 

Whether there will be enough domestic demand to absorb the excess capacity remains to be seen. Beijing has seen this play before, and it may simply want to sit on the sidelines for now rather than repeat the mistake of further incentivizing overcapacity.

Reason Two: Excess Coal Capacity Means More Gray, Not Green, Hydrogen

Speaking of overcapacity, China’s coal power sector appears to be facing the same conundrum. This can be seen in coal plants’ low utilization rates, just 53% on average, which means many are running at a loss. Yet due to various factors, chief among them being Beijing’s prioritization of energy security since 2021, China has been engaging in a record buildout of coal power plants. 

In 2022 alone, 106 GW of new coal power projects were approved, or the equivalent of two large plants per week. Currently, a total of 243 GW of coal power plants are either under construction or have been permitted, which could increase China’s installed coal capacity by one-third over the next few years. 

Figure 2. Beijing Approved Two Coal Plants a Week in 2022 

Source: Greenpeace.

This unprecedented buildout will only intensify pressure on the bottom lines of China’s largest coal firms, such as Huaneng, Datang and Huadian, which have been unprofitable since 2021. One way to sustain, if not bolster, the coal sector’s utilization rate is to stick with gray hydrogen, which may help alleviate some of the financial pressures facing the firms. 

So, it’s no surprise that Beijing is generally color-agnostic when it comes to hydrogen, since gray hydrogen both fulfills China’s hydrogen needs and benefits the coal power sector, which still exerts strong influence on energy policy. This means that Beijing is not as eager to provide direct subsidies to green hydrogen in the near term, as it needs to put all that excess coal capacity to work. 

Reason Three: Let SOEs and Local Governments Test the Waters First

Subsidizing green hydrogen can get very costly very quickly because it is an industry that’s essentially being built from scratch. China may be leading on electrolyzer manufacturing, but it is deficient in pipeline infrastructure. For instance, China has only 100 km of hydrogen pipelines in operation compared to 2,600 km in the United States and 2,000 km in the European Union. When it comes to downstream applications such as fuel cell electric vehicles, China seems to also lag behind Japan and South Korea. 

It would be impossible for Beijing to subsidize all segments of the industry, especially one whose future remains uncertain. Moreover, given the spending that Beijing needs to address serious challenges in the economy, throwing money behind a nascent industry may not be the wisest decision at the moment. Instead, Beijing seems to prefer a hands-off approach, while letting state-owned oil majors like Sinopec test the waters by investing in large green hydrogen projects and building infrastructure

How long China’s lackadaisical approach to green hydrogen will last is hard to say. While Beijing has been content to be a backseat observer of how the industry unfolds, the United States and Germany have aggressively moved into green hydrogen. That might be the wake-up call Beijing needs to step up its game, recognizing that private sector investment is necessary but insufficient in driving substantial growth in this new and costly industry.

Amy Ouyang is a research associate at MacroPolo. You can find her work on the global energy transition and its intersection with the economy, technology and industrial policy here.

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