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National collaboration essential to win share of green hydrogen market, say debaters

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National collaboration essential to win share of green hydrogen market, say debaters

Hydrogen Economy Discussion covered by Mining Weekly’s Martin Creamer. Video: Darlene Creamer.

13th September 2021

By: Martin Creamer
Creamer Media Editor

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JOHANNESBURG (miningweekly.com) – South Africa’s early mover advantage in green hydrogen will fade and become ineffective over time without a collaborative, collective and holistic national approach that assures the export of green hydrogen over and above its domestic use.

That was the strong message that came across in the Hydrogen Economy Discussion webinar in which AP Ventures founding partner Kevin Eggers, PwC South Africa director energy, strategy and infrastructure James Mackay, Industrial Development Corporation (IDC) head of mining and metals, infrastructure and energy Reginald Demana, and Atlantis Special Economic Zone (SEZ) Company acting CEO Dr Pierre Voges participated, under the watchful eye of mining doyen Bernard Swanepoel. (Also look at attached Creamer Media video.)

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The big takeaway is that domestic and export green hydrogen potential must be considered together if either is to be economically competitive.

The export of green hydrogen is expected to lead South Africa’s green hydrogen growth story, with export and domestic balances being key.

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South Africa is seen in the early stages as being in the lowest quartile of cost globally as a result of having a good balance of natural resources, sufficient land, good positioning, infrastructure, and legal and banking expertise.

However, projected over time, South Africa keeps slipping down the projected cost curve according to the projected calculations being done and by 2040-45, the country is, at best, mid of the global cost curve. That is because other countries with natural resources will be catching up.

The debaters concurred about South Africa's early mover advantage needed to be anchored by exports because the country does not have the financial incentives, subsidies and finance available to accelerate domestic uptake.

AP Ventures, which is looking for investments in South Africa, has 80% of its investments in the US and Europe.

The Anglo American-linked venture capital company had its origin eight years ago as a corporate venture development fund spun out of Anglo American Platinum, and quickly learnt the close coupling between platinum group metals (PGMs) and hydrogen, and the opportunity to get PGMs to play a catalytic role in bringing about the hydrogen economy.

“The two are inextricably linked in my view,” said Eggers of PGMs and hydrogen. AP Ventures manages $400-million and has invested in 17 portfolio companies. Last year, 200 of the 500-plus deals that AP Ventures viewed were hydrogen-linked, the online webinar covered by Mining Weekly heard.

“We see a lot of hydrogen opportunities. What we look at as a team is very much focused on the venture capital end, so the early stage novel technology part of that spectrum, and we invest all the way across the value chain,” Eggers said.

“Importantly, worth mentioning in terms of this South African focused audience is that we have the majority of our capital from South African sources, and that Anglo American Platinum, Impala Platinum and the Public Investment Corporation form the cornerstone of our capital base.

“Beyond that we have Japanese, Norwegian and French investors, but it’s very important that we’ve got this strong base of South Africans who see this really interesting link between the PGMs growth and the opportunity to build our hydrogen economy.

“I must say at the outset that I’m bullish, I’m very optimistic about hydrogen, I’m very optimistic about the opportunity for South Africa to benefit on the back of successfully building the hydrogen economy.

“I know it’s going to be hard to marshall that level of capital into a nascent sector like the hydrogen economy but I’m still optimistic.

“South Africa is a very important geography for us. We want to see this hydrogen story develop here, and I think we can do that by bringing some technology into the country and putting some dollars to work at the same time,” said Eggers.

Questioned on how much risk the IDC was prepared to take on piloting hydrogen projects within South Africa, Demana said the State-owned IDC saw itself as an implementation agent of government policy, which was very clearly in favour of development of the hydrogen economy.

“As the IDC, we need to develop the hydrogen economy with the right balance sheet that’s able to support industry. We will be there. We’re evaluating projects. Some of them are in prefeasibility and early stage development, with the viability of such projects being assessed.

“Obviously, within industry will be hydrogen producers. They might call it grey hydrogen or something like that and it needs to be converted into green hydrogen, for example, by adding renewable energy.

“We’ll be there to assess all those advanced stages of development of those projects and our risk appetite allows us to partner with people, including at early stage development.

“We are not strategic operators of assets so we wouldn't want to take control. We’ll keep our shareholding and facilitation below certain thresholds but we are assessing projects, even at this point in time,” said Demana.

Mackay said that the big focus that PwC had in its energy trigger at the moment was the net zero energy transition.

A lot of that comes down to technology choices and how organisations over time are going to pivot their balance sheets.

“These are really important commercial decisions, financial structuring and will even go down workforce skills.

“Hydrogen is one of those really critical technology plays and is a vector that is critical to the net zero energy transition.

“I think it’s just further out along the timeline than renewable energies, wind and solar, but it is still a very critical part of that overall transition globally.

“We have a global team, as PwC, who work on hydrogen,” Mackay added.

Voges described the Atlantis Special Economic Zone (SEZ) as one component of an infrastructure programme on which the West Cape had embarked.

