Mexico seen ‘losing time’ in Latin America green hydrogen race

The hydrogen industry is expanding in Latin America, with projects starting to develop in Chile, Uruguay, Brazil and Colombia.

Many countries in the region have either published green hydrogen strategies or are in the process of drafting them. The region is privileged in terms of resources and access to some of the biggest potential markets: Europe, Asia and the US.

BNamericas speaks with Dan Feldman (left in picture), a partner and global head of energy innovation at law firm Shearman & Sterling, and Gabriel Salinas, counsel of the private equity and project development practices, about their outlook for the Latin American green hydrogen industry.

BNamericas: Let's talk about the advantages and disadvantages Latin America has over other regions vying for position in the future hydrogen market. Why should investors start a project here instead of Asia or Australia, for example? And what should they be wary of when they do?

Feldman: I'd say four things about that. The first is that I don't think investors see this as a zero-sum game: all regions have a part to play in the future hydrogen market. Most big players are looking at all sorts of opportunities all over the world, whether that be Australia, the US, Latin America, the Middle East and North Africa, for the upstream development of green hydrogen and its derivatives. There are three main reasons why you would look at Latin America. The first is the sheer quality of the natural resource. Green hydrogen and ammonia era extractive industries, like mining and oil and gas, but the difference is, it's above the surface. What you're looking for is fantastic land that's close to water, ideally, so you can move molecules around, with great sun and great wind in combination. And there are not many places in the world that have excellent sun and wind in land close to water, with high load factors. This necessitates a lot of sun during the day, so you can get your process running at high capacity, meaning you get the most out of the money you invested into the equipment; and then at night, when the sun goes down, high factor wind, so the process can keep going. This allows you to run your plant 24 hours a day, which has many technical and economic benefits. There are only a few places in the world that fulfill all or most of these requirements, and a number of them are in Latin America: Chile, Brazil, and so on. 

The next factor is a region's track record. Places like Chile and Mexico have a fantastic record of doing big, difficult projects, with government support for the renewables industry; and players, internationally and domestically, feel comfortable doing projects there. The track record is important, because there are lots of places that look great on paper, from a resources point of view, but when you try to do a project there, you can quickly run into problems. Latin America has a track record of helping these large development projects along.

The final point is location. One of the important elements is being close to your customers. And Latin America is right in the middle of several big customers: Asia, the US and Europe. Asia and Europe especially are going to be very important customers, because they can't produce enough renewables themselves to make their decarbonization targets; they have to import renewable energy, and green hydrogen, ammonia, methanol and so on, are going to be a big part of the decarbonization of both Europe and Asia.

Salinas: The current geopolitical situation has accelerated the process of hydrogen development, and we’re seeing a lot of pilot projects being considered for project finance and starting construction, in part because of what's happening in Ukraine and the energy situation in Europe. The US has shown the world what real incentives in hydrogen could look like. In terms of competition between jurisdictions for investments, I think governments are coming to terms with the fact that they need to attract this potential source of investment that’s chasing around the world for suitable locations.

BNamericas: Dan, you mentioned the synergy between wind and solar generation, although some regions that are trying to attract green hydrogen investment have access to only one of the two. Do you see the availability of both as a disqualifying requirement?

Feldman: There are no disqualifying factors. At the end of the day, you can always draw power from grids, and not all of that power will be renewable directly, but while you’re generating your own power, when the sun is shining or the wind is blowing, you’re still making significant quantities of decarbonized hydrogen. It's just that, optimally, you have a resource that is running 24/7. That resource can be wind, and there are projects in Canada and the North Sea and in Magallanes, where it's only wind. If the wind is going 24/7 at high load factors, that's great. Some places benefit from a combination of sun and wind. Some places have hydro. So it will be different in different places. The most attractive feature is having a multiplicity of options. The more options you have, and the greater the renewable share of the electrons you’re getting, the higher the premium you will get from customers. This is why developers are so attracted to certain types of areas, like deserts in Australia or in the Middle East, as they have access to multiple resources.

BNamericas: We have heard from developers in southern Chile and other regions that they face issues securing the big land plots that are required to house large-scale export projects. What do you think the authorities could do to support the sector’s development and ensure competitiveness?

