Hydrogen and ammonia: 2024 trends, opportunities and risks in light of Japanese regulatory change

What support can be expected?

The Japanese Ministry of Economy, Trade, and Industry (METI) has been tasked with establishing the roadmap for the development of the hydrogen/ammonia economy. The Joint Hydrogen Policy subcommittee is focusing on developing the hydrogen economy through domestic production, transportation, and utilization of hydrogen, with the Ammonia and Other Decarbonized Fuel Policy Subcommittee considering ammonia as a potential carbon-neutral fuel alongside other options like synthetic fuels and e-methane.

The METI subcommittees are looking at creating robust supply chains, developing the necessary infrastructure for large-scale production and transportation, and promoting international collaboration. In addition, METI has recognized the economic barriers that currently exist and is crafting subsidy packages to boost hydrogen and ammonia-related ventures. These proposed subsidies include the following:

• Domestic green hydrogen/ammonia production: such support may consist of grants, tax breaks, or feed-in tariffs for renewable energy-powered electrolyzers.
• Investment in hydrogen infrastructure: including the development of hydrogen “clusters”; subsidized industrial hubs designed to create industrial demand for hydrogen and subsidies for the funding of hydrogen and ammonia terminals and transportation networks.
• Incentives for adoption in specific sectors: for example, the co-burning of ammonia or hydrogen for power generations, shipping or fertilizer production.
• Other demand creation: subsidies for hydrogen-powered vehicles, ships, and industrial equipment which could drive adoption.
• R&D funding: investments in advanced hydrogen technologies connected with the hydrogen/ammonia value chain, and the utilisation of such technologies.

Once these subsidy parameters are established, we expect a surge in M&A activity within the hydrogen and ammonia space across various industries including energy companies (especially those with a technology focus), shipping firms, and industrial manufacturers. The government subsidies will clarify the bankability of these global hydrogen/ammonia projects and no doubt many key players to be interested in exploring these new opportunities.

Timeline for implementation

The anticipated timeline for the release of the new regulatory regime is:

• Q1 2024: Finalization of the "Basic Hydrogen and Ammonia Strategy" by the METI subcommittees.
• Q2 - Q3 2024: Public consultations and refinement of the strategy.
• Q4 2024: Cabinet approval of the final strategy and launch of legislative processes for specific subsidy programs.
• Early 2025: Implementation of initial subsidy programs and funding allocation announcements.

While we hope to see an accelerated timeline, the above timeline may vary depending on legislative and policy deliberations. It is also important to note that there has been criticism of the cost of implementing these policies and questions have been raised over the amount of funding that will be made available by the government.

What are the challenges and opportunities for buyers?

With these subsidies due to come into place by 2025,  a number of significant hurdles to the acceleration of the hydrogen/ammonia economy remain. However, these challenges may also present opportunities for companies able to create novel technologies which key actors have identified.

In terms of M&A trends, we are seeing various players taking early-stage investments in companies promoting technologies connected with the hydrogen/ammonia value chain. Japanese utilities and trading houses in particular have been taking early interests in new IP connected with the hydrogen value chain.

When investing in projects developing the hydrogen/ammonia value chain, buyers are identifying common risks for their investments, including:

• Significant infrastructure gaps, upfront costs and complex project structures
  
  At present, Japan does not have the infrastructure available to import substantial amounts of hydrogen and ammonia. A robust value chain will need to be created, which will involve developing production facilities, storage tanks, pipelines and bunkering infrastructure for maritime purposes. With many of these sectors involving novel technologies, the associated costs will be significant, and questions come into play as to the bankability of large-scale projects – particularly where there is uncertain demand or an incomplete value chain.
• Offtake and demand uncertainty
  
  While the Japanese subsidies are expected to fill the gap for demand, unlike the oil and gas sectors, there is a lack of a mature market and pricing mechanics. The lack of demand and lack of certainty around pricing of hydrogen/ammonia makes it difficult for project developers to secure long-term offtake agreements with guaranteed volume and pricing which are ultimately crucial for financing these projects.
• Technology limitations
  
  Many aspects of the hydrogen/ammonia value chain are new and unusual, requiring innovative technology to enhance efficiency, reduce production costs and optimize transportation methods - particularly for the import of hydrogen/ammonia across large distances. Other areas requiring technological advancement include reducing the cost of electroyzers, improving ammonia synthesis processes and developing safe and cost-effective storage solutions.

While the road to developing the hydrogen/ammonia economy may not be straightforward, we are seeing various companies step up to meet its challenges. This in turn is promoting investment and M&A activity as more buyers become interested in, and have more certainty around, the opportunities these new technologies bring. Once the final details of the forthcoming government subsidies are announced, we anticipate a large uptick in the M&A activity connected with the hydrogen/ammonia economy, not just in Japan but globally.