Aspects of Investment in Hydrogen and Development in the Hydrogen Sector in Africa

Rafael Classen

Global law firm Baker McKenzie recently advised Advanced Clean Energy Storage I, LLC, along with Mitsubishi Power Americas, Inc. and Magnum Development, LLC, in the United States (US) Department of Energy’s (DOE) USD 504.4 million loan guaranty to develop the world’s largest industrial green hydrogen facility in central Utah in the United States. Closed on June 3, 2022, the loan highlights the Biden Administration and the DOE’s commitment toward supporting the clean hydrogen sector. It also helps create a viable market for hydrogen and will make it scalable in the western United States and electrical grid, creating the fundamental infrastructure necessary to deploy this zero-carbon energy storage source.

“Supporting ACES Delta to reach financial closing on the DOE loan is part of the unique opportunity to be involved in such a transformational energy transition project in the United States and globally,” said James P. O’Brien, chair of Baker McKenzie’s Global Projects Practice. “To see ACES Delta transform its vision of hydrogen energy storage to the launch of this project is really exciting.”

Christopher Jones, head of Baker McKenzie’s Hydrogen Group, added: “With a growing number of hydrogen projects taking place across the globe, being a part of such a flagship project enhances our legal insights and industry expertise for our team to continue to excel in this space. It demonstrates our continued global leadership in the clean energy technology sector for the past 20 plus years.”

Key issues and lessons learned

Referencing Baker McKenzie’s report – Shaping Tomorrow’s Global Hydrogen Market, James P. O’Brien and Christopher Jones list some of the lessons learned and key issues to consider when considering an investment in hydrogen.

  • Hydrogen is now playing a crucial role in making an essential and fundamental change to our energy systems. It constitutes a key part of the solution to climate change.
  • Despite regulatory challenges and legal complexity, there are numerous, important opportunities for businesses.
  • Closing the gap between cost and revenue in hydrogen projects is possible by making smart use of government support in the form of public funding and public-private partnerships.
  • Many governments are already supporting the growth of hydrogen using innovation funds, mandatory targets and public-private partnerships, and this support is already showing results. ­
  • Many countries have adopted (or have committed to do so) hydrogen-specific strategies.
  • One of the key challenges is decarbonizing hydrogen production. This will entail using (i) renewable (and nuclear) electricity to produce green hydrogen and (ii) natural gas combined with CO₂ storage or conversion into solid carbon to produce blue hydrogen.
  • Both of these production methods for decarbonized hydrogen are expected to play a major role in meeting the world’s future energy needs. Nonetheless, blue hydrogen could have the advantage in the near term.
  • Without government intervention through emission trading schemes, energy taxes or similar obligations on grey hydrogen users today, and on those that will use hydrogen when obliged to decarbonize, there will be no significant market for green and blue hydrogen in the short to medium term.
  • Since using carbon capture, utilisation and storage (CCUS) is already the cheapest low-carbon hydrogen production method, government support could quickly make this into reality. In this way, the rise in demand for hydrogen could very soon be met using CCUS-based hydrogen production.
  • Since hydrogen markets will grow exponentially in the mid- and long-term, companies that invest today in hydrogen will be able to capture this growth, become technology leaders and shape the future of the business.
  • However, there are still multiple barriers to the widespread development of decarbonized hydrogen and each investment will face challenges in the form of policy, regulatory, economic and financial barriers.
  • The speed of deployment of hydrogen in coming years is expected to vary between sectors and countries. These variations come partly from the different level of maturity or adoption of the technology required for decarbonized hydrogen development, either globally or in specific regions.
  • Investors should assess (i) the effect of existing regulatory barriers on any new investment or project, (ii) the likelihood of such barrier disappearing for a particular market and within a particular timeframe, and of course (iii) the availability of public support to de-risk the investment when needed.
  • To best use available government support, companies should therefore understand (i) which countries provide the most and best focused funding or investment support and (ii) what types of projects governments are likely to support.
  • Companies contemplating a specific investment in their own region and field of expertise should carry out a thorough analysis of funding and financing opportunities. However, understanding regional and sectoral funding trends as well as expert recommendations can already provide some insight as to government-funding and financing patterns.

Africa developments

Kieran Whyte, Partner and Head of Projects at Baker McKenzie in Johannesburg, and Lamyaa Gadelhak, Partner and Co-Head of the Banking & Projects Practice Group, Helmy, Hamza & Partners, Baker McKenzie Cairo, outline some recent developments in the hydrogen sector in Africa.

  • In February 2022, the South African Hydrogen Society Roadmap (HSRM) was published by the South African Department of Science and Innovation, marking an important milestone in the launch of South Africa’s hydrogen economy.  The HSRM was developed by the Department of Science and Innovation, Hydrogen South Africa (HySA), and government and industry stakeholders. It focuses on national ambitions, sector prioritization, the overarching policy framework and the macro-economic impact of the hydrogen economy throughout South Africa.
  • The Roadmap is aligned with the country’s Integrated Resource Plan, the Integrated Energy Plan and the Renewable Energy Policy, all of which acknowledge the important role of hydrogen in South Africa’s just energy transition, which aims for net zero emissions by 2050.
  • The HSRM outlines a number of targets, including the creation of an export market for green hydrogen and ammonia, the implementation of a Centre of Excellence in manufacturing for hydrogen products, the development of domestic hydrogen supply chains, the production of 500 kilotons of green hydrogen by 2030, and a long term target of 15 GW power generation based on hydrogen by 2040. Further targets include a one megawatt small-scale electrolysis facility piloted by 2025, and the deployment of 10 GW electrolysers in the Northern Cape and 1.7 GW electrolysers in the Hydrogen Valley by 2030.
  • The government of Egypt has expressly recognized the production, storage and export of green hydrogen and green ammonia among the areas falling within the state’s economic development strategy.
  • It has also passed a decree that would allow green hydrogen and green ammonia projects to benefit from a wide range of state support under the country’s existing Investment Law No. 72 of 2017, including tax incentives.
  • This is a key development for Egypt’s hydrogen economy. We expect that it will stimulate private investment and the development of new green hydrogen and ammonia projects in the country.
  • In May 2022 Egypt, Kenya, Morocco, Mauritania, Namibia and South Africa launched the Africa Green Hydrogen Alliance, with the intention to foster collaboration and ensure the continent is able to lead in the development of green hydrogen for energy transition.
  • Empowering African countries to participate fully in the green hydrogen market has tremendous potential to improve access to cost-effective power for all African citizens. African economies will also reap the benefits of the rapidly increasing global demand for sustainable, decarbonised power. However, infrastructure gaps, and policy, regulatory and funding barriers must be urgently addressed through government support and incentives.