Feldman: This is the case in Latin America and elsewhere in the world: Africa, the Middle East Australia, where there’s existing population that inhabits the land where you need to build vast fields of solar and wind or hydropower. It's important to remember that these projects must be sustainable and ESG compliant. Simply kicking people off the land, the way other extractive industries have done in the past, is not consistent with a shared vision for the energy system of the future. It’s also not sustainable. If you look at what happened to the energy sector in the 20th century, and how these initial land grabs ultimately resulted in very complex political issues in their host countries, we want to avoid that. Customers in Europe especially will not buy green hydrogen that comes from places that have significant land issues, ESG issues, water usage issues. One of the big incentives systems in Europe, which seeks to support projects with cash, called H2 Global, has a whole raft of ESG conditions you must sign up to if you want your project to qualify for subsidies. It’s a big issue, regarding both water and land. To get it to work, you need to convince people that there's value, treat them with respect, give back to the community, both in terms of the resource and in other areas: food, water, infrastructure. The developers that are best at working with local communities will be the most successful developers in this space.

Salinas: Latin America is not new to renewables. There’s a long history of ESG principles and legislation that has been followed and complied with and even exceeded due to the interplay between financial and equity participants that are subject to much higher standards. One of the interesting things about hydrogen is its marriage of multiple technologies. It requires renewable sources, caverns for storage, ports, infrastructure, pipelines. That's why you see around the world, and particularly in the US, an attempt to organize all these disparate elements by creating large hubs, and facilitating the initial permitting for these larger projects while complying with ESG, because an international or local private player may not have the time to request each and every permit related to each of these different activities fast enough.

BNamericas: There are some countries with potential, like Mexico and Argentina, that are facing significant hurdles in terms of regulation, investment conditions and political support. Do you think hydrogen could become a missed opportunity for some countries in the region?

Salinas: Mexico is definitely losing time. It has a geographical advantage being a neighbor to the US. Mexico is doing a U turn, which is widely acknowledged by the industry. It’s not uncommon in Latina America, where countries sometimes decide to roll back a previous opening of the energy sector. Mexico has pushed back on the regulation that favors the dispatch of certain renewable technologies, and the energy authorities have been silent with respect to new permitting. That has hampered the development of new projects and has sparked some conflict. But Mexico has great potential. It’s close to the US, it has excellent sun and wind and hydro, it has seen decades of investment in the renewables industry. And there are a lot of local discussions taking place regarding hydrogen, with a hydrogen association and several proposals on the table for hydrogen regulation. I think Mexico could benefit greatly from getting more involved in this industry. 

BNamericas: How important is local demand for the initial rollout of green hydrogen production? And from which sectors is demand expected to come?

Feldman: It's very important that we look to decarbonize local industries through green hydrogen before exporting. It's important for three reasons: firstly, economics. Transporting energy in the form of green molecules is not the most efficient course of action, and you would only do it when you have excess molecules that you can monetize profitably once you've exhausted your local possibilities. Step one is decarbonizing everything you can with renewable electricity. In step two, everything you could not decarbonize with electricity directly should be addressed with hydrogen and its derivatives, which are essentially forms of transporting that renewable electricity in different ways. Step three is that, if you still have molecule left over, you look to export it. 

This helps with meeting local targets, with the economics, and it also helps with the local communities because you can demonstrate that you’re using the resource to the benefit of the local population, particularly where there are existing power or infrastructure issues in the area. If you’re seen to be exporting all of the renewable energy before you have decarbonized locally, then that's a very awkward political position to be in, because you’re seen to be taking a scarce resource and giving it to somebody else when you should be looking after your own environment. Key industries that could develop a local demand for green hydrogen include fertilizer, oil and gas [where refineries can replace blue hydrogen with green], and mining.

BNamericas: Which countries would you say are currently at the forefront of hydrogen development in the region?

Salinas: Similar to what we saw with LNG, there is a great opportunity for the first comers. The question is which countries will seize this opportunity and you need to think about resources, proximity and geography, and government support. In that sense, Chile has been in the forefront due to those three resources. You can also see Brazil making great strides, a huge country with great resources that has seen a lot of interest from investors around the world and which has advanced greatly in terms of renewable resources. Mexico has great resources and a long history with renewables development, but the government needs to be more supportive and put in place a hydrogen strategy. There’s a lot of industry interest there. Smaller countries such as Uruguay are seeing a lot of support from the government and are starting to develop pilots. Argentina has amazing resources, a long history of energy development initiatives, but the government will need to be clear about its strategy in the sector. Looking at Latin America as a whole, the opportunity is great, and countries need to focus on being clear with investors about the size and scope of the opportunity, and the permitting process required to get there.