The new hydrogen economy will not just be global, it must be used as a major economic development opportunity for low income nations and promoting shared prosperity, explain Dolf Gielen, Silvia Carolina Lopez Rocha and Priyank Lathwal at the World Bank. They carefully lay out the obstacles and pathways for making hydrogen in developing countries. It’s very capital intensive, but such projects – think of existing fossil fuels, mining, etc. – have always existed even in the poorest of nations. Hydrogen will be a new marketplace, so customers and prices will have to be guaranteed through forward-thinking trade deals with richer consuming nations. Rather than just exporting the H2, developing nations can use it locally to make higher value-add products for export, like ammonia, methanol, jet fuel, green iron and steel. There are also opportunities for setting up the local manufacture of components across the hydrogen value chain. Job creation won’t just be around the H2 plants, but accompanied by the new housing and wide range of services the new workers will need. With that in mind, better socioeconomic modelling of the benefits is required to convince politicians and citizens to get their essential buy-in. The authors point at early-stage projects to illustrate their recommendations. In the context of a just energy transition this development angle is critical to hydrogen’s future, say the authors.
The World Bank, together with partners, has launched the Hydrogen for Development Partnership (H4D) to assist developing countries in accelerating low-carbon hydrogen deployment. Governments and public sector institutions globally recognise that hydrogen can play a key role in decarbonising certain sectors and processes. Hydrogen can also generate socioeconomic benefits as derived from other energy industries, such as fossil fuels. As such, it can be a basis for sustainable development. This topic warrants more attention.
The socioeconomic impacts due to low-carbon hydrogen industry on countries and their economies can be diverse. The low-carbon hydrogen industry can have positive effects on national GDP growth and improve the trade balance. Further, from a social perspective, the development of the green hydrogen industry will likely enable new job creation upstream and downstream and serve as a development engine for these economies.
Although recent analytical work suggests that local populations can reap benefits from green hydrogen projects, the potential of positive spillovers depends on the local conditions. Also, the national context must be considered. For example, hydrogen production is very capital-intensive, which poses a barrier in many developing countries. There is also a resource availability and use dimension – green hydrogen production requires a lot of renewable power – which in turn requires vast land availability. Moreover, electrolysis requires pure water, which may compete with other water uses, or it can increase water stress in certain locations. Successful hydrogen development projects must consider these aspects.
So far, few green hydrogen projects have been established around the world and more specifically in developing countries. The Haru Oni project in Chile just came online (e-methanol production). The NEOM project in Saudi Arabia is under construction (green ammonia production). There are other emerging hydrogen clusters around the world for example, the Norrbotten area, in northern Sweden, is experiencing a hydrogen-based boom, including green iron and steel, ammonia, and methanol production.
Scale-up: what have we learnt so far?
Given the limited experience with green hydrogen production, especially in developing countries, there are limited best practices to draw on from the global south. Hence, an important question to ask is that given the limited experience, what have we learned so far and what are its implications for policy design?
…multi-billion dollar investments
First, commercial-scale hydrogen projects require multibillion-dollar investments, which is comparable to large mining or hydropower projects, and typically, only large private sector institutions can bear the burden of such investments. Green hydrogen projects are very capital-intensive. To put it simply, the production of 1 million tons of hydrogen per year requires around 10 Gigawatts (GW) of electrolysers and 20 GW of renewable power generation capacity. This translates into investment requirements of USD 25-30 billion. The vast share of expenses is related to capital expenses, particularly in renewable power and electrolysis components. If on-site hydrogen conversion is included, this process can add further costs and drive up the investment.
…Renewable power and Electrolysers for making H2
Second, the renewable power component is critical, as it represents two-thirds of investments. For a typical solar photovoltaic or wind power project, approximately half of the expense is in equipment such as solar panels and wind turbine nacelles that in most cases produced elsewhere. The other half of the investment is related to local manufacturing and installation. Electrolyser investments follow a similar pattern– stacks, gas processing equipment, and inverters may be brought from abroad so the local value added to the economy may be limited.
…Guaranteed customers and prices
Third, one of the main perceived risks at this moment is related to demand certainty in terms of volume and price. Government mechanisms to mitigate risks related to off-takers are also being developed by OECD countries. The H2Global program, funded by the Government of Germany, aims to reduce these risks by guaranteeing offtake and prices for a decade. The UK is also analysing tackling this risk by developing a Hydrogen Production Business Model, which envisions Contracts for Difference mechanisms to close the gap between production cost and what consumers are willing to pay. But so far, H2Global is the only operational program, and the funding available is limited. Credible global decarbonisation targets and implementation policies are needed to drive demand for green hydrogen in hard-to-decarbonise sectors.
…More transparency on socioeconomic consequences
Fourth, there is a need for greater transparency regarding hydrogen-relevant socioeconomic data, which at the moment remain scattered with a wide range and uncertainty in estimates for projects and technologies across regions.
