NRF Japan energy update – January 2024

To accelerate the global hydrogen/ammonia economy, the Japanese government has recognised the need to support the development of commercial/industrial scale hydrogen supply chain. To facilitate this, the Japanese Ministry of Economy, Trade and Industry (METI) is proposing to develop such hydrogen supply chain through government subsidy schemes, focusing particularly on:

1. The price differences between hydrogen and more conventional forms of energy (Supply Chain Support); and 
2. Industrial areas or the so-called “clusters” that have capabilities to accommodate large-scale hydrogen/ammonia projects (H2/NH3 Clusters Support) and to benefit a broad range of businesses and help to increase demand for hydrogen.

METI, working with the private sector, plans to offer support for pilot projects that are proactive and likely to be self-sustaining in order to promote Japan’s industrial competitiveness and reduce CO2 emissions. Note that the support is intended for pilot projects undertaking supply chain development on a preliminary/experimental basis and is therefore not expected to be available for projects that are already on a commercial scale.

We set out below an overview of the proposed support schemes based on the information and materials that have been released by METI to date.

Supply Chain Support and pricing subsidies

The Supply Chain Support scheme is intended to cover the pricing differential associated with the production and/or supply of hydrogen and is expected to include support for the costs of hydrogen production in the case of domestic projects and the costs of production, as well as maritime transportation of hydrogen in the case of overseas production. METI notes that suppliers will not only be required to transport or supply hydrogen, but must also be in a position to manage the entire supply chain.

The government will fund the difference between: (a) the standard price (at which the supplier expects to be able to generate revenue - calculated based on the costs of production and supply of hydrogen which, in principle, will be fixed for 15 years); and (b) the reference price (determined by reference to an applicable index based on: (i) the price of substituted raw materials and fuels; (ii) the actual price at which hydrogen is sold domestically; or (iii) past transactions or pricing). As reference prices increase over time the amount of support will decrease, thereby facilitating the supply chain to be increasingly self-sustainable.

We expect further updates from METI on these subsidies over the next few months and will provide updates of material developments.

H2/NH3 Clusters Support

Key to developing the Japanese hydrogen / ammonia economy is the creation of the an industrial scale value chain which, to-date, has not been seen on a sufficiently large scale in Japan. The H2/NH3 Clusters Support scheme focuses on the development of hydrogen and ammonia industrial clusters around Japan and is METI’s vision for creating demand for H2 and NH3 through the aggregation of (existing) industrial clusters in key areas throughout Japan. 

Materials that have been released by METI to date include specific references to areas/locations in Japan for the development of the H2/NH3 Clusters and name specific companies developing infrastructure in these areas. Whilst there have been no official announcements or determinations as to the details of the H2/NH3 Clusters, these locations identified seem to have certain characteristics from which significant demand for H2 and NH3 is expected to be generated and/or aggregated – e.g. areas with existing large-scale power stations, multi-industrial clusters with existing steel or petrochemical refineries and regional renewable energy production areas.

Based on materials released by METI, the H2/NH3 Clusters expected to be developed over the next 10 years are as follows: 

1. approximately three large scale H2/NH3 Clusters around metropolitan areas; and 
2. approximately five medium scale H2/NH3 Clusters in regional locations spread throughout Japan.

While no formal process has been determined by METI for the selection and development of the H2/NH3 Clusters as yet, the development process is expected to involve a three phase “stage-gate” system comprising the following steps: 

1. the Feasibility Study Phase; 
2. Front-End Engineering and Design (FEED) Phase; and 
3. Construction / Engineering (or Infrastructure Development) Phase.

The H2/NH3 Clusters will be selected based on the suitability for providing a stable and efficient supply of H2 and NH3, thereby supporting a robust supply chain.

The H2/NH3 Clusters will drive investment in the sector and all parts of the value chain; not just in Japan but for the purposes of international supply. We are keenly following developments and will update again when further material information is released by METI.