South Africa has ambitious Green Hydrogen goals but the government still needs to specify how it is going to fund it.
By Larry Claasen
GREEN Hydrogen has been touted as an environmentally friendly energy alternative to fossil fuels, as it does not produce greenhouse gases. However, if South Africa wants to be a major international player, it will have to invest R319-billion by 2027.
Green Hydrogen is the process of creating hydrogen by using renewable electricity as a power source to electrolyse water, and it is seen as an opportunity to develop their economies by many developing countries, such as South Africa and Namibia.
The idea is to create hydrogen as a green replacement for fossil fuels and then export it to countries looking to decarbonise their economies.
Namibia is particularly ambitious, as it aims to produce 10-million to 12-million tons per annum of hydrogen equivalent by 2050.
For its part, the South African government is backing Green Hydrogen projects, like the 5000MW one at Boegoebaai in the Northern Cape and the 850MW project at the Saldanha Bay Industrial Development Zone (IDZ).
According to the government’s Green Hydrogen Commercialisation Strategy (GHCS), it could add 3,6% to GDP by 2050 and create 370 000 jobs.
EU boost and incentives not enough
The European Union (EU) is supporting the development of Green Hydrogen in Africa, as can be seen in its pledge of R628-million to support the sector in South Africa.
Aside from this funding, the government is also providing support like grants to fund 5% of feasibility studies and a reduction in corporate income tax if a project is based in a Special Economic Zone (SEZ).
Despite this support from the EU and the incentives on offer, a research report by Norwegian consultancy group Rystad Energy said the country will have to invest substantially more if it wants to see the sector get off the ground.
“The current incentives seem relatively insignificant, and the grants are mostly expected to fund early-stage feasibility studies for a domestic green hydrogen industry. The grants are not intended for capital investments but will support research and analysis to determine the viability of green hydrogen projects, laying the groundwork for future developments and investments in the sector.”
According to South Africa’s Green Hydrogen Commercialisation Strategy, R319-billion will need to be invested in the sector by 2027.
Rystad Energy says it’s clear that the Green Hydrogen sector in South Africa will need offshore funders to get off the ground.
For its part, the commercialisation strategy didn’t spell out specifically where the funding will come from.
“The broad principles of traditional project finance are likely to still be applied, necessitating collaboration by government, international development finance institutions, multilateral financing agencies, local commercial lenders and private sector investors.”
High risk. Uncertain reward
The Rystad Energy report also noted that the majority of the Green Hydrogen projects in South Africa are in the concept phase and are considered “high-risk.”
Boegoebaai, for example, is undergoing a feasibility study and will need the construction of a deepwater port to water port capabilities to facilitate the export of hydrogen and ammonia to international markets.
Aside from the uncertainty around funding, the risk is also compounded by the lack of offtake agreements between producers and buyers that outline the sale and purchase of a specific amount of future production is also an issue.
If offtake agreements are reached, they could be used as a way to incentivise funders to invest in these projects.
Maths not mathing
Aside from issues around financing, the business model for Green Hydrogen has also been questioned.
Craig Morkel, CEO of iKapa Energy says a Green Hydrogen pilot project run in Saldanha Bay found the cost difficult to justify.
“I can tell you that we designed a green hydrogen facility, including those components — renewable energy, electrolyser, and desalination facility — and the numbers don’t stack up.”
Morkel, a member of the South African Oil and Gas Alliance (SAOGA), says the other members he has spoken to are also not keen on investing in it.
“The feedback that we’re getting from SAOGA members is that [green] hydrogen is not viable at this stage.”
Morkel says that though its members were not excited about Green Hydrogen, it did not mean they were not open to it.
“We’re not against hydrogen; it’s just that hydrogen will have to bide its time.”
Subsidies needed
Bruce Douglas Young, senior lecturer at Africa Energy Leadership Centre, University of the Witwatersrand, and Craig McGregor, associate professor in Mechanical and Mechatronic Engineering and director of the Solar Thermal Energy Research Group, Stellenbosch University, also highlighted the cost issue in an article in The Conversation.
“Green hydrogen production is expensive, costing between $5 and $8 (R89-R143) per kilogram – around five times the cost of hydrogen derived from fossil fuels. It is also three to five times more expensive than oil.”
Morkel says for Green Hydrogen to get off the ground, it will need considerable state support.
“The numbers don’t stack up without contract for difference — a contract that pays the difference in the settlement price between the open and closing trades — in other words, subsidies from governments. It will remain competitively, uncompetitively priced to the admittedly dirtier alternatives.”
