LatAm H2 - The Growing Importance of Low-Carbon Hydrogen in Latin America

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LatAm H2: The Growing Importance of Low-Carbon Hydrogen in Latin America | September 2022 10 REGIONAL DEVELOPMENTAL CHALLENGES REGULATORY CHALLENGES The lack of comprehensive, integrated regulation and regulatory strategies for the production and commercialization of low carbon hydrogen currently limits the development of the entire industry in Latin America. There is not yet complete market consensus on the criteria for description of hydrogen as "green," nor are there widely accepted, objective carbon limits for describing hydrogen as "blue" or "low-carbon." This results in legal and market risks that investors have to consider before investing significant capital. The lack of clarity with regard to local regulations and global definitions in this industry drives up the time and cost of engineering, as projects have to be structured conservatively in order to mitigate the risk that future regulation will demand greater reductions on carbon intensity or use of electricity and water. This conservative structure potentially reduces the operating efficiency of the projects, making the end-use hydrogen unnecessarily more expensive and may therefore curtail demand. INFRASTRUCTURE CHALLENGES A second obstacle to widespread adoption and commercialization of green and blue hydrogen in Latin America is the slow pace of development of strategic infrastructure, particularly for hydrogen transportation. Several industry players in the region are moving towards developing hydrogen infrastructure, but the lowest production costs for green hydrogen may be located in remote regions that have not been well connected or are distant from hydrogen demand or export hubs. This strategic infrastructure issue must be addressed in order to develop a regional hydrogen market, reduce production and transportation costs, and establish the necessary supply for eventual international export. OFFTAKE There is currently no international market for green or low-carbon hydrogen, and developers and lenders alike are grappling with how to manage the associated market risk exposure. To be considered bankable, green hydrogen projects generally require long-term offtake contracts with creditworthy off-takers, structured on a take-or-pay basis, similar to early LNG projects. On the import side, there have been recent announcements of new projects and commitments, particularly in Asia where Japan and South Korea are betting heavily on hydrogen to meet their clean energy goals. For Japan, hydrogen is considered "indispensable" to meet its zero-emissions targets and is expected to account for 40% of its energy portfolio by 2050. Australia, earlier this year, delivered the world's first liquid hydrogen shipment to Japan's terminal in Kobe. Japan expects to import up to 300,000Mt/year of hydrogen by 2030, and 36,000,000Mt/year by 2050.

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