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How viable is hydrogen?

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Green hydrogen is produced through a process of electrolysis powered by renewable energies such as wind or solar. Image credit: Karsten Würth from Unsplash.

How viable is hydrogen?

How viable is hydrogen as an energy source? Does it really have the potential to alleviate SA’s energy woes?

By Bridgett Majola and Gavin Noeth

South Africa’s energy crisis has created opportunities for innovation, especially given Africa’s abundant natural resources which can be harnessed for renewable energy supply.

Following the 2023 release of Eskom’s renewable Energy Grid Survey for 2023, the South African Wind Energy Association and the South African Photovoltaic Industry’s Association reports, there is awareness of a significant pipeline of solar, wind, battery, and gas projects in the country, which if implemented, could address the country’s load shedding issues.

All stakeholders, including business, government, and academia should be encouraged to explore the opportunities the current energy crisis has provided and to find new and innovative ways of working.

Load shedding has led to a myriad of innovative solutions such as renewable energy but the question of what happens next, past load shedding and how we get there remains.

Hydrogen a possible solution

One possible solution that is receiving growing attention is the energy potential for the universe’s most abundant element, hydrogen.

Analysts predict that the global market for hydrogen production will be worth about USD225.73-billion by 2030. On the face of it, the shift to hydrogen makes sense.

But how viable is hydrogen as an energy source? Does it really have the potential to alleviate South Africa’s energy woes? And if it is viable, how should hydrogen projects be financed, what should developers do to create investable or financeable projects, and how should the government get involved?

Advantages with caveats

As a fuel source it has several advantages, including its relative abundance, efficiency, versatility, and that when it is burnt as a fuel it produces only water vapour, making it a clean source of energy. But even those advantages come with caveats.

Almost all hydrogen produced today is grey or blue hydrogen, both of which come from a steam methane process in which methane extracted from natural gas is combined with steam (produced by burning fossil fuels), allowing it to break down into hydrogen and carbon dioxide.

Unfortunately, methane leaks during production and transportation can make this kind of hydrogen worse for the environment than simply burning natural gas.

In theory, this is where South Africa should have an advantage. Thanks to its abundance of sunlight, particularly in areas such as the Northern Cape, it should be able to produce abundant amounts of green hydrogen.

Unlike other forms of hydrogen production, green hydrogen doesn’t make use of methane at all. Instead, it makes use of electrolysis to split water into hydrogen and oxygen.

But even green hydrogen can be difficult and costly to transport and store. That means that for hydrogen to be truly viable, production hubs need to be close to markets.

What is the bankable scenario?

Assuming those pitfalls are overcome, as industry optimists say they will be, what is the bankable scenario for hydrogen in South Africa?

One possible place to start is by using blended finance. In this model, development finance institutions would make the initial investments in green hydrogen projects.

Less risk averse than other financiers, such institutions would be able to absorb defaults on any failed projects they’ve financed through loans.

Once those projects are weeded out and successful ones start to emerge, senior lenders (including banks) can come in, particularly if there are additional security measures such as insurance in place.

While extensive due diligence would need to be put in place, that green hydrogen is a relatively nascent concept need not be an obstacle as it is for some other emerging innovations. After all, the process of producing hydrogen is well established, as is renewable energy. The only new thing is bringing the two together.

Even so, a number of conditions would have to be in place to attract the kind of funding green hydrogen needs to be viable. Players in the sector would, for example, need to secure commitments from green finance programmes to attract further investment.

For its part, the government will also have to incentivise investment in the green hydrogen sector through attractive tax breaks, grants and the creation of hydrogen-specific special economic zones that help bring down the cost of producing, transporting and exporting hydrogen.

No silver bullet

Ultimately then, it should be clear that hydrogen is no silver bullet for South Africa’s energy crisis. In fact, overcoming that crisis will be critical if the country is to have any hope of meeting the hydrogen potential many think it has.

As we have seen though, that is just one of many obstacles that will have to be overcome for South Africa to have a viable hydrogen industry.

Getting to that point will take time and many technological advances, especially when it comes to storage and transportation.

That is when we will see widespread interest from financiers such as commercial banks. That is not to say South Africa cannot benefit from a healthy green hydrogen sector, but it is not going to reap rewards any time soon.

Bridgett Majola is Director, Banking & Finance, Head of Project Finance: Energy & Infrastructure at CMS South Africa and Gavin Noeth is Senior Consultant, Banking & Finance, Energy & Infrastructure at CMS South Africa

How viable is hydrogen?

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How viable is hydrogen?

 

 

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