Vast amounts of renewable energy are needed to produce green hydrogen, a new form of energy made by splitting water molecules into hydrogen and oxygen using renewable power.
Green hydrogen is a type of clean energy that could reduce greenhouse gas emissions by replacing fossil fuels in energy-intensive industries. These industries include cement, fertiliser and steel production.
The scale of projected investments globally is huge. The Hydrogen Council, an association of major corporations including the multinational mining company Anglo American, Bosch engineers, the chemicals and engineering giant Linde and many others, lists 1,400 announced projects worldwide and announced investments of US$320 billion.
European governments are looking to import green hydrogen from countries like Chile and South Africa that have enough sun and wind to set up the huge power plants required. They’re also planning to build a very large network of green hydrogen pipelines across the continent. By the 2030s, the amount of green hydrogen imported by the European Union may reach 10 million tonnes a year.
Chile needs green hydrogen so that it can stop using fossil fuels in copper mining. The country also wants to become a major exporter of green hydrogen derivatives, such as green ammonia and renewable methanol.
South Africa sees green hydrogen as an export opportunity but, more importantly, as a means to decarbonise its large heavy-industry and mining sectors, which depend on climate-damaging coal-based energy. The chemicals giant Sasol and the steel producer ArcelorMittal could be the first big industrial corporations to use green hydrogen.
However, both countries lack the billions of US dollars needed to set up green hydrogen industries. If they take out large-scale loans to help finance the projects, this could raise debt to unsustainable levels.
We are economists who have analysed policies, especially de-risking measures, to promote the green hydrogen industry in Chile and South Africa. De-risking means that the state guarantees attractive and reliable conditions to bring in private investors, also supporting them with low-interest credit.
By reviewing national strategy papers and further legislation, and through interviews with business people and politicians, we found that de-risking could actually be financially problematic for the two countries.
Our research found that
tax incentives and credits are questionable ways to support the industry. This is because they attract investment in green hydrogen projects without overcoming more fundamental economic and political insecurities. These deficiencies include the lack of infrastructure for green hydrogen, specialised local suppliers and market uncertainty regarding demand and prices.
We suggest that South Africa and Chile concentrate on creating a business environment favourable to foreign investment that also puts local firms and local labour on a firmer footing to participate in green hydrogen projects. There is also a need for countries in the global north to take on a bigger share of the financial risks involved with setting up green hydrogen projects.
Taking the risk out of building green hydrogen industries
Chile and South Africa have taken numerous steps to promote the green hydrogen industry. Chile’s National Green Hydrogen Strategy provides a clear guideline on how to develop the industry. It identifies market opportunities and supportive measures that the state should take. University programmes in engineering and chemistry have been adapted to train the future workforce of the wider green hydrogen sector.
The Inter American Development Bank, the European Investment Bank, Germany’s KfW Development Bank and the World Bank have contributed to Chile’s US$1 billion Green Hydrogen Fund. The government is hoping to increase this fund to US$12.5 billion.
However, it will be essential to avoid taking on excessive liabilities because, in the worst case, loans provided to private companies that are not paid back may bankrupt the state.
In South Africa, the 2021 Hydrogen Society Road Map proposes that firms involved in green hydrogen production set up together in clusters. Existing special economic zones, which have dedicated infrastructure and other advantages for investors, are likely to become the locations of these clusters. University and other training programmes have been launched.
The Green Hydrogen Commercialisation Strategy sets out ambitious production targets, including exports of 1 million tonnes a year by the 2030s.
Again, a key issue is financing. South Africa’s Just Energy Transition Investment Plan is based on a US$7 billion funding package from the UK and EU to grow the renewable energy sector.
The idea is that this amount will attract a bigger group of private sector investors to fund renewable energy, green industrialisation and decarbonisation projects. But only 4% of the US$7 billion consists of grants that do not have to be repaid. The bulk of the amount is made up of loans that could aggravate South Africa’s already considerable debt burden.
What needs to happen next
For countries in the global north to move away from fossil fuel energy, they’ll need to buy green hydrogen from countries such as Chile and South Africa. So it is essential that these wealthier countries take on a larger share of the risks of setting up green hydrogen projects. This will help green hydrogen host countries to avoid being caught in a debt trap.
Wealthier countries could sign long-term purchase agreements. This would mean that green hydrogen producers in Chile and South Africa would be assured of having buyers at fixed prices. First steps in that direction have been taken by Namibia and Germany.
Our research emphasises the need to promote development in the countries that will produce and export green hydrogen. This must happen in addition to a more just international burden sharing. Rather than tax cuts and cheap loans, less expensive and more lasting measures need to be taken to facilitate participation of local players in green hydrogen projects. The creation of such benefits is also important to offset negative environmental and social effects of these projects.
Anthony Black, Professor, University of Cape Town; Glen Robbins, Research Associate, PRISM, University of Cape Town; Adjunct lecturer, Gordon Institute of Business Science, University of Pretoria, University of Amsterdam, and Sören Scholvin, Professor, Universidad Católica del Norte
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