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On 3 November, Chile's Ministry of Energy presented a "National
Strategy for Green Hydrogen for Chile" with three main objectives:
have 5 GW of electrolysis capacity under development by 2025;
produce the cheapest green hydrogen in the world by 2030; and be
among the world's three largest hydrogen exporters by 2040. These
grand ambitions come with proposed measures including extending
US$50 million to pilot projects, promoting hydrogen in end-user
applications, and launching "green hydrogen diplomacy" to position
Chile internationally.
IHS Markit recently published a report examining whether Chile
has the resources, economic environment, know-how, and long-term
policy focus to become a powerhouse in a future global hydrogen
economy.
Chile has the renewable resources and power market
environment to produce among the cheapest hydrogen in the
world
Chile's unparalleled solar and wind resources and
business-friendly power regulations allow renewable electricity
generation—the primary variable in green hydrogen production
costs—at among the lowest costs in the world.
Already these resource and regulatory qualities transformed
Chile into a testing ground for many international power utilities
for their solar and wind ventures. In a country with an installed
power base of only 25.5 GW, a remarkable 3.9 GW of unconventional
renewables were added from 2016 to 2020.
This "Chile as a testing ground" approach could be repeated for
hydrogen. The country's power market is oversupplied, and its
renewables target for 2025—to meet 20% of demand from
unconventional renewables—is already met, so renewable players
are eager for hydrogen business opportunities.
The question is whether the scale and economics of Chile's
hydrogen goals will support the enthusiasm.
For example, Chile aims to manufacture green hydrogen at below
US$1.5/kg by 2030. This equates to generating electricity at
US$15-20/MWh. IHS Markit analyses of the levelized costs of energy
show the prospects for this to occur, but risks surrounding offtake
options and returns could complicate project financing.
Favorable new legislation and international partnerships
will be essential to launch a dominant hydrogen
industry
To meet its hydrogen objectives, Chile must rapidly increase
production levels and reduce costs. This urgency requires rapid
decisions on policy development, permit approvals for projects, and
the delivery of financial support.
Yet green hydrogen is a nascent sector that offers few
international precedents for policymakers. Therefore, Chile is
instead relying on the growing experience of multinational
companies, the advice of international governmental agencies, and
the few international standards that do exist. It is also pursuing
partnerships with other countries with hydrogen objectives (Figure
1).
Another challenge in Chile's vision is finding hydrogen
offtakers. This task will not be easy in Chile's small economy.
Understanding this challenge, the government wants to promote
hydrogen in six point-source and large-scale applications. Chile's
mining sector will likely play a key role owing to the sector's
size and need to reduce emissions.
Later when Chile will shift its focus from local offtakers to
hydrogen exports, different challenges will arise: technologies to
transport large volumes of hydrogen must be perfected, and Chile
must position itself internationally as a preferred supplier.
Debate over a new constitution and the global economic
crisis threaten Chile's ability to attract foreign investment for
its hydrogen ambitions
Chile currently faces a period of instability. Social upheaval
in 2019 led to a referendum to start drafting a new constitution,
and the country faces immense challenges caused by the COVID-19
pandemic.
Investor uncertainty will be high until a new constitution is
finalized. The constitutional rewrite, along with presidential
elections in 2021, could cause debate on the role of the state,
property rights, environmental protection, and foreign involvement
in strategic sectors, including energy.
On the other hand, Chile's strong commitments toward private and
foreign investment, its lack of hydrocarbon resources, and its
cross-party support for sustainable development provide a good
chance that the country will maintain its policy to develop green
hydrogen.
A greater risk is rather that the pace at which hydrogen is
promoted slows. The government will rapidly face the dilemma of
using its public spending to support hydrogen pilot projects versus
support poorer segments of the population in the wake of the
COVID-19 pandemic.
Etienne Gabel, a senior director at IHS Markit with the
Latin America Gas, Power, and Energy Futures team, specializes in
the analysis of regulatory and market developments in the natural
gas and power sectors.
