By Fitch Solutions
The Latin America region contains a handful of markets with significant potential for the development of green hydrogen, although there are several weaker performing markets that rank well below the global average. Fitch Solutions has developed a Hydrogen Index, which assesses the suitability of a market for the green hydrogen industry. REGlobal presents excepts from Fitch Solutions’ analysis of Latin American countries’ green hydrogen status based on the index.
Latin America contains several markets that hold significant potential for the development of green hydrogen, despite the region’s overall score ranking below the global average score. While the Latin America region holds an average score of 39.3 in our Hydrogen Index, ranking below the global average of 45.7, there are a handful of markets which stand out in terms of suitability. In total, six markets score above both the global and regional averages across all time frames and rank in the top half of the index, including Mexico (23rd globally), Chile (26th), Brazil (28th), Argentina (45th), Colombia (47th) and Peru (55th). Of these, we highlight Chile, Colombia, and Brazil as markets which present the most potential for significant development over the coming decade, with Chile expected to be the key outperformer as it offers the best balance of risks and rewards throughout the decade and the Chilean government has ambitions to become a global green hydrogen producer.
The Hydrogen Index’s assessment of green hydrogen development suitability is scored out of 100, with the higher the score indicating a more favourable balance of risks and rewards. The index combines Fitch Solutions Power and Renewables forecast data to form the Renewable Industry Rewards as well as our economic, political, and operational research teams assessments to form a Country, Project and Industry Risk profile. Furthermore, we include 33 industry-dependent indicators to assess current and future demand for hydrogen as well as capture existing technology expertise. The combination of the following form our Hydrogen Industry Rewards:
- Existing Industry Feedstock: Indicators of current industry demand for hydrogen, including crude oil production, refining capacity & production as well as ammonia and methanol production capacity. In total, these activities make up 80% of current global hydrogen demand.
- Future Use Cases: Indicators of future use cases for green hydrogen gas include commercial vehicles fleet size, bus and coach fleet size, heavy truck fleet size, and inland waterway freight transport. We also expect that hydrogen blending into of the gas sector will emerge over the decade, displacing gas consumption – particularly in Europe. As such we use indicators reflecting the consumption of natural gas as well as the share of gas fired power generation in the market’s electricity generation mix. Furthermore, steel production has also Emerged as a viable off taker for hydrogen products as a low carbon fuel for steel manufacturing and associated indicators are also included.
- Infrastructure & Industry Expertise: Indicators in relation to the quality and scope of existing infrastructure and industry expertise, which are also crucial for the development of green hydrogen, including port infrastructure, gas pipeline infrastructure, existing hydrogen production capability, natural gas production.
As highlighted in our previous research, we expect to see an increase in both the global demand and supply of green hydrogen over the decade – the majority of hydrogen gas is currently created with the use of fossil fuels. Many markets are now looking to rapidly expand renewables-based green hydrogen production, with most focusing on the utilisation of electrolyser technology while developing renewables capacity at the same time. While Europe is taking a leading role in the technologies and production within the hydrogen industry, we believe that a few key markets in Latin America contain untapped potential that could be leveraged to create robust green hydrogen production capacity, with Chile being the key standout in the region.
Mexico And Chile top Latin America region’s green hydrogen suitability index
Latin America – Green Hydrogen Suitability Index (2020)
Chile takes top spot in hydrogen index by 2025, aligning with government’s green hydrogen ambitions
While Mexico ranks first in the Latin America region’s Hydrogen Suitability Index for 2020, Chile overtakes the market to rank first in both 2025 and 2030. This is due to Mexico’s score declining over the decade as its Renewables Rewards is set to decline with contraction in wind and solar capacity growth. In contrast, Chile’s Renewables Rewards Score is set to improve significantly – boosting its overall Hydrogen Suitability Index. Regarding these two markets and their green hydrogen development potential, we note:
Chile: The market is the key bright spot for green hydrogen potential within the region, with a project pipeline that is already beginning to develop and international interest. While Chile scores behind Mexico marginally to rank second in the region at present, the suitability is set to improve and the market overtakes Mexico by 2025 to rank first. In addition, the market is set to rank in the top 20 globally from 2025 onwards. The improved score and rankings are primarily the result of significant forecasted growth within the country’s non-hydro renewables sector, which nearly doubles it Renewables Rewards score between 2020 and 2025. We forecast total non-hydro renewables capacity will increase from 5.6 gigawatts (GW) in year-end 2020 to 17.4GW in 2030, with non-hydro renewables’ share of Chile’s total electricity generation more than doubling from 21.9% to 46.0% over the same time period. Growing electricity demand, an improving transmission and distribution infrastructure, a highly favourable energy policy landscape support our robust growth outlook. In addition to its robust Rewards profile, Chile also offers one of the most favourable Risks profiles in the region. This includes the lowest project development risks in Latin America, according to our Project Risk Index.
