By Cecilia Aguillon*
LA JOLLA, California, Jun 22 2020 (IPS) – The COVID-19 pandemic and crisis has led to increasing attention and clamor to redouble efforts toward an energy transition that would help the world reduce C02 emissions. In many countries of the region, how to manage hydrocarbons, but with an eye on the energy transition has only been accentuated. We believe clean hydrogen is part of that broader policy and reconstruction debate.
Clean hydrogen markets can be a key part of the economic recovery from the COVID-19 pandemic, accelerate the decarbonization of Latin America’s electricity and transportation sectors, attract investment and create jobs. Indeed, the possibilities for oil and gas companies to produce and deliver hydrogen should facilitate and accelerate its adoption in Latin America particularly when combined with the region’s considerable renewable energy upside.
As the US Energy Information Administration notes, hydrogen is the most abundant element on the planet and the simplest. Furthermore, the EIA underscores that “hydrogen, like electricity, is an energy carrier that must be produced from another substance.”
Clean energy policies with clear objectives and successful implementation have resulted in renewable auctions that were over-subscribed throughout the region. The policies also engendered competition and electricity prices among the lowest in the world all the while injecting billions of dollars of direct investment into their economies
According to the US Department of Energy, most hydrogen today is produced from fossil fuels, specifically natural gas, but there is also increasing production from electricity including renewable sources such as biomass, geothermal, solar, and wind.
With regards to technology, most hydrogen is produced through steam methane reforming, a high-temperature process in which steam reacts with a hydrocarbon fuel to produce hydrogen. Electrolysis is also commonly used to produce hydrogen by separating H2O into oxygen and hydrogen. Hydrogen can be compressed, liquefied, transported and used at gasoline stations to fuel vehicles.
Latin America counts some of the globe’s most abundant and cost competitive renewable energy resources including hydroelectricity, solar, and wind. The elements that make the region a world-leader in renewables can facilitate a similar ascension for clean hydrogen production this decade. But it is important to note that in order to spur investment, economies of scale must be supported and enhanced through policy and market incentive programs.
Take the photovoltaic (PV) industry. PV has demonstrated that policies with a well-conceived implementation strategy greatly incentivizes the market and leverages steep cost reductions. Average PV prices in the United States dropped 89% from $359 USD per MWH in 2009 to $40 USD per MWH in 2019.
Over the last ten years, most countries in Latin America enacted clean energy targets and laws that include fiscal incentives and goals to achieve a determined percentage of their electricity mix from clean energy sources by specific timeframes. Using a reverse auction mechanism, solicitations were announced attracting bids from mostly wind and solar developers. A major energy auction in Mexico in 2017 delivered prices in the $20´s USD per MWH.
Clean energy policies with clear objectives and successful implementation have resulted in renewable auctions that were over-subscribed throughout the region. The policies also engendered competition and electricity prices among the lowest in the world all the while injecting billions of dollars of direct investment into their economies.
Latin America’s power sector is well-positioned to be the main driver for a clean hydrogen boom as the pace of solar and wind energy projects continues to accelerate. In some cases, their intermittent nature, however, creates mismatches in the supply and demand of electricity in the system which prompts grid operators to temporarily shut down generation when it exceeds demand.
This reduces return on investments. Reliable and cost-effective batteries are needed to address the problem. Hydrogen-based storage is emerging as a technically viable and effective solution, but more has to be done to foster a competitive industry.
According to IRENA´s latest report on hydrogen and renewables, the lowest average cost of producing hydrogen from wind is $23 USD per MWH. There is consensus that reducing the cost of storage will help maximize the use of renewable energy generation, reduce energy imports, and contribute to economic prosperity.
There are natural allies in this effort. Policymakers and regulators together with power companies and renewable energy investors are increasingly aligned with similar objectives and goals. Latin America does not have to start from scratch; there are important lessons from around the globe.
Clean hydrogen projects being developed in Asia, Europe, and the United States could lead to policies, programs, and robust industries. Lessons learned and best practices from early adopters can be harvested and adapted to develop successful hydrogen markets.
