The Indian government's ambitious Rs 8,500 crore capital subsidy scheme could be a game-changer in India's efforts to convert coal into more valuable chemicals such as hydrogen and methane, ratings agency ICRA said.
The scheme, announced a month ago, could help India reduce dependence of imported natural gas for producing hydrogen, and downstream chemicals such as urea, ammonia and methanol. It is believed that India spent around $27 billion on the import natural gas and downstream chemicals in the last financial year.
As of now, only two industrial-scale coal gasification plants are operational in the country. In addition, projects with a capacity to process nearly 20 million tonnes of coal are under various stages of implementation in India.
The new incentive scheme, which works via grants to companies setting up plants to extract hydrogen from coal, wants to create an annual capacity to convert 100 million tonnes of coal into hydrogen by 2030.
If this can be achieved, India will be able to meet 80-85% of its hydrogen demand from this source within the next decade, ICRA said.
Besides its use in industry, hydrogen is seen as the transportation fuel of the future.
Many corporate groups such as Adani and Reliance Industries have aggressive plans in the hydrogen space, both in its manufacturing and distribution. However, they are focused more on producing hydrogen from non-polluting sources, rather than from coal.
However, coal-based hydrogen is much cheaper than green hydrogen, made from non-polluting sources such as solar electricity. It will be cheaper than hydrogen from natural gas too.
While hydrogen from natural gas -- considered cleaner than coal -- currently costs around $3 (Rs 250) per kg.
However, hydrogen made from clean power costs four times (Rs 1,000/kg) as much, making it unsuitable as a mass fuel. Given that 1 kg of hydrogen delivers around 250 km of mileage for a car, clean hydrogen would imply a fuel cost of around Rs 4 per km, compared to around Rs 1 for battery-powered cars.
However, if India uses its coal -- much of which is of low quality, inexpensive and highly polluting -- hydrogen can be made at just $1.3-1.5 (Rs 100-120) per kg, which works out to less than 50 paise per km.
The new government scheme involves giving Rs 8,500 crore to companies who will set up coal gasification projects.
Coal gasification refers to controlled burning of coal at extremely high temperatures to convert it into gas, which can then be separated into hydrogen, ammonia, methanol and other chemicals.
However, coal gasification requires large upfront investments in capital equipment resulting in high project costs - almost 50% of which comprise interest, depreciation and return on equity components over the asset lifetime, pointed out ICRA.
The new capital subsidy scheme can lead to making brown hydrogen production via coal gasification almost 7% cheaper at an estimated $1.3-1.5 per kg.
At the same time, coal gasification can lead to high emissions of carbon, which has to be captured and not released into the atmosphere to avoid worsening global warming.
Of the Rs 8,500 crore, Rs 4,050 crore has been reserved for public sector undertakings such as Coal India, Rs 3,850 crore for private sector entities and PSUs jointly, and Rs 600 crore for pilot projects demonstrating indigenous technologies.
The subsidy will be disbursed in two equal installments to identified eligible entities meeting the qualifying criteria.
The scheme hopes to catalyze investments of over Rs 4 lakh crore in this sector.
As of now, most of the gasification plants have been announced by public sector companies such as Coal India.
Others setting up such projects include Talcher Fertilizer, which has tied up with China-based Wuhan Engineering Co as its technical partner, and Jindal Steel & Power, which has collaborated with US-based Midrex Technologies.
Separately, indigenous technology development is also underway - with HAL and Engineers India Ltd mandated to demonstrate pilot projects using locally developed technologies and technical support from BHEL.