Green hydrogen projects create a lot of jobs during the initial phases of the project, typically construction, but the job creation in the later stages of project operation is more limited. In fact, the initial assessment suggests that job creation during the operation stage is less than a tenth of the early years during the construction of the project.
However, there may be indirect job effects that may be more substantial than the direct job benefits once the project is commissioned. This type of phenomenon is well-known historically in the chemical industry or the oil sands industry. Well-paid energy project staff needs housing, food, health services, shopping, schools, and other amenities, but the extent of such services is location specific. Therefore, the indirect effects are hard to quantify and uncertain at the initiation of the project cycle
H2 for export: implications
Although developing countries and emerging markets have experience related to investments in renewable power generation, and there are best practices that can be replicated in the hydrogen industry, the latter presents fundamental differences: renewable power is produced for local markets, and most of the hydrogen projects announced in the global South are for export. In addition, hydrogen projects create demand for additional renewable power, and in certain regions, they may even compete for scarce renewable power supply.
The GDP effects can be substantial. In the Mauritania case, the implementation of the Aman project is forecasted to raise the national GDP from 12 billion to 17.6 billion by 2030. Once the project is fully operational by 2037, imports will amount to USD 1.3 billion per year, but exports will reach USD 4 billion per year (an increase of 63% compared to the reference case national exports). Significant job creation benefits are expected, as illustrated in Figure 1.
What this calls for is a need to understand the socioeconomic impacts of scaling hydrogen better. This requires validated econometric models to be fed with good quality data and correlations, so the results on estimated job creation, GDP growth, trade balance and wealth distribution are valid and can be understood by governments and policy makers.
Maximising socioeconomic benefits
Recognising that the green hydrogen industry is booming in the global south, this raises another important question: – what can be done to maximize socioeconomic benefits?
…Manufacture equipment locally
Local equipment manufacturing is one aspect that deserves attention. For example, in the case of India, the new green hydrogen policy calls for domestic electrolyser manufacturing. This is supplemented by national efforts to strengthen the competitiveness of solar photovoltaic manufacturing. While this policy may be feasible in a large economy such as India, it may be challenging to scale in smaller developing countries. While it may be challenging to sustain the full supply chain, there may be opportunities to focus on specific components of the supply chain.
…Don’t just export H2, export products made from the H2
A second option is to process hydrogen locally into products with higher value-added, including ammonia, methanol, jet fuel, green iron, and steel. The transportation of such products is much cheaper than the transportation of hydrogen, so this opens up a possibility to increase revenues and create additional local economic benefits. If hydrogen transportation costs 1,500 USD/t but product transportation of a product such as ammonia only costs 50 USD/t and 200 kg hydrogen is needed per tonne of product, the local value-added per kg of hydrogen nearly doubles. Its, therefore, no surprise that the majority of proposed hydrogen export projects are in fact, ammonia projects. And other opportunities exist. In various iron mining countries such as Australia, Brazil, and Mauritania, companies are exploring the production of direct reduced iron (DRI) and hot briquetted iron (HBI).
Developing countries need to assess and identify adequate hydrogen applications that will allow them to achieve their decarbonisation goals and at the same time create positive socioeconomic benefits. The World Bank is already supporting this type of technical analytical work. In the case of India an analysis of the use of hydrogen across 26 end-uses suggests that refineries, steel, gas blending for CNG vehicles, hydrogen heavy-duty freight trucks, gas blending for industrial heating, ammonia production, cement production, ammonia for coal power plant co-firing and chemicals constitute the main opportunities.
Using public funds
There is also a question on the level of support from public funds for hydrogen projects, particularly in developing economies where capital is scarce. The optimal allocation of scarce government funding should maximise development benefits. Hydrogen projects are at a disadvantage because of their capital intensity. It’s therefore no surprise that the majority of hydrogen projects in developing countries are financially supported by companies and governments from developed countries. For example, in the case of Namibia, Germany, and the Netherlands have provided substantial grants, and the European Investment Bank (EIB) provided substantial concessional loans. Ways how Namibia can mobilise additional funding are currently being explored. So financing is an area for international cooperation.
So, countries from around the world are scaling up their low-carbon hydrogen economy while maximising socioeconomic benefits and achieving their development objectives. The H4D initiative aims to support the global energy transition through the World Bank’s goal of reducing extreme poverty and promoting shared prosperity. Strategic thought leadership, a good level of technical and economic knowledge as well as strengthened international cooperation is required. This development angle is critical in the context of a just energy transition. It will help to guide decisions on how to use concessional financing and grant funding effectively and efficiently in the years and decades to come. Together with our H4D partners, the World Bank will continue to provide advice to client country governments on how to maximise the development benefits of hydrogen.
The opinions expressed in this contribution are those of the authors and do not necessarily reflect the official views of The World Bank or of the governments of its member countries.
Dolf Gielen is a Senior Energy Economist, World Bank Group
Silvia Carolina Lopez Rocha is a Consultant, World Bank Group
Priyank Lathwal is a Young Professional, World Bank Group