In Latin America, Chile could emerge as the clean hydrogen market leader since the country has surplus production of solar and wind electricity that could be leveraged for producing hydrogen. The government is already developing its post-pandemic stimulus package with a heavy focus on energy decarbonization by 2040 backed by aggressive policies targeting growth and further deployment of renewable energy and electric mobility.
The Energy Ministry is even working on a specific plan to develop a hydrogen market. In addition, the Chilean government is enlisting the participation of its power and energy sectors to join the effort. Chile´s success with solar and wind deployment along with its new decarbonization strategy can be a template for developing sustainable and robust hydrogen markets throughout the region.
For many countries in Latin America, one of the thorniest challenges to reduce emissions is in their transportation sector. Even highly-touted renewable energy markets such as Costa Rica have struggled to reduce fossil fuel consumption for transport. Hydrogen offers an important possible solution. Indeed, hydrogen can help decarbonize the fuel sector, most likely as a source for heavy duty transportation such as long-haul buses and trucks, trains, ships, and airplanes.
The current environment of low oil prices is providing many countries relief from onerous fuel subsidies. Indeed, in some markets such as Ecuador have begun to remove them entirely. It could be wise to consider applying some of these savings to promote the modernization of their public transportation infrastructure to accommodate the use of clean fuels and by extension, support economic development and reduction of CO2 emissions.
Moreover, national oil companies have had to shut down refineries due to the recent drop in fuel demand caused by the lockdowns in the fight to manage the COVID-19 pandemic. This forced shutdown could provide an opportunity to use the time to retrofit equipment and train workers on hydrogen fuel production.
Taking such measures in the near-term would allow for an important step towards diversification while transitioning to clean fuels. In some cases, oil and gas companies are able to obtain low-cost financing in addition to having the infrastructure, distribution channels, and know-how to produce fuels. As countries emerge from the pandemic and review policies and stimulus packages to reactivate their economies, governments should further consider designing road maps that include the promotion of clean hydrogen to decarbonize their power and transportation sectors.
Uruguay provides an example that public-private partnerships can work towards developing a local hydrogen market and one that can inform neighboring countries. The national oil company, ANCAP, together with the government, the national electricity company UTE, the Inter-American Development Bank (IDB) and private investors are developing a pilot project to produce hydrogen using renewable energy to power trucks and buses, and to support green electricity through storage. This is to comply with the government´s goal of achieving 100% renewables by 2030.
In Uruguay, a comprehensive roadmap was enacted in 2010 with clear objectives and specific milestones that includes active collaboration of the various public agencies with specific roles to play to achieve the target. The policy also calls for regulations and standards that promotes the use of renewables throughout every sector of the economy making Uruguay a renewable energy leader in the southern cone. The inclusion of traditional energy sectors in the hydrogen pilot project could help the country achieve its decarbonization goal ahead of schedule.
As the example from Uruguay underscores, well-crafted policies and successful implementation of regulations are essential to attract foreign and domestic investments. The technology and resources to produce clean hydrogen are available. Scaling manufacturing to achieve cost-effectiveness is already taking place thanks to programs to promote hydrogen throughout the world.
The current investment profile and soaring amounts for renewable energy has shown the myriad actors and players – from Wall Street and private equity to multilateral agencies to local and international banks – willing to invest in renewable technologies particularly shown by the scale of deployment levels of wind and solar. Furthermore, the potential ability of oil and gas companies to produce and deliver hydrogen should facilitate and accelerate its adoption in Latin America.
Governments throughout the region should also consider direct participation in the clean hydrogen market. By serving as customers, governments can further support and develop critical mass for fast adoption through investment and modernization of state-own transportation infrastructure. Moreover, governments should consider fiscal incentives for heavy industry and traditional fuel suppliers to adopt the technology. Lessons learned from developing successful renewable energy programs should inspire political will to make clean hydrogen the next link in the chain to achieve zero carbon economies for this generation across Latin America.
Navigating the path forward from the COVID-19 pandemic coupled with the persistent threat of climate change makes clean hydrogen a possible solution for the day after and the region’s energy and economic recovery.
*Cecilia Aguillon is Director of the Energy Transition Initiative at the Institute of the Americas in La Jolla, California