By Felipe Bahamondez, Founding Partner, DLA Piper Chile
Nowadays we see governments around the world adopting decarbonization policies to transition their economies away from high-emission electricity generation and polluting manufacturing/production of goods and services. The main approach has been through fostering renewable energy (mainly solar and wind) and different energy efficiency policies. The results have been reasonably successful so far regarding energy-related CO2 emissions in the energy generation sector. There has also been recent consensus about the important role Hydrogen, and especially Green Hydrogen, can play in the future energy system and its contribution to a more sustainable full production cycle for goods and services.
Having in mind the above, the ongoing targets on decarbonization mainly focus on adopting standards to achieve net-zero carbon emissions by the year 2050. Seemingly there is now enough scientific evidence from the Intergovernmental Panel on Climate Change (IPCC) indicating that human-caused emissions of CO2 need to fall to net-zero by around the year 2050. This is aligned with the goal of the Paris Agreement and therefore we are currently facing a near global consensus on climate-related policy action. For instance, the UK and France started in 2019 with targets to achieve net-zero by 2050. But perhaps the most significant development came in 2020 when China pledged to achieve net-zero by 2060. Chile also made a pledge in 2019 to achieve net-zero by 2050.
Where do we stand globally regarding energy supply?
- Electricity production is the largest single source of CO2 emissions, and emissions reduction in the last ten years has essentially been achieved by the replacement of fossil fuels with renewables sources in electricity (mainly solar and wind). Countries, including Chile, are moving towards renewable-based electrification of entire economic sectors (also called decarbonization by electrons).
- There is strong evidence that renewable-based electrification may not be possible, for technical and/or economic reasons, in hard-to-abate sectors. These include heavy industries that require high-temperature heat and have significant process emissions (i.e. iron, steel, chemicals and cement production). Therefore there is a chance that some sectors that may be left un-decarbonized and behind the energy transition.
- There are high hopes for other decarbonization methods that may be used to bring industry emissions close to net-zero (also called decarbonization by molecules); for example, through the extended use of Hydrogen and particularly Green Hydrogen, and carbon capture and storage (CCS).
Alternatives ways to increase decarbonization to meet net-zero carbon targets
First, the traditional concept of a Circular Economy, used in the economics of production and the management of resources in general, can be seen as an additional way of increasing decarbonization through non-energy means. In a Circular Economy, materials and products are kept in the loop for as long as possible, with minimum loss, thereby offering a way to deal with partial decarbonization.
Second, as indicated before, Hydrogen as a decarbonization method has several attractive features, beyond the obvious of being a clean-burning and common element (though often tied up with other elements such as oxygen or carbon). It is relatively transportable and can be stored for a long term. In fact, Hydrogen has several benefits as a component of the global energy transition. It can be used to decarbonize hard-to-abate activities in sectors such as heavy industry and transport that could be at risk to be left un-decarbonized. The Hydrogen’s store feature is also compatible with existing natural gas infrastructure that may be used for that purpose in the near future. In summary, Hydrogen can potentially replace hydrocarbons in aviation, shipping and heavy road transport, and those in the chemical, iron, steel and also cement industries. A relevant question is where the Hydrogen to serve these future energy needs might come from, and a colorful group of terms has emerged to describe the technology options, based on which form of primary energy they are derived from – black for coal, grey for gas, blue for gas with CCS, and green for renewable electricity via electrolysis.
The business interests behind Hydrogen are important to understand and from that perspective the renewable electricity suppliers, gas companies and governments should be, in principle, supporting the Hydrogen transition. Just as an example, for natural gas companies, support for Hydrogen would be driven by concerns about the long-term decline in the demand for natural gas and increasingly regulated emissions. In this scenario, Hydrogen offers an alternative that combines the possibility to retain gas infrastructure as an asset, making Hydrogen a strategic business opportunity for these companies.
Hydrogen Policy Drivers in Chile
In November 2020 Chile published an important document setting out what was called the National Green Hydrogen Strategy.
It is clear from the strategy that Chile views a significant long-term role for Green Hydrogen, made via electrolysis using renewable electricity. It is not clear at this point if there is room for Blue Hydrogen, using natural gas as a feedstock with CCS probably in the Magallanes area.
Today, Hydrogen is predominantly produced from fossil fuels, accompanied by the generation of large amounts of CO2 emissions and since it is produced close to consumption, there is no need for large-scale transportation. However, there are several options to replace this carbon-intensive Hydrogen and expand production to make Green or Blue Hydrogen. The leading low-carbon technology is electrolysis of water using renewable energy or perhaps natural gas. Currently, Hydrogen derived from water electrolysis is not relevant in terms of production in Chile. However, due to decarbonization ambitions and the important expansion of renewable energy, the future production potential is very high. In addition, two electricity sourcing options can be distinguished: off-grid electricity supply from dedicated plants (i.e. offshore wind or a dedicated solar plants) and electricity supply from the grid. The main advantage of electricity supply from dedicated plants is that no electricity grid connection is necessary, and it could be a viable alternative for the future plants in Chile in extreme zones of the country.
The Strategy is based on experts reports show that Chile has competitive advantages in the production of Green Hydrogen and could potentially become a major worldwide exporter. However, several challenges are also looming that will be fundamental in achieving the goals proposed by the strategy:
- Production: Near 60-80% of the cost of Green Hydrogen is the electricity supply. This is the area where Chile has important comparative advantages by having a low production cost of renewable energy – solar in the north and wind in the Magallanes area. The existing cost of Green Hydrogen production is in the range of USD5 per kg, but to be competitive worldwide that needs to drop to USD1.5 or less per kg. To achieve that, very low generation costs are required, as well as efficient transportation logistics.
- Regulation: A comprehensive regulation for Green Hydrogen production, storage and transportation is needed to reduce market uncertainty, providing clear and transparent signals, and minimizing bureaucracy for the development of new projects.
- Desalination: The need for fresh water to make Green Hydrogen is a challenge in terms of cost, particularly in areas where desalination may increase the burden of costs.
- Human resources: To develop this industry on the scale that the strategy expects, Chile will need a large contingent of specialized human capital.
- Storage and Transportation: The potential need to apply an additional process that allows Green Hydrogen to be compressed (liquefied) may require high energy expenditure. On the transportation side, there are serious challenges for the initial development of a local market. The export will be done by, as far as is known today, transforming the Green Hydrogen into ammonia to be transported by large ships. But the scale of production must be big enough and the transportation logistics (including ports) efficient enough to be competitive with other countries.
As experience in other industries show, while publishing a document setting out a strategy is a simple first step, it is likely to be significantly more challenging to put in place the required incentives and regulatory structures to enable the required investments to proceed within the timetables. The good news is that Chile is taking the right steps to develop its Green Hydrogen industry and to position the country as a center of excellence with a view to becoming a global exporter, making an important contribution to the global energy transition.
The article has been sourced from DLA Piper and can be read here