In January 2024, the Japanese government released its "Interim Summary Report" in relation to its hydrogen strategies. The Report summarizes Japan's latest plans on hydrogen, including updates on the proposed "contract-for-difference" type of government support program.
Background
On 29 January 2024, the Japanese government released its "Interim Summary Report" (chukan torimatome)1 (the "Report") providing for further details on the "contract-for-difference" type of government support program for hydrogen and ammonia's "first mover" projects (i.e., projects commencing supply by fiscal year 2030).
The Report follows the "Interim Report" (chukan seiri) released in January 2023,2 the "Draft Interim Summary Report" (chukan torimatome an) released in December 2023,3 and the subsequent public comment process that took place from December 2023 through January 2024.
The Report summarizes the government's discussion to date, but as the discussion within the government is still ongoing, the details presented in the Report may change over the coming years.
Framework
According to the Report, the subsidies will be granted to the "suppliers" of "low-carbon hydrogen",4 in the form of "contract-for-difference" type of program, for a period of 15 years.
Eligibility
To be eligible for the subsidies:
- the proposed business plan must be relevant to "hard-to-abate" sectors (e.g., steel and chemical); and
- the project must be expected to commence supply by fiscal year 2030.
- In addition, the suppliers of hydrogen must be either:
- those who produce hydrogen domestically and supply such hydrogen; or
- those who import hydrogen and supply such hydrogen.
The above suppliers must also be in a position to "control and manage" their respective supply chain and not merely take a limited role in transporting or supplying the hydrogen.
Selection Process
The process to select the winning projects will be conducted via a case-by-case screening process and will not focus solely on the proposed price. Various factors will be taken into consideration during such process, including:
- whether the proposed project will contribute to Japan's energy policy (e.g., can supply over 1,000 tonnes per year) and also "GX (Green Transformation)" policy (e.g., decarbonizes "hard-to-abate" sectors); and
- whether the proposed business plan appears to be feasible (e.g., has secured a credible offtaker) and also reasonable (e.g., has a reasonable Base Price).
Subsidies Amount
The subsidies will be provided for a period of 15 years and will be a "contract-for-difference" type of program. This means that, in principle, the amount of subsidies granted will be equivalent to the difference between the "Base Price" and the "Reference Price", to the extent the Base Price is higher than the Reference Price. If the Reference Price is higher than the Base Price, then the difference will be required to be returned to the government.
The Base Price will be determined on a project-by-project basis and will need to be proposed by the suppliers themselves as a formula or fixed value. The Base Price should be based on the following principles:
- the proposed formula or fixed value should represent an amount necessary to recover the costs and secure a profit in connection with the production and supply of hydrogen;
- the approved formula or fixed value will be fixed and will not change during the 15-year support period;
- for overseas projects, factors such as fluctuations in foreign exchange rates and fluctuations in raw material costs may be included in the Base Price formula, so long as it follows a pre-defined approach and a ceiling amount is set in advance; and
- in case of an exceptional event such as introduction of a new innovative technology, a downward review of the Base Price will be requested.
The Reference Price, in turn, will be determined by the government using publicly available information. More specifically, the Reference Price will be set as the highest figure calculated under either of the following formulae:
- the price of existing alternative raw fuel at the time of arrival in Japan, plus the price for environmental value;
- the actual sales price of hydrogen at the time of arrival in Japan (if an overseas project) or at the production site (if a domestic project); and
- a price calculated based on past transactions (in case of sales in existing hydrogen markets).
Future Outlook
The government will aim to start the first application process by the summer of 2024 and to select the first subsidized project by the end of 2024.
1 https://www.meti.go.jp/shingikai/enecho/shoene_shinene/suiso_seisaku/pdf/20240129_1.pdf.
2 https://www.meti.go.jp/shingikai/enecho/shoene_shinene/suiso_seisaku/pdf/20230104_1.pdf.
3 https://www.meti.go.jp/shingikai/enecho/shoene_shinene/suiso_seisaku/pdf/013_01_00.pdf.
4 The Report does not explicitly define the term "low-carbon hydrogen". While the draft released in December 2023 appeared to recommend a standard of "3.4 kg-CO2/kg-H2" as the basis of defining such term, the Report explicitly mentions that this standard, which was presented by Japan Hydrogen Association (JH2A) in November 2022, is only an example and that further consideration should be given. The Report also mentions that similar standards should be used for ammonia, synthetic methane and synthetic fuels.
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