Power generation pivotal to creating large-scale hydrogen supply chain in Japan

Ahead of the conclusion of Japan's first Contract for Difference tender in early 2025 — which will create demand for imports of low-carbon ammonia for ammonia co-firing in the country's coal-based power generation sector — market interest is turning to the price differential between low-carbon ammonia and thermal coal.

These spreads have wider relevance for Japan's energy-intensive sector, as co-generation requirements extend to other end-use sectors, such as chemicals.

"The initial [low-carbon ammonia] demand is anticipated to be highest in power generation, bolstered by supportive mechanisms like the Long-term Decarbonized Power Auction. However, it's worth noting that funding CFDs (contract for difference) for the power sector comes at a steep price, which limits the extent of hydrogen support," said Anri Nakamura, associate director at S&P Global Commodity Insights.

Commodity Insights launched ammonia/coal price spreads in October based on an energy parity basis comparison between Platts' NEAT thermal coal index and the JKAP low-carbon ammonia reference price. The spread has averaged $71.40/MWh since October, underlining the higher cost of utilizing low-carbon ammonia for co-combustion.

Renewable ammonia costs are still significantly higher than JKAP low-carbon ammonia, with the spread between Japan delivered renewable-derived ammonia originating from Australia and NEAT coal averaging $157.80/MWh, more than twice the JKAP-NEAT coal spread.

Price gap framework

The Hydrogen Society Promotion Act came into force in October and the Ministry of Economy, Trade and Industry opened the window for applications for the "Support Focusing on the Price Gap" program starting Nov. 22.

Japan Organization for Metals and Energy Security, will administer support focusing on the price gap and support for the development of a hub as part of Japan's support measures, in cooperation with METI.

One of the requirements for the program also commonly referred to as "Contract for Difference" is that suppliers shall continue their supply for at least another 10 years after this support period.

"The aim of the Act is to establish a large-scale and resilient supply chain for low-carbon hydrogen and its derivatives," Kazuaki Miyata, Director at JOGMEC told Commodity Insights.

"The 'Support Focusing on the Price Gap' program requires both suppliers and users to prepare their business plan for application so that the supply chain to Japan could be established. Once a business plan is awarded and approved, the price gap between hydrogen and conventional fossil fuels will be supported for 15 years based on the approved business plan," he said.

METI is preparing to launch another support program the 'Hydrogen Hub Development Program' in 2025, "which support the establishment of infrastructure which leads to large-scale expansion of the use of low-carbon hydrogen and its derivatives and widely benefits a variety of companies, such as shared pipelines and tanks."

Ammonia/coal co-firing

Japanese companies have successfully demonstrated the technological feasibility of co-combusting ammonia at concentrations of up to 20% with thermal coal.

Idemitsu Kosan conducted a demonstration of the use of ammonia as fuel in a commercial naphtha cracking furnace in March, co-firing 20% ammonia with existing fuel and reducing CO2 emissions in the chemicals industry.

Japan's JERA completed a 20% ammonia co-firing test with "positive" results at its 1GW No. 4 coal-fired unit at the Hekinan thermal power plant in June 2024, marking the world's first co-firing of ammonia at a large commercial coal-fired power plant.

However, market participants note that the significantly higher cost of generating power using ammonia as a feedstock for co-combustion alongside thermal coal remains a barrier to uptake, alongside concerns about the cost of converting existing thermal coal boilers to co-combustion operation.

The first long-term decarbonization power supply auction by the Organization for Cross-regional Coordination of Transmission Operators, which awarded 825.582 MW of ammonia, hydrogen co-firing capacity April 2024, explicitly included capex support for participating projects.

Power generation to facilitate large-scale production

The CFD scheme specifically mandates that eligible business plans must include hard-to-abate sectors alongside power sector consumption.

"Striking a careful balance is essential – not only does the government need to ensure that hydrogen is supplied to the most needed areas but also [that it] brings down the cost by developing a large-scale supply chain," Nakamura said.

A market source said "hard-to-abate sectors such as steel, chemicals etc. are mandatory for participation. If only supplying ammonia to power generation, it won't qualify."

Another source said they are trying to secure low-carbon ammonia supply from the US Gulf Coast.

"The ammonia will be used for power generation, but for 20%-30% co-firing with coal in boilers to be used by chemical companies," the source said. "The ultimate plan is ammonia mono-firing."

Another Japanese market participant said energy-intensive producers in the non-ferrous sector were monitoring the potential implications of the scheme on their input costs.

Japan's strategic push

Japan is looking to award a total of 7.244 GW of decarbonized power sources in its second long-term decarbonization power auction in 2025.

The OCCTO plans to award 1 GW of ammonia/hydrogen co-firing and biomass mono-firing, as well as a total of 1.5 GW of hydropower and battery storage capacities, along with existing 2 GW nuclear power generation capacities, as part of the decarbonized power sources auction.

Under the current sixth Strategic Energy Plan formulated in October 2021, Japan plans to introduce 1% hydrogen/ammonia in its power generation fuel mix by fiscal year 2030-31 (April-March), when it also aims to begin 30% co-burning of hydrogen at gas-fired power plants or mono-burning of hydrogen for power generation, as well as commence 20% co-burning of ammonia at coal-fired power plants.