Like the thinly-populated Atlantic coast of Newfoundland, large tracts of LAC are also well-placed to generate ample renewable energy. Those that are close to ports are then also ideal for producing hydrogen.
LAC is one of three regions in the world considered to have the largest potential to produce and export hydrogen. The others are Australia and the Middle East. There are also good conditions heading further east but a hydrogen hub with all the required infrastructure in the Himalayas, for example, may not yet be economically feasible and is too distant from a port or major consumer.
The combination of sunshine and wind, ample space, and proximity to ports makes much of the Atlantic coast from northeastern Brazil down to southern Patagonia apt for hydrogen production at costs between $2.75 to $1.75 per kg/H2. Similarly in parts of the central Andes, and in particular in the Atacama desert with its proximity to the port city of Antofagasta, those costs fall to $1.5 and less per kg/H2.
“Countries are beginning to address diversification efforts in electricity systems, and are working to create more enabling policy and regulatory environments,” says Irena. “In this context, recent auctions in Argentina, Brazil, Mexico, Chile, and Peru have helped to accelerate the deployment of thousands of megawatts of wind and solar energy in the region.”
Indeed, the lowest production costs are in southern Patagonia (Argentina and Chile) and the Atacama region (including parts of Argentina, Bolivia, Chile, and Peru), as well as north-western Mexico and north-eastern Brazil, among many others. In the long term, Latin America could have a land area of over 800,000 km2 in which the LCOH via electrolysis is under USD 1/kg H2 using a hybrid energy supply.
LAC also has the advantage that it already has a large percentage of renewables in its energy matrix. For example, renewables, including hydroenergy, account for 43% in Chile, 63% in Colombia, 80% in Brazil, 97% in Uruguay, 98% in Costa Rica and Uruguay, and 100% in Paraguay. That compares to 15% in the US, 17.5% in France, or 32.5% in Australia, or 0.3% in the United Arab Emirates. That may come in handy if customers prefer to buy from nations that are not only selling green energy abroad but also using it at home.
While there are several big projects under way in Brazil and Chile, and a few on the drawing board elsewhere, the extent to which the hydrogen wave will take off will depend on issues ranging from proper regulations to certifications of origin, infrastructure and in some cases opposition from indigenous groups and even environmental activists.
Domestic v export markets
Also, to what extent hydrogen will turn into another export item like coffee or copper, or bring broader benefits to local economies by decarbonising heavy industry and transport, for example, and creating spill-over effects will depend on national strategies, incentives, and distribution channels. These could help reduce emissions where direct electrification can’t be used, such as long-distance transport, or in processing sectors where hydrogen is used such as steel or high-temperature applications such as cement.
In some cases, geography plays a role. In Brazil much of the country’s industry is concentrated along the eastern seaboard, relatively close to where hydrogen hubs are developing around seaports. There it makes sense and would be relatively easy to produce and deploy hydrogen. On the contrary, fuelling buses or trucks in the vast interior or north, thousands of kilometres from ports is probably less efficient.
Similarly in Chile, a narrow coastal country, the generation of hydrogen in the centre and north will be relatively close not only to ports but also to the biggest potential consumers of hydrogen, a mining industry whose trucks and tractors currently consume much of the country’s diesel. Having said that, it wouldn’t be unthinkable to develop a system of hydrogen fuel pumps along the Amazonas, Paraná, La Plata, or other of the most trafficked rivers. In smaller, less industrialised countries it may be easier to introduce networks of refuelling stations for transport.
The bottom line is that manufacturing areas, ideally close to sea ports, provide ideal locations for hydrogen hubs with diverse potential revenue streams that can reduce investment risk.
“Successful cases of commercial-scale (several MW) green hydrogen project development have demonstrated the importance of developing complete ecosystems (such as ‘hydrogen valleys’) to have demand redundancy, while reducing technical and financial risks,” wrote Julián González Martínez and Fernando Cubillos, climate change and energy consultants, respectively, at IDB Invest. “Therefore, projects to be developed during the market maturity stage (2022-2030) should seek to integrate various buyers of the hydrogen produced in the planning and structuring phases.”
