In December 2022, a renewable energy development company announced plans for two major green hydrogen projects in Morocco, starting with the AMUN project which will combine 15GW of wind and solar generation with the production of green hydrogen and ammonia. These two projects further expand Africa’s green hydrogen portfolio, which also includes operations in Mauritania and Djibouti.
The regional projects are one of the many indications of Africa’s potential as a future global hub for green hydrogen production. Another is Namibia’s massive first green hydrogen project aimed at exports. The USD10 billion “Hyphen” project is set to produce two million tonnes of green ammonia annually for regional and global markets, employing 15,000 employees during construction and 3,000 employees once fully operational.
These projects are just the start. There’s a deep pool of global capital ready to be invested in green hydrogen initiatives, attracted by both the future promise of the sector and the ‘green halo’ effect, where private sector investors are, at present, willing to back projects on less than traditional terms. But in an increasingly competitive global market for investment, securing a share of this capital will not be easy – and Africa’s window of opportunity will not remain open forever.
Rapid growth from a low base
There’s a lot of hot air around green hydrogen’s role in the energy transition. Today, most of the hydrogen produced worldwide is “grey”, meaning it’s generated using fossil fuels, and is used in relatively limited contexts. By contrast, green hydrogen is produced from renewable sources such as wind and solar and is often portrayed not just as a replacement for the existing grey hydrogen use cases, but as a much broader panacea for addressing the net zero challenge.
However, as Michael Liebrich’s “Hydrogen Ladder” makes clear, use cases for hydrogen that are feasible right now are limited to a handful of areas such as fertiliser manufacturing, hydrogenation, methanol production and desulphurisation. Much-vaunted applications like metro trains and buses are currently uneconomic and may never be rational. Overall, mass electrification from low carbon sources will be critical for reaching global net zero targets, with green hydrogen forming an important but focused part of a solution which will ultimately require numerous inputs from a variety of energy sources.
That said, from today’s almost standing start, the global green hydrogen market is set to expand strongly in the coming years. Research by PwC, the World Energy Council and EPRI predicts the market will see moderate growth through niche applications until 2030. But from then on, demand for green hydrogen is expected to accelerate rapidly, especially from 2035. By 2050, it’s estimated that global demand could be anywhere between 150 to 500 million metric tonnes per year.
“Numerous countries in Africa have plans to regulate and support the hydrogen sectors. It will be essential that these arrangements are properly balanced to enable projects to be competitive in a global market and therefore attract capital. First and foremost, governments need to create the right conditions to get the sector started. It’s more like building a business than anything else.” - Troy Edwards, Partner, A&O Shearman, London
It’s a huge market to go for – and one in which Africa is well placed, given its abundance of renewable resources. And the rewards could be enormous. A 2024 report by the Hydrogen Council and McKinsey & Company estimates that if African countries can secure just 15% of the anticipated global hydrogen trade, the continent could see its green hydrogen exports increase from one million tonnes per annum (Mtpa) in 2030 to 11 Mtpa by 2050.
This growth trajectory could attract a cumulative investment of around USD400bn, boost Africa’s export revenues by USD15bn in 2050, and generate a cumulative 13 million job-years.
Overcoming the tyranny of distance
While unlocking this potential is undoubtedly in the best interests of both Africa and the planet, achieving it will be far from straightforward – for several reasons. The first hurdle to overcome having generated large amounts of renewable energy, is what to do with it, and where?
Historically, it’s been difficult to transport electricity over large distances, although that is now changing. A case in point is the groundbreaking Xlinks Morocco-UK Power Project, which will use sub-sea cables to transport enough renewable power from Morocco to the UK to power more than seven million British homes and supply 8% of the country’s electricity needs.
However, there can only be a handful of such ambitious projects. So, for the bulk of renewable energy production, the challenge remains: how to move it to where it’s needed? Converting electrical energy into hydrogen, notwithstanding the energy losses that this process entails, is one option. But transporting hydrogen remains difficult, given the limitations of pipelines and the fact that liquid hydrogen can only be stored and moved at extremely low temperatures.
