Avoid white elephants while supporting green hydrogen

Green hydrogen has gained worldwide attention as a source of energy that could be essential to climate change mitigation. European and Far Eastern states have adopted plans to become large-scale importers from countries with low renewable energy costs.

The Green Hydrogen Commercialisation Strategy in SA echoes this optimism with a projection of green hydrogen exports reaching 1-million tonnes a year by the 2030s. Leading companies such as ArcelorMittal and Sasol are exploring green hydrogen as a means to reduce their carbon footprints — against the backdrop of carbon border adjustment mechanism (CBAM) regulations coming into force in Europe. 

Many of these ambitious schemes are likely to have both direct and indirect effects on the SA fiscus. In fact, the state is already exposed to considerable debt in activities associated with the Just Energy Transition Investment Plan (JET-IP), a $8.5bn package from Western partners. Loans represent 81% of this sum, grants just 4%. A total of 15% is for guarantees. The loans will have to be repaid, which implies a major risk if projects underperform.

The JET-IP is further bolstered by parallel initiatives such as the SA-H2 Fund, which aims to make $1bn available for infrastructure related to the green hydrogen industry. The fund involves the Development Bank of Southern Africa, the Industrial Development Corporation (IDC) and large players from the private sector such as Sanlam. Again, failure or underperformance means escalating liabilities.

As researchers exploring these matters in SA and beyond, we are concerned that the debate on industrial policies to support the green hydrogen industry might well shift even further towards the provision of credits and subsidies. This problem is reinforced by calls from the business community, both domestically and internationally, to subsidise the production and consumption of green hydrogen, to overcome the severe price gap with other sources of energy.

However, even seasoned industry experts have expressed concern that many green hydrogen-based products may never become competitive. What is more, green hydrogen production is highly capital intensive and its direct employment impact will be modest at best. 

We are not opposed to supporting this new industry. On the contrary, we think it offers opportunities to generate significant export revenues and also boost green industrialisation at various locations across SA. However, fiscal support, including public investment in infrastructure such as electricity grids and ports, should focus on multi-user capacity to avoid becoming white elephants in the event of green hydrogen projects falling short of the hype.

Subsidies to as-of-yet unproven industrial processes should be used with a great degree of caution, taking SA’s long history of excessive support for capital-intensive heavy industries into consideration. 

To begin with, there is a need to identify and strengthen competitive advantages: the features that make SA attractive for foreign investment and the segments of complex production processes to concentrate on. Next to cheap solar and wind energy, which are critical to producing low-cost green hydrogen, SA benefits from an abundance of platinum group metals and expertise in related technologies. These are essential for building the electrocatalysts needed to produce green hydrogen.

Support for these industry sectors and their innovation and skill needs has already been forthcoming. Special economic zones such as Coega in the Eastern Cape and Saldanha Bay in the Western Cape offer suitable infrastructure and a favourable regulatory environment. 

Public support programmes aiming at further up- and downstream localisation, modest as it may be, must not be sacrificed in the rush to allocate subsidies demanded by major corporations. Public authorities, working with partners from the business community, should draft dedicated schemes to develop local suppliers, especially light manufacturing. Foreign manufacturers of electrolysers could be attracted so that more than assembly happens in SA. 

While it is likely that the green hydrogen industry will start with exports of derivatives such as ammonia and methanol, there are opportunities for downstream linkages too. Fertiliser production is a low-hanging fruit as there is a clear market in SA and the region. E-fuels, in particular for the mining sector, and hard-to-abate industries such as nonferrous metal processing, oil refining as well as cement production, are other potential
in-country applications. 

As these examples indicate, there is a wide variety of players involved in the green hydrogen industry: investors and producers from abroad, domestic and foreign suppliers, customers from numerous energy-intensive industries, as well as the complex array of state institutions.

Effective co-ordination to form partnerships, share knowledge and reduce market uncertainties is a better way to support the industry than handing out cash. Indeed, there is already an advisory board at the department of science & innovation, and the IDC has recently established a green hydrogen secretariat for stakeholder co-ordination. 

Addressing the human capital requirements of the wider green hydrogen industry is a condition for competitiveness and also an opportunity for domestic development. A report by the department of higher education & training highlights the contribution that can be made by universities and vocational institutions. Existing competence centres at various universities need suitable support. Efforts should be made to retain talent that all too often leaves the country. 

SA moreover needs to consider ways to deal with its challenging regulatory environment. On the international level, partnerships with offtakers have to be established to guarantee demand, as it remains the main barrier to investment. Standards on products and the production process must be agreed upon, since there is a risk of hydrogen produced with nuclear power being treated like green hydrogen. Agreements with the EU, Japan and South Korea are essential to enable market access for green industrial products from SA. 

• Scholvin and Robbins are affiliates at Policy Research in International Services & Manufacturing (Prism), School of Economics, University of Cape Town (UCT). Black is a Prism associate and emeritus professor of economics at UCT.