By Tim Scales, Troy Edwards, Alexandra Clüver, Antoine Haddad and Alessandra Pardini
Green hydrogen is often hailed as a critical part of the low-carbon energy future – and Africa as the continent where that future will be realised. But while the opportunity for Africa is clear, the task of maximising its promise is complex and nuanced. To harness the full potential of green hydrogen, the region’s governments must take a balanced and pragmatic approach.
Several regional projects showcase Africa’s potential as a future global hub for green hydrogen production. Major green hydrogen projects in Morocco are believed to have the potential to capture up to 10% of the global market. Mauritania , Djibouti, Namibia and South Africa are also major players in the game.
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 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.
Hydrogen-powered metro trains and buses are still uneconomic and may never be rational. Overall, mass electrification from low carbon sources, including green hydrogen in the energy mix, will be critical for reaching global net zero targets.
The global green hydrogen market is however not developing fast enough. Research by PwC and the World Energy Council predicts the market will only see moderate growth through niche applications until 2030, whereafter demand for green hydrogen is expected to accelerate rapidly from 2035. By 2050, it’s estimated that global demand could be near 500 million metric tonnes per year.
It’s a huge market to go for – and one in which Africa is well placed, given its abundance of renewable resources. 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 $400 billion, boost Africa’s export revenues by $15bn 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.
Firstly, we need to work out what to do with the large amounts of renewable energy Africa will generate. Historically, it has been difficult to transport electricity over large distances, although that is now changing. The groundbreaking Xlinks Morocco-UK Power Project, for instance, will use sub-sea cables to supply power to more than seven million British homes and supply 8% of the UK’s electricity needs.
Regarding bulk 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 as it is highly flammable and explosive.
At present, green hydrogen projects are best able to attract funding when the customer (‘offtaker’) is co-located with the energy production. Green hydrogen can for instance be used as a substitute for natural gas at oil refineries, it can be converted to ammonia to make fertiliser, or it can be the primary energy source for the manufacture of ‘green steel’.
Chicken and egg
The biggest long-term opportunities lie in export to other markets worldwide, but it brings its own chicken and egg conundrums. Given its transport limitations, one popular solution is converting the hydrogen into ammonia, a vector which is already transported globally in smaller volumes. Aimed at export markets, these projects are coming to market more slowly than simplified offtake – although the NEOM green ammonia project in Saudi Arabia is an exception.
It’s unfortunately still 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 regions such as Europe and Asia.
Demand is still limited, and to up it, supply must also be available. For private sector actors this challenge risks slowing developments significantly. Governments must 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, for enabling downstream demand. For the broader green hydrogen sector, however, the dilemma remains whether it’s worth building supply ahead of demand taking off.
The next issue to solve is ideal location – and why investment in production should come to Africa at all. While Africa has abundant renewable resources, it’s competing for foreign direct investment with developed markets like the U.S., Australia and Spain that both present lower perceived political risk and offer subsidies to attract investment.
Another challenge is that there is no global indexed price for green hydrogen or green ammonia – and probably won’t be for a while. 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. Investors may feel that countries with lower political risk could mobilise both cheaper and greater levels of capital – making it more attractive to proceed.
Unlike with the highly localised and profitable fossil fuels of the past, overseas investors now have more choice of where to go because the sun shines and the wind blows everywhere. Oil and gas projects can also typically operate offshore with relatively limited interaction with the host nation, while renewable energy generation usually demands full presence on the ground. This however has positive implications for countries in Africa, as it could turn the ‘curse of resources’ into a blessing for local economies and jobs.
A further factor for governments to consider is whether 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 uneconomical.
A centralised approach to common infrastructure may seem attractive, but 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. More creative approaches to common infrastructure could ensure that pathfinder projects are not delayed and are appropriately rewarded for developing common infrastructure.
A need for realism from governments
All 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 maximise government revenues must be balanced against the need to avoid pricing the country out of the market with foreign investors. The benefits of increased trade flows must be balanced against domestic needs. 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.
Domestic allocations of offtake from green hydrogen projects can also be tricky and will require innovative initiatives. Mass electrification is critical to driving a net zero outcome, and while there is a need for further electrification across the African continent, domestic allocation of hydrogen production may not be the most efficient means of developing the domestic energy sector for many countries.
For governments to reconcile competing priorities and capitalise on new opportunities, they must carefully calibrate what they can get from and offer investors. African nations that attract projects may 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.
To do this, countries across the continent are developing national hydrogen strategies and signing memoranda of understanding (MoUs) with selected partners to both establish and evidence stable platforms for hydrogen projects. Those with formal national strategies for hydrogen include Morocco, Namibia, the DRC, South Africa and Zambia.
Namibia has already 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 maximising the benefits for the nation.
A roadmap for Africa’s green hydrogen future
Fundamentally, to make these projects fly, governments need to be on the front foot, accepting that simply pursuing the highest short-term returns may end up driving projects elsewhere.
Adopting a balanced, long-term, and pragmatic approach will enable African countries to outbid their competitors with relatively low costs, readily available labour and plentiful renewable resources. Green hydrogen production in Africa could become a major new industry that can help create a more sustainable future for the world.
A&O Shearman, London, partners: Tim Scales, Troy Edwards, Alexandra Clüver, Antoine Haddad and Alessandra Pardini
BUSINESS REPORT