The numbers for its plan to rely on “clean” ammonia-fueled coal just don’t add up
Japan stands at a climate crossroads. Its latest strategic energy plan, released in February, commits the government to reduce greenhouse gas emissions by 73% by 2040. Yet it also says coal will continue to supply more than 40% of the country’s power generation mix.
Japan’s solution to this paradox? Decarbonizing technologies, such as low-carbon ammonia and hydrogen co-firing, and carbon capture and storage (CCS) to transition to 100% ammonia combustion, or “co-fire,” combined with CCS by 2050, according to Japan’s Seventh Strategic Energy Plan. Ammonia co-firing involves replacing some of the coal used in power plants with ammonia, and then combusting that ammonia alongside coal to generate power.
Three kinds of ammonia are used: grey ammonia, which is derived from hydrogen produced by fossil gas or coal. More than 99% of ammonia produced falls within this category, according to a 2021 IEA report. Blue ammonia is also derived from fossil fuels, with integrated carbon capture and storage (CCS). Less than 1% of ammonia is produced in this way. Finally, there is green ammonia, produced through water electrolysis powered by renewable electricity, accounting for just 0.01% of ammonia produced.
A new report warns that the proposed decarbonization pathway promises financial losses that no business can sustain without perpetual government support.
No matter what kind of ammonia is used, the cost will be substantial. A new report on this clean coal scheme warns that the plan is economically unsustainable and becomes more expensive the more ammonia is used. The Singapore-based Asia Research & Engagement (ARE) warns that the proposed decarbonization pathway promises financial losses that no business can sustain without perpetual government support.
“Our modeling shows that even at a modest 20% co-firing rate, coal plant operators are looking at EBIT margins of -48%,” said Mira Cordier, research analyst at ARE. This financial hemorrhaging worsens dramatically as the ammonia proportion increases.
“Once that rate climbs to 50%, we calculated the probable losses at 112%, which would render the strategy unviable as a solution to transition most of the coal fleet,” Cordier added.
No margin for error
One reason is the cost of ammonia, which requires vast amounts of imported natural gas. Grey ammonia, the cheapest source of ammonia, currently costs around four times that of thermal coal. The cost gap widens further when considering green ammonia, which is 15 times the cost of coal. For the scheme to make economic sense, the cost of carbon by 2040 would need to be $240 per ton of C02. Today, carbon cost in the notoriously opaque global markets ranges from $10 to $60 per ton of CO2.
Large-scale ammonia co-firing requires levels of ammonia far exceeding current global production capacity.
There is another problem. Large-scale ammonia co-firing requires levels of ammonia far exceeding current global production capacity. To put it into perspective, Japan imports around 200,000 tons of ammonia annually. This means that demand from a single power plant would exceed the country’s total yearly imports.
Soaring subsidies
To make its strategy work, Japan has allocated approximately $20 billion to a subsidy program to bridge the cost gap between low-carbon hydrogen derivatives, including ammonia, and conventional fuels over 15 years. However, its models suggest the number seriously underestimates the total subsidies required and warn that the reality is that the subsidies could cost the country five to ten times the proposed subsidy, adding up to $200 billion in future subsidies, or about the annual GDP of many mid-sized economies.
Under current market conditions, coal plants are already operating on slim margins that would disappear if the scheme is implemented. At a 20% co-firing rate of ammonia to coal, production costs would rise to 1.5 times revenues; at 50%, costs would more than double. The economics are unsustainable without massive government intervention, interventions likely to meet political resistance as their magnitude becomes apparent.
Fossil fuel dependency in Japan and beyond
Yet, the Japanese government, with the support of industry players, has strongly pushed ammonia co-firing as a key abatement technology because ammonia does not require significant retrofits in existing coal plants. The strategy is favored by many Japanese utilities to keep their existing plants running with limited capital outlay.
Japan is taking the strategy beyond its borders, promoting the use of ammonia co-firing coal in Southeast Asia.
The long-term economic case for its current approach appears increasingly untenable as renewable energy costs decrease. “The logical course of action,” the ARE report concludes, “is to redirect resources toward scaling alternative electricity sources, strengthening the grid, investing in battery storage, and accelerating the reduction of coal’s share in the electricity mix.”
Japan is taking the strategy beyond its borders, promoting ammonia co-firing in Southeast Asia. According to the consultancy E3G, betting on co-firing risks delaying the deployment of clean, low-cost, domestic, and scalable alternative solutions, like wind and solar, which present far more cost-effective, reliable routes to net-zero emissions in the region. IRENA modeling shows that Southeast Asia has vast renewable resources and that, with significantly upscaled investment and support, a majority renewables-based power system is feasible, and will generate economic opportunities.
No proof of concept
Japan’s commitment is also puzzling given the limited real-world evidence of its viability compared to the proven use of solar or wind at scale. Today, there are no examples of ammonia co-firing plants operating full-time and at scale commercially. Ammonia co-firing remains a nascent technology, with only a 20% ratio trialed so far. The feasibility of achieving more than 50% ammonia co-firing, let alone 100%, is commercially and technically unproven. “Time is short and resources are limited, so steering power generation in the best possible direction is paramount,” notes Cordier.
Japan’s coal crossroads
Japan faces a classic economic choice: continue down a path requiring ever-increasing subsidies with diminishing returns, or redirect investment toward technologies with improving economics and proven scalability. The report suggests that Japan’s commitment to ammonia co-firing increasingly resembles an expensive detour rather than a viable transition strategy and argues that Japan should follow economic principles: investing where returns are highest rather than propping up inherently uncompetitive technologies. Japan also risks the opportunity cost of misallocating finite capital to economically unsustainable technologies, undermining Japan’s broader decarbonization efforts. Cordier says the message is clear for investors and policymakers: follow the economics, not the plan.
