15 minute read
ENERGY
GREEN HYDROGEN
Southern Africa’s time is now
Advertisement
Generated from renewable energy and capable of decarbonising industries that traditional renewables cannot tackle alone, green hydrogen has been getting a great deal of attention. In fact, the world’s steadily growing demand for hydrogen is expected to exceed supply by 2030, making now an ideal time to invest.
BY KEARNEY CONSULTING*
By 2030, global hydrogen demand is expected to reach 130 Mt, an almost 45% increase from today’s demand of 90 Mt, although the future demand remains uncertain with a broad range of demand scenarios possible. Low-carbon hydrogen could comprise up to a third of this supply.
With Europe and East Asia prioritising hydrogen in their energy transitions, the two regions are expected to emerge as the dominant demand centres for low-carbon hydrogen in the first wave of the green hydrogen industry’s development. Other economies such as North America are expected to follow quickly, also driven by recent regulatory changes such as the US Inflation Reduction Act.
Most green hydrogen demand centres, such as Germany, the Netherlands, Japan and South Korea are projected to have sizable demand gaps, exceeding 1 Mt in most cases, thanks to renewable electricity costs that are expected to remain high amid undesirable climate conditions for optimal renewable capacity. A joint study by Kearney and German utility Uniper shows that imported green hydrogen in Germany can be more cost-competitive than locally produced green hydrogen, with imports offering a cost advantage of about 30% when importing from countries with favourable renewable energy costs.
As demand grows, Europe is likely to remain a major importer of green hydrogen. To capitalise on the emerging import centres, more than 60 international hydrogen trade projects have been announced (see figure 1). Export routes can be developed wherever the cost of green electricity is lowest, with transport costs being a low-impact variable on the levelized cost of hydrogen regardless of the distance from production centre to import area.
Figure 1: Dozens of new hydrogen trade projects will open a variety of global trade routes.
TO TRANSFORM OR NOT TO TRANSFORM
Green hydrogen’s ability to store renewable energy holds one especially intriguing possibility: it can be transported when transformed into a portable product such as ammonia, methanol or an e-fuel. Simultaneously, work is under way to develop a way to transport liquified green hydrogen over long distances without having to transform or reprocess it. Therefore, geographies with promising conditions for renewable energy production, such as southern Africa, will be able to store renewable energy and export it to areas where renewable energy production is technically or economically limited.
Southern Africa has some of the world’s most attractive sites for generating renewable solar electricity. Together the best onshore and offshore wind conditions, this makes it an appealing option for high-capacity and scalable renewable energy for green hydrogen production. And some parties are already well-aware of this: public- and private-sector support is on the increase, including a political commitment with Germany pledging €40-million to Namibia for green hydrogen development. Three EU countries are interested in importing Namibian green hydrogen.
There is also interest in South Africa’s potential to produce green hydrogen: Sasol is entering into an agreement with the Northern Cape Development Agency to conduct a feasibility study production in Northern Cape. South Africa and Namibia have both joined Egypt, Kenya, Morocco and Mauritania in the Africa Green Hydrogen Alliance, which is designed to support the energy transition with green hydrogen.
Although southern Africa has a major opportunity to produce green hydrogen, the region’s demand is projected to be lower than in Europe and Asia. For example, South Africa, the region’s most industrialised country, is projected to reach a demand of only 238 kt by 2030, according to South Africa’s national road map. With the region’s relatively low demand, the favourable production climate and the limited impact of transport costs southern Africa is poised to become a green hydrogen export hub.
Looking beyond the theoretical merits of green hydrogen to the tangible strategies to meet global demand, five moves can put market entrants on the path to success as they seek to establish green hydrogen production facilities in southern Africa.
GOVERNMENT SUPPORT
Government has a central role in the energy transition, with market entrants’ success impacted by the level of government buy-in and a clearly defined strategy. Governments set the policies that impact both the speed and the direction of the transition, and they create the regulatory environment that supports the development of production facilities and the attractiveness of the location for investors.
Furthermore, export trade routes are typically facilitated by intergovernmental agreements. For potential entrants into the southern African market, choosing a location is key. For example, Namibia is prioritising hydrogen development with appropriate policy instruments and a conducive environment for investors thanks to policy certainty.
With hydrogen as an emerging piece of the energy puzzle, there is no universal, well-defined government policy yet. So far, South Africa is the only country in the region that has published a hydrogen strategy. Potential market entrants will need to collaborate with local regulators and governments to assess and shape national hydrogen strategies.
According to best practices in exporting countries such as Chile and Australia, governments can use three mechanisms to build an attractive environment for producing green hydrogen:
Diplomacy. Government diplomacy can be a vital part of forming international offtake agreements. By building relations with demand centres and establishing beneficial trade routes, supply quotas, and investments, governments can set the scene for successful export agreements. These agreements will allow the incorporation of specified volumes over a long period of time, and volume commitments can lock in demand to establish even more certainty.