Twenty five hectares of the 118 ha of the designated SEZ had been allocated to a wind turbine manufacturing plant and the challenge lay now in the development of the 94 ha land acquired from the Cape Town City Council.

“We hope to take that 25 ha success story into the 94 ha, piggy backing on the government’s power producing programme, not only in the subcomponents thereof, but attracting the smaller greentech investment into the Atlantis area, which is about 40 km from Cape Town and close to the international Saldanha port and the Cape Town port,” Voges said.

VALUE CHAIN STRATEGY

Former Wescoal CEO Demana, who spent 15 years at green-investment-heavy Nedbank as an investment banker, said the IDC strategy is a value chain driven funding strategy.

That meant that its funding would start with construction or development, whether it was a mine, manufacturing facility or renewable energy power plant.

“It then goes throughout the value chain, including support of local equipment manufacture such as solar photovoltaic panels, wind turbine blades and inverters.

“We’ll do the same with the hydrogen value chain. We’re going to be funding projects starting from renewable energy, hydrogen production, storage and distribution, fuel cell and electrolyser production as well as become involved on the demand side with ammonia, heavy duty fuel cells, aviation fuel, all the way through.

“As an IDC, we’re play a coordinating role in plotting a commercialisation path, through collaborations with the Department of Trade, Industry and Competition. We entered into memorandums of association with some key institutions such as Sasol in order to commercialise hydrogen,” Demana said.

The IDC investment book totals about R100-billion of which 40% is within the mining and metals, infrastructure and energy division.

At any given point in time, the IDC has applications going into several billions of rands being assessed.

As a development financial institution, the IDC has an appetite for funding projects from prefeasibility to definitive feasibility study stage and the building of such facilities across the entire value chain.

“We want to see empowerment, transformation in industry and as such we would be very keen to support local entities, skills development and real participation in the operational activities across the value chain,” Demana said.

STATUS OF THE HYDROGEN MARKET

Mackay drew attention to the fossil fuel energy model being dependent on the scale of the cost of the resource, which was inherently inflationary.

But in the case of the renewable energy model, the feedstock is free and is inherently deflationary, with no limit to the supply of green hydrogen.

“We can make as much as we want in the world, the question is really at what cost. If we understand at what cost, we can then determine how much market can be created,” said Mackay.

“We’re in a global competition, and I think that’s a very important point because it references that the cost is a global competition. Yes, as South Africa we've got very good natural resources but those natural resources don’t necessarily offset other inefficiencies across the value chain.

“Domestic markets and export markets are going to have different timing and different price points. The domestic market is going to be driven by the cost at which green hydrogen can displace an alternate fossil fuel plus carbon tax.

“If green hydrogen at a domestic level is cheaper than a fossil fuel plus tax, you’ve got a market and you will sell it and industries will transition. But in the export market, it’s different.

“We’re going to have to compete with Morrocco, Iceland, Russia and Australia. If our green hydrogen production is at the same cost if we have to put it on a vessel and ship it to the Port of Rotterdam versus Morocco putting it into a pipeline, then Morroco is going to dominate market share.

“We’ve got to have a very holistic understanding at a national level on how we leverage our natural resources and benefits but on how we create a very integrated view of the dip in the market.

“If we start to carve out little pieces or allow a separate rush into different pieces of the market, I think we’re at risk of not having a national strategy and not being able to optimise our full market potential, which has got to include both the export and domestic markets,” said Mackay.

From a numbers perspective, the recent IHS model for South Africa projected that South Africa would supply about four-million tonnes of green hydrogen, which would be a renewable energy land footprint of roughly half the size of Gauteng.

“We’re talking about 100 GW of renewable energy, 48 GW of electrolysers, potential capital cost of R145-billion. That network would have to move 210 GWhrs, which is roughly equivalent to the entire annual South African electricity consumption, and that would have to be put into a ringfenced green power grid.

“That four-million tonnes in the IHS model is probably a conservative view of what South Africa could do. The most integrated, efficient value chain has to be created to make sure that South Africa has the best cost positions coming out of the green hydrogen production side because that will drive our ability to secure both global and domestic markets,” Mackay said.

Eggers concurred wholeheartedly that domestic and export potential had to be considered as a single entity.

“They’re not independent and all is predicated on ultimately getting the right cost,” Eggers added.

EARLY ADOPTER MARKETS

The two key drivers are the availability and the cost of finance. “With both of those, we are probably a little bit on the back foot if we compare ourselves to developed markets, which are showing a lot of big programme subsidies on the production side.

The other aspect is the green arbitrages such as incentives, carbon taxes and carbon border taxes.

At this stage, hydrogen in all its forms is not cost competitive against any alternative, so going forward one has to understand the point in the timeline at which we are going to be able to start pivoting.

There is no doubt that at some stage in the future steel, cement and any direct reduction or DRI process in heavy industry is going to use hydrogen, as in heavy-duty transport, where the only challenge is the distribution infrastructure.

The efficiency of hydrogen in heavy duty transport is probably already commercially attractive.

But to determine the level of green arbitrage required to shift the market must also be linked to global strategies, with Germany and Europe leading in this regard, as South Africa would unlikely have that depth of financial clout to cover those aspects.

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