China’s hydrogen and CCUS opportunity

Hydrogen and CCUS are set to play important, complementary roles in meeting the carbon neutrality goals of China. China has pledged to peak CO2 emissions before 2030 and achieve carbon neutrality before 2060, requiring a profound transformation of its energy system. Low-emission hydrogen and carbon capture, utilisation and storage (CCUS) technologies have both been identified as key priorities in China’s carbon neutrality guidelines.

China leads the world in hydrogen production, but this production is currently emissions-intensive. In 2020, hydrogen production in China reached around 33 Mt, or 30% of the world total. China’s leading position results from its large share of the global chemical market and its considerable oil refining capacity, which are the primary sources of hydrogen demand today. China is the only country in the world that produces hydrogen from coal at significant scale: about two-thirds of China’s hydrogen production is fuelled by coal, with around 360 Mt of CO2 emissions generated in 2020.

Equipping existing hydrogen production facilities with CCUS is a key strategy to reduce emissions and enlarge the country’s low-emission hydrogen supply. For hydrogen to contribute to China’s carbon neutrality goal, an ambitious shift to low-emission production is essential. The most promising low-emission routes include producing hydrogen from renewable electricity through electrolysis or equipping fossil fuel-based production routes with CCUS. As many of China’s existing coal-based hydrogen plants were built recently, are highly emissions-intensive and could be in operation for decades to come, equipping them with CCUS could be critical to reduce their emissions.

CCUS could also provide a viable cost-effective supply option for new hydrogen capacity in regions with abundant coal resources and opportunities for CO2 storage. Given the low availability of indigenous natural gas resources in China and the country’s large coal gasification fleet, coal-to-hydrogen production with CCUS is expected to persist as an important fossil fuel-based hydrogen generation route. Nevertheless, electrolysis is likely to predominate from the 2030s. In fact, anticipated electrolyser and renewable energy cost reductions could mean that renewable electricity-based electrolytic hydrogen would make up as much as 80% of China’s hydrogen supply by 2060.

A growing role for hydrogen across the economy

Hydrogen use could tackle a range of energy and emissions challenges in China. Low-emission hydrogen could be employed in a range of sectors (including long-distance transport, chemicals, and iron and steel) to achieve deep emissions reductions. Developing hydrogen as an energy vector can also improve air quality, reduce reliance on fuel imports and drive technological innovation. For these reasons, China Hydrogen Alliance (CHA) has established an initiative to raise the share of hydrogen in China’s final energy demand to 20% in 2060.

Hydrogen is set to have a crucial role in China’s strategy to achieve carbon neutrality by 2060. The IEA Announced Pledges Scenario (APS) suggests that hydrogen demand could increase more than threefold by 2060 for China to meet its climate goals. Nearly two-thirds of this growth is linked to hydrogen and hydrogen-based fuel use in transport, and around one-third is associated with using hydrogen as a fuel and for feedstock in industrial processes.

Demand for hydrogen grows to 31 Mt in 2030 under the APS, owing partly to the conventional use of hydrogen in methanol production, oil refining and coal-to-chemicals production, although novel uses (including as a fuel or feedstock in non-chemical industries, and in the transport and buildings sectors) also gain ground slowly. The hydrogen market grows strongly during the 2030s to reach just over 90 Mt by 2060, mainly because of rapid market expansion for fuel cell heavy-duty trucks and hydrogen-based fuels for shipping and aviation, and from rising fuel and feedstock demand for industrial processes.

Targeted support could expand China’s use of hydrogen. CHA analysis shows that targeted policies and support for hydrogen could result in even greater market uptake of hydrogen. In the CHA study, which is a detailed bottom-up assessment of hydrogen’s technical and commercial potential outside the context of an energy system modelling framework, hydrogen demand rises to 37 Mt by 2030 and to 130 Mt by 2060, with particularly strong growth in hydrogen and hydrogen-based fuels for transport as well as for use in industry.

CCUS supports cost-competitive hydrogen expansion

Producing low-emission hydrogen from coal with CCUS will be a low-cost option in regions of China with abundant coal, access to CO2 storage and limited renewable energy availability. Hydrogen production costs in China vary by region based on several factors, with capital costs and the cost and availability of renewable energy being key determinants. For instance, the average cost of producing hydrogen from coal with CCUS is currently USD 1.4-3.1/kg H2, while generating electrolytic hydrogen using renewable electricity is more expensive at USD 3.1-9.7/kg H2, depending on the origin and availability of the electricity.

However, costs are projected to drop substantially in the medium term, potentially falling to around USD 1.5/kg H2 in the longer term in regions with ample solar and wind resources.

CO2 capture rates must be high and upstream emissions low to ensure that coal-based production routes with CCUS are truly low-emission. With CO2 capture rates of 90-95% and upstream fuel emissions accounted for, the greenhouse gas (GHG) emissions intensity of low-emission hydrogen produced from fossil fuels with CCUS in China could be 3.5-4.5 kg CO2‑eq/kg H2 for coal-based production and 2.6-3.1 kg CO2‑eq/kg H2 for natural gas-based.

While producing electrolytic hydrogen with grid electricity would result in a GHG emissions intensity of 29‑31 kg CO2/kg H2 in the current electricity system, electrolytic hydrogen produced from renewables averages 0.3-0.8 kg CO2/kg H2, including emissions generated from the manufacturing of the hydrogen production units. The emissions intensities of both coal- and gas-based production with CCUS could therefore meet China’s current “clean hydrogen” standard of below 4.9 kg CO2/kg H2 (the world’s first formal standard). However, thresholds will likely have to be lowered over time, including to meet international market standards currently under development.

Nurturing hydrogen-CCUS synergies can help China achieve carbon neutrality

Deploying hydrogen production and CCUS together can be mutually beneficial and reinforcing. Because hydrogen production offers a relatively pure CO2 stream, equipping facilities with CCUS is a least-cost CO2 capture option. At the same time, it offers the Chinese government early opportunities to develop CCUS technologies and to support investment in CO2 infrastructure in the country. In the APS, 2.6 Gt CO2 is captured across the Chinese energy sector in 2060.

Industrial clusters can serve as nerve centres to scale-up low-emission hydrogen production and CCUS deployment. Both hydrogen supply and demand are more likely to be concentrated in industrial clusters, some of which are located near potential CO2 storage sites. Thus, retrofitting existing capacity with CCUS would be a low-cost way to expand low-emission hydrogen infrastructure while simultaneously rolling out facilities for CO2 transport and storage. Plus, owing to the co‑location of potential demand (e.g. for heavy-duty trucks), clusters are also promising sites from which to extend hydrogen use to other sectors.

Captured CO2 and hydrogen are key inputs for the future production of synthetic fuels. Despite their currently high production costs, synthetic fuels are one of the few solutions to reduce emissions from long-distance transport, particularly aviation, for which the direct use of hydrogen and electrification are challenging. Captured CO2 in China can also be used for enhanced oil recovery (CO2-EOR) or to manufacture chemicals or building materials. In applications for which the CO2 is re-released into the atmosphere (including through synthetic fuel combustion), careful accounting is needed to validate emissions reductions.

Producing hydrogen from bioenergy with CCUS could contribute to carbon removal and balance emissions from other parts of the economy. Carbon removal will need to be an important part of China’s plan to achieve its carbon neutrality goals, including to balance residual emissions from the industry and transport sectors. While it is still at a relatively early stage of technology development, producing hydrogen from biomass with CCUS could help enable carbon removal. However, this production route requires access to a sustainable biomass supply, which may be threatened by competing claims on it for other uses, including for fuel production (e.g. biokerosene).