September 2022

Quick Bite

Africa has the potential to produce 5,000 megatonnes of hydrogen per year at less than $2/kg-equivalent to the global total energy supply today. –International Energy Agency

Africa and the Global Hydrogen Pivot: A Game-Changer?

The Meat

Africa and the Global Hydrogen Pivot: A Game-Changer?

The German chancellor’s trip to Canada three weeks ago was a big deal for hydrogen. In addition to seeking Canada’s help in easing Europe’s fears over Russia’s energy blackmail, the two leaders signed a comprehensive hydrogen supply agreement, with the first delivery expected in 2025. Admittedly, this isn’t the first bilateral agreement on hydrogen supply. However, a combination of worsening geopolitical uncertainty and the deleterious effect of climate change has moved hydrogen from a future energy source to a viable fuel in the next five years. These rapid changes present opportunities (and challenges) for Africa.

Increasing interest in Hydrogen

More than just a gaseous element on the periodic table, hydrogen is fast gaining acceptance as a key component in the world’s quest for a climate-neutral fuel that shares fossil’s relative abundance and versatility. Hydrogen is present in everything from municipal solid waste, through fossils, to water. However, since it is rarely found alone, hydrogen has to be separated from the carbon and oxygen in these materials. This explains its current scarcity and lack of cost-competitiveness vis-a-vis fossil fuels. Electrolysis of water into hydrogen and oxygen remains quite expensive due to the high energy cost incurred in the process. Other cheaper options such as the production of hydrogen from coal fail to meet the sustainability requirement. In addition to the cost of production, challenges exist with storage and long-range transportation of hydrogen due to its gaseous nature and explosibility. However, positives exist.

Hydrogen’s high energy density, zero emission, and mobility (if key challenges are addressed) give it a major advantage over other renewable energy options. Hydrogen is especially suitable for applications that require high energy density, continuous supply, and offshore usage. Key areas include marine transport, long-haul trucking, and large-scale industrial/electricity generation application. Data by the US EPA show that the transport, electricity, and industrial sectors account for nearly 76% of global emissions. Hydrogen could play an important role in these sectors, especially in applications where larger battery sizes are impractical. The hydrogen production market, currently estimated at $130 billion, is expected to grow rapidly at a CAGR of 9.2%. The industry’s growth rate is likely going to be buoyed by increased volatility in the energy market, concerns over energy security/redundancy, and rapid advancement in storage/distribution technology.

Where is Africa in all of this?

While the Germany-Canada hydrogen agreement gained global attention, key hydrogen projects are already underway on the African continent, albeit at various levels of development. A number of African countries, including Namibia, South Africa, Egypt, and Morocco play host to significant hydrogen projects at multiple stages.  The furthest is Namibia’s Swakopmund project. The $180m project is expected to be operational in 2024. Namibia’s much larger $10bn Hyphen hydrogen project is at a much earlier stage.

Nonetheless, Africa is fast emerging as a potential hydrogen powerhouse, with the International Energy Agency estimating that the continent could produce up to 5,000 megatonnes at a cost-competitive price of $2/kg if key investments are made. Africa’s potential as a hydrogen powerhouse for hydrogen production derives from the continent’s wealth of cheap energy resources, especially solar and wind. Energy cost makes up 60-70% of the variable cost of hydrogen production. Thus, access to relatively cheap and renewable energy is critical to the mainstream adoption of hydrogen. Africa could provide this.

Beyond Africa’s renewable energy advantage, hydrogen could prove the missing link in the continent’s quest for an orderly energy transition. Oil and coal-producing countries on the continent had been critical of international pressure to achieve net neutrality along the timeframe proposed by more developed economies. Considering the single-commodity dependence of many oil-producing countries as well as the continent’s argument that it contributes a minuscule amount to global emissions, these countries had argued for extended timelines to avoid short-term jolts to their economy. While these arguments remain, international funding for new energy projects has gradually dried up on the continent as investors’ climate footprints come under the spotlight. Furthermore, considering the extended payback period for new energy projects, investors are wary.

These fears could be assuaged by adopting a combined hydrogen-natural gas strategy that allows investors to gain returns from natural gas in the next 10-15 years before gradually shifting to hydrogen after a decade. Recent advances in technology make it possible to transport hydrogen via natural gas pipelines (with slight modification). More so, blue hydrogen could be produced from natural gas if combined with a carbon capture and storage infrastructure. Considering the relative ease of repurposing fossil production and transport infrastructure for hydrogen production/distribution,  there is a clear business case for investing in Africa’s existing natural gas opportunities while preparing for a hydrogen pivot in a decade or two, with minimal cost. This natural gas-hydrogen continuum could help African countries adopt an orderly transition while assuring investors of the long-term viability of their investments.

What’s Next?

Increased geopolitical uncertainty, growing concerns over a worsening climate, and rapid technological advancement helped move hydrogen from a long term fuel to a viable option in the next few years. Already, projects are underway. While oil-producing countries in Africa and other parts of the world had long dragged their feet on the energy transition, the natural gas-hydrogen continuum could help countries achieve the twin goal of short term economic survival and long term prosperity. For investors, Africa’s wealth of renewable energy as well as the natural gas-hydrogen continuum provide ample opportunities for both green and blue hydrogen investments. There is no gainsaying that idiosyncratic challenges, including political instability, regulatory risks and macroeconomic uncertainties exist. Nonetheless, the opportunities are enormous. We could help guide investors along this path (add link to research page).

Crystal Ball

Kenya’s new president hit the ground running by ending the country’s subsidy on gasoline. This is a big deal. Many countries, including Nigeria, are buckling under the weight of an expensive (and politically sensitive) energy subsidy regime that’s gulping a significant portion of their national budgets. The new kenyan president’s decision to end the subsidy in his first week as president will be closely watched. Ideally, the early decision should give him ample time to free resources and redeploy them in more productive ways. But it might not. The threat of social upheaval in a deeply divided country remains.

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