At present, and with certain limited exceptions, the green hydrogen projects which are developing at pace and are best able to attract funding are those where the customer (or “offtaker”) for the hydrogen is co-located with the energy production. This could involve taking the green hydrogen (as a substitute for natural gas) directly into an oil refinery, converting the green hydrogen to ammonia to make fertiliser or using green hydrogen as the primary energy source for the manufacture of “green steel”.
The demand vs supply challenge
Looking beyond these co-located hydrogen projects, the bigger long-term opportunities lie in export to other markets worldwide. Given such practical limitations for hydrogen transportation, one popular solution is converting the hydrogen into ammonia, a vector which is already transported globally, albeit at much smaller volumes than are anticipated for the nascent green ammonia sector. At present, these green ammonia projects, which are largely aimed at export markets, are (with the notable exception of the green ammonia project in Saudi Arabia) coming to market at a slower pace than those projects which benefit from simplified offtake.
Yet investing to serve overseas demand brings its own “chicken-and-egg” problem. The issue? It’s a high-risk proposition to invest in facilities to produce green hydrogen and green ammonia for export until the necessary demand is there among downstream customers, including in regions such as Europe and Asia.
Currently, that demand is limited, however the challenge for all participants in the sector is that for demand to be created, the supply must also be available. For private sector actors in the green hydrogen sector, this challenge risks slowing developments significantly, however it is open to governments, both on the demand and supply side, to intervene to accelerate both the supply and demand side economics of the green hydrogen equation. We are seeing aspects of this intervention globally, including through the US’s Inflation Reduction Act (which incentivises supply side developments) and market measures in Japan and South Korea, which are intended to enable downstream demand. These existing measures should be sufficient to support some projects – for the broader green hydrogen sector, however, the dilemma remains as to whether it’s worth building supply ahead of demand taking off.
A similar type of dilemma applies locationally as to where green hydrogen export projects should be developed – and the question remains as to why investment in production should come to Africa. While Africa has abundant renewable resources, it’s competing for foreign direct investment with developed markets (like the US, Australia and Spain) that both present lower (perceived) political risk and are also gearing up subsidies to attract investment.
In this context, it is important to recognize that there is no global indexed price for green hydrogen or green ammonia – and probably won’t be for a significant period. This throws the emphasis in investment decisions onto the cost of production of the green hydrogen product, itself being determined by the capital and operating costs of the project and the cost of that capital. In most cases, the cheapest contenders – recognising that countries with the lowest (perceived) political risk will be able to mobilise both cheaper and greater levels of capital – will be those most likely to proceed.
“One of the main challenges around green hydrogen right now is that, on mega projects, developers need certainty around offtake. Before they commit billions of dollars to building these plants, they want to be sure who’s going to buy the offtake and at what price.” - Alessandra Pardini, Partner, A&O Shearman, Johannesburg
In considering the investment case for green hydrogen projects and the level of support they warrant from host governments, it is useful to make a distinction with the dynamics of oil and gas investment in the past. Many emerging markets regarded these fossil fuels as a golden goose that would enable them to extract the highest possible “rent” from overseas investors. But renewable energy is different. The sun shines and the wind blows (to a greater or lesser extent) everywhere, meaning investors have more choice of where to go.
There’s also a positive difference with green energy investment compared to fossil fuels. Whereas many oil and gas projects can operate largely offshore with relatively limited interaction with the host nation, generating renewable energy usually demands full presence on the ground. This has positive implications for countries in Africa, potentially turning the “curse of resources” into a blessing by sharing the rewards more equally and having a more beneficial impact on the local economy and jobs.