Early agreements will allow flexibility in establishing the hydrogen pricing mechanism with demand centres. A variety of mechanisms are being evaluated with large demand centres preferring a price
between fixed supplier cost and buyers’ willingness to pay in the short term amid the market’s nascency. There will be a longer-term shift toward market-based pricing once the market develops.
Incentives. Government incentives can stimulate green hydrogen production by encouraging both direct funding and capacity building supporting the development of local production facilities and consequently an export capability. Simultaneously, incentives that drive up demand for local green hydrogen can establish immediate offtake locally to support the emerging industry.
Regulations. Government regulations should focus on standardising green hydrogen certification and streamlining the approval processes. Efforts are being made to align on an international green hydrogen certification system to provide clarity on the requirements for market entrants while validating safe and corruption-free production processes for importers.
Apart from these best practices, lessons learnt from other energy industries highlight the need for a clear governance structure and regulatory body to ensure mechanisms are followed fairly, strengthen trust in international relationships, and avoid over-regulation and disincentivising investments.
PARTNERSHIPS FOR PROJECTS
Due to the market’s nascency, any new development will have a variety of project and operational risks, making it more difficult to secure funding for the project itself and for any offtakers. To be successful, market entrants will need to establish three partnerships to attract funders and offtakers: public partners, offtakers and technology partners. Beyond setting the environment for investments, having active government partners for a project can strengthen the case for investors with formal government support, incubation funding and cementing offtake agreements.
With global trade a core part of establishing export agreements, obtaining a partner that is familiar with setting up complex global supply chains and delivering in key markets is essential to show this ability to funders and offtakers. Shipping hydrogen-based products is a complex undertaking; partnering with a company that has experience in chemicals and energy trading is crucial. Furthermore, a partner with access to the European and Asian markets strengthens the investment case considerably. In 2020, six of the 10 largest green hydrogen projects announced involved a partnership with a major trading, energy or petrochemicals firm.
Because green hydrogen is an emerging technology, establishing strategic partnerships with reputable technology suppliers rather than simply conducting tactical sourcing creates benefits for both the project and the technology partner. Technology partners gain a valuable opportunity to prove that their green hydrogen technology is viable at scale, an important consideration in this emerging industry, while giving the project access to vital technical expertise and the latest technology. Selecting a technical partner with a sound manufacturing blueprint, technical know-how, a proven ability to scale, a suitable levelized cost of hydrogen road map, and crucially, experience in partnerships and a good cultural fit, including values and a purpose that aligns with the project team, will significantly reduce project risk and improve the investment appeal.
OBSTACLES AND OPPORTUNITIES
As with any major project, significant amenities are required. Sizable green hydrogen projects require vast areas of land to produce the renewable power. Finding sites with large areas of available land is often possible only in remote areas, where access to infrastructure is limited. When selecting a site, market entrants will need to consider not only climatic conditions, but also the strategy for site development and eventual export infrastructure.
An essential part of understanding the optimal export pathways and how best to undertake development, where required, is securing stable export demand. This will enable planning for transport considerations. Our analysis shows that shipping is the only viable solution when transporting any form of hydrogen more than 5 000km, for both technical and cost reasons, as would be the case when exporting green hydrogen from southern Africa to the European and Asian demand centres, so stable access to ports will be critical.
Establishing access to ports could pose various hurdles. In remote areas where road or rail access is not readily available, significant technical, financial and institutional barriers may need to be overcome. This presents an opportunity for strengthened government partnerships, where developing the required infrastructure will not only support the project, but also contribute to the area’s socioeconomic environment and industrial development.
By establishing the market entrant as a partner in creating public value – as opposed to a project focused on extracting value for private benefit, strong government buy-in can be obtained. This can ultimately benefit the market entrant, accelerating infrastructure development through policies and regulations and strengthening relationships with local communities, whose support is a vital part of a successful project. It can also create the opportunity for industrial development in downstream chemicals and energy sectors, which can be integrated into the development of green hydrogen programmes.
SECURE FUNDING
As with any mega project, and more so for nascent technologies with inherent risk, securing adequate funding is complex. Funding from multiple sources is often required. Kearney’s market sensing study of the southern African renewables ecosystem identified the main archetypes for investors interested in financing renewable energy projects, each with a unique value proposition, risk appetite and expectations for a return on investment.
The investor archetypes are financial investors; lenders; original equipment manufacturers (OEMs); developers and engineering,
procurement, and contracting firms; as well as development financial institutions, multilaterals and export credit agencies. Financial investors typically require a high return on investment on equity with a longtime horizon, while lenders, OEMs and multilaterals tend to seek debt investments with advantageous terms to mitigate the risks, such as offtaker credibility, limited-to-no development risk exposure and lucrative project financing structures.