Chile is well-positioned for the development of cost-competitive green hydrogen given the robust growth outlook and continued cost declines within the wind and solar sectors. In addition, the Chilean government has strong ambitions towards the development of a sizeable green hydrogen industry, with the country aiming to become a global supplier of clean fuels, including green hydrogen, from 2030 onwards. Furthermore, we note growing interest in companies looking to develop green hydrogen projects in Chile, with Enel Green Power and Engie already in the early stages of developing green hydrogen projects in the country. We highlight Enel’s project which was announced in October 2020. While the announcements did not specify the expected capacity and the project is still subject to government approval and the finalisation of financing, the electrolyser plant could come online as early as 2022 – making it the first green hydrogen project in the country and likely one of the largest in the Latin America region.
Strong renewables growth to boost Chile into top spot in Latin America
Chile – Hydrogen Suitability Index Profile (2020 & 2030)
Mexico: Despite Mexico ranking between first and third within the Latin America Hydrogen Index across the three timeframes, the market ranks much lower globally. The market’s declining Hydrogen Suitability Score and rankings are primarily the result of a weakened outlook for growth in the wind and solar power sectors. While the country added 10.5GW of non-hydro renewables capacity between 2016 and 2020, growth is set to slow down considerably, with the market forecasted to add 5.5GW between 2021 and 2025. The weakened outlook for the sector is the result of a significant shift in policy under the administration of President Andrés Manuel López Obrador, which favours the state-owned utility, CFE, and its thermal and hydropower plants, at the expense of private renewables developments. We note that the policy shifts away from clean energy development and action on climate change will also present a lofty barrier to any substantial hydrogen development.
Significant variation for risk and rewards across the region
There is a wide range of risks and rewards within Latin America, resulting in markets on both extremes of the Hydrogen Index. Brazil, Argentina, Colombia and Peru join Chile and Mexico in holding Hydrogen Suitability Indices above the regional and global averages – mostly by a healthy margin. In particular, we highlight Brazil and Colombia, which rank third and fifth in our 2020 regional index, respectively, as both of their governments are in the process of developing hydrogen policies and roadmaps to leverage their non-hydro renewables sectors. The lowest ranked markets in the region, including Paraguay (112th globally), Cuba (101st), Nicaragua (88th), and Honduras (89th), are most significantly weighed down by their extremely weak Rewards profiles. The weak Hydrogen Rewards and Renewables Rewards scores, some of the weakest globally, are the result of the market’s small industrial sectors as well as little development in the non-hydro renewables sector. In addition, these markets also present moderate to high risks in relation to project developments, as seen with scores from our Project Risk Index. The exception is Venezuela (95th globally), which holds Rewards scores that ranks well above the global and regional averages, but is weighed down by one of the weakest Risks profiles globally – including its Project Risk and Industry Risks scores – due to its ongoing economic and social crisis. At present, these bottom five countries all rank in the bottom 30 markets in our global ranking of 117 countries.
Wide range of risks and rewards within Latin America
Latin America – Green Hydrogen Suitability Index Risks & Rewards (2020)
The region’s green hydrogen suitability will remain relatively consistent, based on our 2020 and 2030 Hydrogen Index Scores. The region’s average Hydrogen Suitability Score will increase only marginally – from 39.3 in 2020 to 39.5 in 2025 and 40.5 in 2030 – and therefore remain below the global average. While there will be some movement in rankings within the region, as seen with Chile surpassing Mexico to take the top spot, the large separation between the top six ranking markets and the rest of the region will remain throughout the decade, given the substantial discrepancy in renewables growth outlooks. In terms of individual growth, Ecuador stands out as the market in the region that will see the most improvement to its overall Hydrogen Suitability Score, going from 30.1 in 2020 to 38.8 in 2030. The improvement is primarily the result of forecasted renewables capacity and generation growth, which boosts its Renewables Score in the middle and end of the decade. That said, the market will remain ranked in the bottom half globally, improving only marginally from 87th to 79th.
Relative consistency between 2020 & 2030 forecast index scores
Latin America – Green Hydrogen Suitability Index (2020f & 2030f)