“For the moment, there’s very much a green halo effect whereby these projects, provided the economics are fundamentally sustainable, can be pushed forward on less than traditional terms. Developers and investors are basically willing to look at them in a broader way instead of solely focusing on the sometimes strict criteria that are traditionally needed before a project can move forward. That’s a real opportunity that will not last forever. But it’s a real opportunity now.” - Troy Edwards, Partner, A&O Shearman, London
A further factor for governments to consider is whether it makes sense to invest in common infrastructure, such as ports, that can be used by a range of projects. Rather than loading the costs onto a single project in a sector like green hydrogen, it may be more appropriate to fund port construction separately as a national asset with wider benefits. Otherwise, the effect could be to make the original green hydrogen project uneconomic.
However, while in principle a centralised approach to common infrastructure may seem attractive, there are downsides. Separating out this type of infrastructure from the development of a major project that will rely on such infrastructure to serve its customers creates “project-on-project” risk, which can become a major hurdle in raising capital for the major project. More creative approaches to common infrastructure are likely to be needed which ensure that pathfinder projects are not delayed and are appropriately rewarded for developing common infrastructure, while at the same time allow subsequent projects to be facilitated and overall sector economics to be improved for the benefit of all participants.
A need for realism from governments
Together, these factors confront African governments with the decision-making equivalent of a Rubik’s cube, with many moving parts and trade-offs to be considered. Critically, the desire to maximize government revenues must be balanced with the need to avoid pricing the country out of the market with foreign investors. The drive to grow energy exports and inbound trade flows must be balanced against domestic needs. And the opportunity to generate value from overseas markets must be balanced with the potential to develop and decarbonise domestic industries. By way of example, take Mauritania, whose massive reserves of iron ore could possibly support a thriving green steel manufacturing sector at home and deliver a significant value-add on the country’s natural resources.
Another key focus for governments is how (or if) to reserve domestic allocations of offtake from green hydrogen projects. Innovative initiatives could be introduced to fast-track progress in the respect. However, in view of mass electrification being the primary means of driving a net zero outcome, and the need for further electrification across the African continent, it may be that domestic allocation of hydrogen production will not represent the most efficient means of developing the domestic energy sector for many countries.
For governments to reconcile competing priorities and capitalise on new opportunities demands a highly considered and carefully calibrated approach to their offer to investors. But whatever African nations do to attract projects, they’re always likely to be saddled with a higher risk premium than more mature markets. A priority therefore must be to de-risk the environment for investors while also providing them with sufficient incentives and returns to win them over.
Countries across the continent are now moving to do this by developing national hydrogen strategies and signing memoranda of understanding (MoUs) with selected partners so as to both establish and evidence stable platforms for the development of hydrogen projects. The countries that the IEA lists as having formal national strategies for hydrogen include Morocco, Namibia, the DRC, South Africa and Zambia.
Among these, Namibia – for example – has entered into MoUs with Germany, the Netherlands and the EU for the export of green hydrogen. And Morocco, with its Green Hydrogen Offer, is looking to provide investors and developers with a “holistic, transparent and pragmatic approach” for developing and investing in green hydrogen projects in the Kingdom, while maximizing the benefits for the nation.
“The development of more and more green hydrogen projects will be a gamechanger for the African power industry…they provide attractive opportunities for developers to create additional revenue streams by selling any excess energy on the local market.” - Antoine Haddad, Partner, A&O Shearman, Casablanca
A roadmap for Africa’s green hydrogen future
So what actions can be taken by the countries leading Africa’s green hydrogen future? Fundamentally, to make these projects fly, governments need to be on the front foot, prepared to intervene and ready to accept that simply pursuing the highest short-term returns may end up driving projects elsewhere.
By contrast, adopting a balanced, long-term and pragmatic approach will enable African countries to leverage their natural competitive advantages of relatively low costs, readily available labour and plentiful renewable resources. Together, these attributes offer a bright future for green hydrogen production in Africa – and, in turn, a more sustainable future for the world.