Obtaining sufficient investments often requires appealing to multiple archetypes. Large hydrogen projects are typically profiled as high-risk investments for financers because of the inherent risks associated with new technologies that are unproven at scale, the nascent offtake market and the general complexities of large capital projects, particularly those in remote areas. For southern Africa, political and economic factors escalate the risk profile. However, appropriate project phasing can contain the risks to levels that are attractive to investors. Green hydrogen projects can be broken down into component projects, which can be phased for scaling in accordance with three main models (see figure 2).
Figure 2: Green hydrogen projects can be scaled up based on three models with varying levels of risk.
Lower-risk ramp-ups. This model creates opportunities to secure investments from various investor archetypes. These ramp-ups implement the low-risk project components first as a pilot and then scale them over time as the market matures. For green hydrogen, this begins with the tried-and-tested component of renewables.
Because there are multiple ongoing mega-scale renewable energy projects worldwide and existing proven technologies, starting with the production of renewable energy significantly lowers the project’s risk profile and increases the likelihood of obtaining the required earlystage funding. Once these low-risk project components are mature, the project owners can begin to add project components that are currently viewed as higher risks because of their nascency, such as the green hydrogen production facility.
Modular ramp-ups. This model carries higher risk while still packaging project components to align with risk levels that are attractive to investors. These ramp-ups establish the full value chain at
Green hydrogen energy production. a small scale, building its success with limited product offerings and capacity before scaling the products and capacity over time. With the increase in the number of related large-scale projects year on year, investors can then be convinced to fund scaling initiatives.
Full-scale ramp-ups. This model comes with the most risk and entails executing all components at full scale as part of one megaproject and providing a variety of products from the beginning. This approach requires the most funding because investors are asked to back unproven technologies and the development of large-scale green hydrogen projects, which are less prevalent globally.
The first two models allow multiple investors to fund specific project components, satisfying their individual objectives and their appetites for risk along with enabling a funding model that allows for sufficient funding to be obtained while inherently de-risking the project.
JUST TRANSITION
Green hydrogen will be a fundamental part of southern Africa’s just energy transition, which the International Labour Organization defines as occurring “in a way that is as fair and inclusive as possible to everyone concerned, creating decent work opportunities and leaving no one behind”. Green hydrogen also has the potential to create jobs throughout the value chain, in addition to project developmentrelated jobs.
However, achieving a just transition is a complex undertaking. Developing the right skills will be essential. Early development of the green hydrogen industry in southern Africa creates an opportunity for skills to start developing now, allowing for a gradual transition away from coal. By partnering with local governments and educational institutions to create reskilling programs, a skills pipeline can be built while also strengthening community relationships.
Green hydrogen could play an instrumental role in reindustrialising the region. Developing the industry in southern Africa and opening access to affordable green hydrogen at scale would support the creation of a variety of related industries, including green chemicals, mobility and transport, power as well as mining – in turn supporting socioeconomic development and improving local environmental outcomes.
Hydrogen atom.
These opportunities are already being recognised in the region. A reliable green hydrogen supply can support this, driving meaningful socioeconomic and sustainable development in the region.
Ultimately, green hydrogen production is fundamental to southern Africa’s just transition away from coal. With an eye on realising shared value, the strategies discussed in this article can be achieved with an integrated approach – achieving commercial success while also locking in a variety of social benefits.
*Authors: Igor Hulak, Prashaen Reddy, Sumit Mitra (partners), Romain Debarre, managing director, Kearney Energy Transition Institute.
THOUGHT [ECO]NOMY
PSG THINK BIG SERIES | The future of traditional fuels and green hydrogen | PSG Konsult | [2022]
The national drive to a greener economy will require large-scale collaboration. Success will call for resilient partnerships between sector leaders. This was the perspective of president and CEO of Sasol Fleetwood Grobler in PSG’s recent Think Big webinar, which forms part of a series of dialogues around the country’s most pressing issues.
As Grobler explains, a focus on green hydrogen is a vital component of this strategy but needs to be seen “through the lens of greeneconomy/report recycle the long-term” rather than as a “quick fix”. The Global Hydrogen Council predicts that the world will need about 400-million tons to be supplied over long distance by 2050, which emphasises the opportunity for South Africa to become an exporter. This is even before considering the potential of re-industrialising South Africa through initiatives locally. Leveraging this “symbiosis” in a deliberate move towards pooling the country’s resources is how South Africa can leapfrog ahead in the green energy game, argues Grobler. However, the industry must present a unified voice to government, ensuring that regulation and infrastructure are prioritised to create an enabling environment for the energy sector. While he sees enormous potential ahead for the country, successfully leveraging these opportunities is a big task that may stretch beyond the abilities of a single company. As he explains: “Collaboration will be the name of the game going forward. The days of ‘closed corporate strategies’ are behind us and players in renewable energy cannot afford to ‘go it alone.’” In Grobler’s estimation, the establishment and smooth running of this part of the economy will take between six and eight years to come to fruition due to the complexity and bankability of these types of projects. In the short term, the task at hand for players like Sasol is to secure off-take agreements with parties in countries in the European Union and Asia to reach the levels of scale and economic viability needed to ensure the feasibility of the projects.