Given current backlogs in procuring electrolysers and some other key components, there may be a good case to develop a regional industry. That would require coordination within regional fora such as the Mercosur customs union or the Andean community, for instance. Even within each country the successful deployment of hydrogen requires considerable coordination between policymakers, regulators, industry, and environmentalists. Deploying a fleet of urban buses or refurbishing an iron plant without a long-term supply of hydrogen and adequate regulations, for example, can be counterproductive.
Finance
Another big challenge is finance. From transmission lines linking renewable energy production to storage facilities and export terminals, putting the infrastructure in place is capital-intensive. Given the current budgetary constraints in much of LAC, financing large-scale public investments into hydrogen may be a tall order. Some state-owned companies such as Petrobras in Brazil, Pemex in Mexico, or Codelco in Chile may be able to co-finance part of the infrastructure or participate through technology-sharing agreements, especially when it comes to CCUS projects.
Some regional and multinational financing opportunities are becoming available. In November 2022, the Inter-American Development Bank (IDB) announced a partnership with the Green Climate Fund (GCF) to create a US$450m fund to promote electric mobility and green hydrogen in Latin America and the Caribbean. More may follow.
The IDB Invest and IFC in 2022 co-financed a 50 MW photovoltaic farm with green hydrogen and lithium-ion battery storage in Barbados that will feed electricity into the grid. The Renewstable Barbados project was developed by Hydrogène de France (HDF) and fuel distributor Rubis. With the IDB conditioning all new investments to be consistent with the Paris Agreement from 1 January, 2023, it expects green hydrogen projects to make up a larger share of its portfolio going forward.
Brazil’s state development bank BNDES in July 2022 launched a R$300m (US$56m) line of credit to help develop pilot projects for hydrogen production and research. “Subsequently, the bank will expand its financing lines, including support for large plants capable of exporting hydrogen,” the BNDES said.
Despite a number of multilateral and state financing mechanisms, most of the proposed hydrogen projects will be financed through private capital, which means creating a proper investment climate with clear rules of the game, macroeconomic stability, as well as competitive fiscal incentives.
Certification and standards
The bulk of the hydrogen projects currently underway are for the export market. But even that requires more than just the physical infrastructure, such as pipelines and ports. Customers will demand certifications that guarantee origin, low-carbon production, and perhaps safety standards.
Europe as one of the biggest emerging hydrogen markets, and Germany in particular, have been at the forefront of the standards and certification process, accounting for nearly half of the dozen or so different international standards. CertifHy is one of the initiatives forging a continent-wide green and low carbon hydrogen certification process. It is financed by the Clean Hydrogen Partnership and undertaken by a consortium led by HINICIO that includes the Association of Issuing Bodies (AIB), GREXEL, Ludwig Bölkow System Technik (LBST), CEA, and TÜV SÜD. The initiative started in 2014 and, following a series of tests and pilot phases, led to one of the first non-governmental Guarantee of Origin schemes for Hydrogen in the world.
Other efforts are under way to try and coordinate and harmonise global certification and standards, such as those by the International Partnership for Hydrogen and Fuel Cells in the Economy.
Carbon pricing
But perhaps the biggest determining factor in creating domestic demand for hydrogen and sustainable energy more broadly is the cost of continuing to use fossil fuels, and that often depends on political pressure at home or global market pressure from abroad. Only a handful of LAC countries have adopted carbon pricing initiatives, such as a carbon tax or an emissions trading system (ETS). Argentina, Colombia, and Chile have implemented a carbon tax, as has Mexico, which has also been experimenting with an ETS pilot project since 2020. New governments in Colombia and Brazil are studying ETS.
The problem is that in all cases the carbon tax or the carbon emissions certificates have been too cheap to make any meaningful difference. The existing carbon pricing systems cover industries and oil refineries, so that an increase from current levels of no more than US$10 per tonne of C02 could have a real impact on investment in green hydrogen.
