South Africa is poised to become a major player in the global energy transition, thanks to its vast renewable energy resources (sun and wind) and its plans for green hydrogen production.
The European Union’s recent pledge of €32 million (R628 million) in grants to support South Africa’s green hydrogen industry shows that the country’s potential is being recognized. However, a research by some engineers has revealed that the amount is not enough, as getting a green hydrogen industry started will need more than this grant.
Green hydrogen production is expensive, costing between US$5 and US$8 (R89-R143) per kilogram, around five times the cost of hydrogen derived from fossil fuels.
It is also three to five times more expensive than oil. If green hydrogen is to be cost-effective enough to compete with fossil fuels, the green hydrogen industry will need government subsidies and incentives for manufacturers. It will also need supportive government regulations, such as carbon taxes or a requirement to use sustainable chemicals such as green ammonia for fertilizer made from green hydrogen.
Apart from this, substantial international investments will be needed to mitigate the risks, such as cost overruns, that come with building huge green hydrogen projects. In fact, South Africa’s future green hydrogen industry depends on government-backed support from the global north, through mechanisms like sovereign guarantees, a promise by a government to cover the financial obligations of a project if it fails to meet its debt repayments, or equity stakes, partial ownership, sharing in both the profits and risks.
The European Union has provided two grants, totaling €32 million (R634 million). The first is a R490 million grant to help set up a regional green hydrogen hub in the southern Africa region.
The European Union, and South Africa’s ministries of Trade and Industry and Electricity and Energy, say this grant aims to “leverage R10bn in private and public sector finance across the hydrogen value chain”. In other words, this grant is expected to entice investors to inject funds into green hydrogen production, transportation, storage and downstream industries (including green steel and airplane fuel).
A second EU grant of R138 million is supposed to attract additional funding to boost the state utility Transnet’s ports, railways and pipelines. This is so that green hydrogen can be exported efficiently.
South Africa’s green hydrogen commercialization strategy aims to produce one million tonnes a year of green hydrogen by 2030, rising to seven million tonnes a year by 2050.
If it does this, by 2050 the green hydrogen industry could potentially contribute R75 billion annually, 6.5% of South Africa’s gross domestic product. It could generate R24 billion in tax revenue, and create up to 370,000 jobs.
“The European Union grants are a step towards this. But they pale in comparison to the estimated R410 billion (approximately €20 billion) needed to produce one million tonnes of green hydrogen by 2030. We calculate that the new grants represent less than 0.2% of the investment needed to get this done.
“There is a vast financial gap that must be addressed. South Africa does not have the funds to set up a green hydrogen industry. The entire one million tonnes a year of green hydrogen that South Africa aims to produce by 2030 is entirely dependent on global north subsidization.
“We believe that the European Union grants will cover early stage studies to assess the feasibility of setting up the green hydrogen industry, rather than any capital investments,” the chemical engineers stated.