To produce green hydrogen, renewable energy is required for renewable energy to be produced. This is a new form of energy created by splitting water molecules into hydrogen and oxygen using renewable power.
Green hydrogen is a kind of clean energy that can reduce greenhouse gas emissions by replacing fossil fuels in energy-intensive industries. These industries include cement, fertilizer and steel production.
The expected size of investments is huge worldwide. Hydrogen Council, an association of large corporations including multinational mining companies Anglo-American, Bosch Engineers and chemical and engineering giant Linde, has announced projects announced around the world and has announced an investment of US$320 billion.
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The European government is trying to import green hydrogen from countries like Chile and South Africa, where there is enough sun and wind to set up the huge power plants they need. They also plan to build a very large network of green hydrogen pipelines throughout the continent. By the 2030s, the amount of green hydrogen imported by the European Union could reach 10 million tonnes per year.
Chile requires green hydrogen, allowing copper mining to stop using fossil fuels. 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 way to decarbonize the large industrial and mining sectors that rely on coal-based energy that undermines the climate. ArcelorMittal, a huge SASOL and steel producer of chemicals, could be the first big company to use green hydrogen.
However, both countries do not have the billions of US dollars needed to establish a green hydrogen industry. If they take away massive loans to help fund projects, this could raise debt to unsustainable levels.
We are economists who have analyzed particularly risky measures to promote the green hydrogen industry in Chile and South Africa. Risk means that the state ensures attractive and reliable conditions for introducing private investors and supports them at low interest rates.
Through reviewing national strategy papers and further legislation, and interviews with businessmen and politicians, it was discovered that de-lisking could in fact be financially problematic for both countries.
Read more: Green hydrogen is a clean fuel, but South Africa isn’t ready to produce it: Why energy experts explain why
Our research found that tax incentives and credits are questionable ways to support the industry. This is to attract investment in green hydrogen projects without overcoming more fundamental economic and political unrest. These defects include green hydrogen, lack of infrastructure for specialized local suppliers, and market uncertainty regarding demand and prices.
It is recommended that South Africa and Chile be focused on creating business environments that favor foreign investment. This also provides a stronger foothold for local businesses and local workforce to participate in the Green Hydrogen Project. Additionally, Green North countries need to assume a greater share of the financial risk associated with setting up green hydrogen projects.
Take risks by building a green hydrogen industry
Chile and South Africa have taken many steps to promote the green hydrogen industry. Chile’s National Green Hydrogen Strategy provides clear guidelines on how the industry is developing. It identifies market opportunities and advocacy measures states should take. The University Program in Engineering and Chemistry is adapted to train the future workforce in the broader green hydrogen sector.
The Inter-American Development Bank, the European Investment Bank, the German KFW Development Bank and the World Bank contribute to Chile’s US billion Green Hydrogen Fund. The government hopes to increase the funds to US$12.5 billion.
However, in the worst case scenario, it is essential to avoid undertaking excessive debt, as loans offered to private companies that are not repaid can cause the state to go bankrupt.
In South Africa, the 2021 Hydrogen Association Roadmap suggests that companies involved in green hydrogen production have been established together in clusters. Existing economic zones with infrastructure and other benefits to other investors could be the location of these clusters. University and other training programs have begun.
Green Hydrogen Commercialization Strategy sets ambitious production targets, including exports of 1 million tonnes per year by the 2030s.
Again, the key issue is fundraising. South Africa’s Just Energy Transition Investment Plan is based on a US$7 billion funding package from the UK and the EU to expand the renewable energy sector.
The idea is that this amount will attract a larger group of private sector investors to fund renewable energy, green industrialization and decarbonization projects. However, only 4% of the US$7 billion are made up of grants that don’t need to be repaid. The majority of the amount consists of loans that could exacerbate South Africa’s already substantial debt burden.
What needs to happen next?
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For countries in the northern part of the world to move away from fossil fuel energy, they need to purchase green hydrogen from countries such as Chile and South Africa. Therefore, it is essential that these wealthy countries take on a greater share of the risk of setting up green hydrogen projects. This helps to prevent green hydrogen host countries from getting caught up in debt traps.
A wealthy country can sign long-term purchase agreements. This means that green hydrogen producers in Chile and South Africa are guaranteed to have buyers at a fixed price. The first step in that direction was taken by Namibia and Germany.
Our research highlights the need to promote development in countries that produce and export green hydrogen. This must occur in addition to a fairer international sharing of burdens. Cheaper and more lasting steps need to be taken to promote the participation of local players in the Green Hydrogen Project, rather than tax cuts or cheap loans. Creating such benefits is also important to offset the negative environmental and social impacts of these projects.
Anthony Black, Professor at the University of Cape Town
Glenn Robbins, a prism researcher at the University of Cape Town. Associate Lecturer at the Institute of Business Science, University of Amsterdam, University of Pretoria
Sören Scholvin, Professor, Católica Del Norte University