In Europe there was a similar situation until massive climate protests in 2019 forced the European Union to increase the carbon price, apply to sectors such as transport and construction, and adopt more ambitious zero-emissions targets. Part of that may spill over on LAC countries as the EU is adopting a carbon tariff on imported goods that are out of line with zero-emissions targets.
Chile is aiming to overhaul its carbon tax and proposing to implement in parallel an ETS or tradable performance standard which acts in a similar way as an incentive to reduce emissions.
Hydrogen production
Currently, LAC produces 4.1m tonnes of hydrogen per year, almost all of it made from natural gas, using the steam reform technology. Trinidad and Tobago produces approximately 1.8m tonnes, followed by Mexico, Brazil, and Argentina with between 350,000 and 700,000 tonnes each. Chile and Colombia account for approximately 7% of the market each.
Of the 2.5m tonnes of pure hydrogen, 1.2m goes to ammonia production and 1.3m tonnes is used in oil refining. Ammonia, in turn, is often made into fertilisers or explosives. The remaining 1.6m tonnes demand is for mixed hydrogen in the production of methanol (1.2m) and in direct reduction of iron, DRI (0.4m).
Except for three pilot projects in Chile, Argentina, and Costa Rica, LAC currently produces no green hydrogen.
In Cusco, for nearly six decades a 25 MW electrolyser has been producing ammonium nitrate, which is used as an explosive in the mining industry and as a fertiliser in agriculture. To power the electrolyser it uses grid power, which is nearly 40% fossil.
Blue hydrogen
Existing grey hydrogen plants can be retrofitted with CCUS, the process in which carbon is captured and then stored in underground reservoirs or used as a feedstock in other industrial or chemical processes. Whether CCUS can be used depends to a large extent on transport and storage facilities and their related costs. Even where blue hydrogen can be produced at a competitive cost, the downside is that carbon is not really eliminated but simply stored, sometimes in products that have a limited lifecycle.
Oil-giant Petrobras in Brazil currently operates the only commercial CCUS project in Latin America and one of the largest in the world. In 2011 Petrobras started separating carbon dioxide from associated natural gas and reinjecting it back into the wells in the offshore Tupi oil fields. By 2025 an estimated 40m tonnes of carbon dioxide will have been stored in rock formations several kilometres below the sea bed. That experience could go a long way to help decarbonise hydrogen production in Brazil and more importantly in countries such as Colombia and Trinidad and Tobago.
According to a comparative study produced by Hinicio, a global hydrogen consultancy, Chile, Colombia, and Brazil lead efforts toward developing a hydrogen economy, with Argentina and Costa Rica dropping in the ranking. Yet all countries surveyed advanced in the index, which reflects “the willingness of governments to implement the first regulations and incentives for zero and low-emission hydrogen, and the interest shown by various private actors to develop projects at a national level”.
Hydrogen demand
Barring a few pilot projects here and there, such as such a green city bus fleet, the most likely scenario is that the biggest demand for hydrogen in LAC in the near-term will continue to come from existing, not new users. That has mostly to do with the before-mentioned challenges in rolling out appropriate regulations, infrastructure, and creating incentives to move aways from fossil fuels.
The International Energy Agency (IEA) sees hydrogen demand jumping to 6.2m tonnes by the end of the decade, as existing ammonia plants that were temporarily not operating come back on line in Mexico and Brazil. In that baseline scenario, all the additional hydrogen demand comes from existing uses in oil refining and industry. In a more optimistic scenario, total demand would increase to 6.8m tonnes, driven mainly by new applications in industry and transport that seek to meet ambitious energy and climate targets. That case assumes the rapid deployment of necessary infrastructure, such as hydrogen refuelling stations.
“Despite the significant potential for hydrogen to decarbonise several sectors in the long term, new uses of hydrogen in the region are likely to remain modest to 2030, and existing uses will continue to dominate regional hydrogen demand,” the IEA study says.
