Green hydrogen - reflections on the new green gold

South Africa had its first investor and policy summit in Cape Town in late November when President Cyril Ramaphosa opened the hydrogen conference.

Hydrogen is the most common element in the universe, and it is what the sun is made of. These days, it is the most sought-after molecule, the global trend towards decarbonisation having brought it back from obscurity and the infamy emanating from the Hindenburg disaster of 1937.

Hydrogen is widely used in activities such as the production of ammonia – which is needed for fertilisers – mining explosives, or synthetic fuels. South Africa’s own petrochemicals giant, Sasol, uses significant quantities of hydrogen in its chemicals and fuels, but it relies on hydrogen extracted from natural gas, a fossil fuel. The alternative, which is regarded as ‘gold’ now, is green hydrogen produced by the splitting of water molecules by passing an electric current through the molecules (a process called electrolysis), leading to the release of oxygen and hydrogen.

Green hydrogen’s value as an alternative source of energy is a result of the low cost of the energy used to produce it (cheap renewables such as high-quality sun and wind energy, as well as hydropower, geothermal and nuclear energy) and the fact that the density of hydrogen is so low that it can be shipped to far-off places that need it.

No global transition mechanism will work without a penalty on carbon emissions and a reduction in subsidies for fossil fuels (although we are seeing continued subsidisation of oil and gas, coupled with counter subsidies for green industries).

Countries that import fossil fuels have to make their energy systems more dexterous to reduce their dependence on the imports, and this is exemplified by Germany, which is highly dependent on Russian gas at present. Germany is scouring the world for new sources of gas but change is slow and costly. Decoupling from dependences and coupling a fossil-based system to decarbonised modernisation will inevitably involve straddling the costs of gas (as the primary source of hydrogen) versus its decarbonised sources – which currently attract a premium.

The introduction of green technologies is not only a race against time and costs but also a race to gain control over production and the value chain. The West is effectively competing against Russia and China, with the latter the lowest-cost producer of green technologies, including hydrogen. China has near-vertically integrated value chains for these technologies – from upstream to downstream.

The US’s Inflation Reduction Act (IRA) is a concerted response to China and perhaps hidden in it is a calculus to also narrow the space for European competition in the green technology space.

There is a concerted rivalry between the major powers over control of the international system; so, we are in the throes of a geopolitical transition where an attempt is under way to rebalance power back in favour of the West. Moreover, the use of decarbonisation strategies to both penalise and incentivise shifts (with an assertive reshoring agenda) are attempts to rebalance who wins in the new green industrial competition and gains control over the global energy system and value chains.

Geopolitics is interfacing with competition over critical minerals, technology patents, manufacturing supply chains and markets for clean energy solutions.

We are entering a more fractured green transition landscape that will have some ramifications for how transitions are managed in terms of access to technology and finance. These factors in climate debates are rarely spoken of but are material to how we will achieve the global ambition to reduce emissions and deal with the risks climate change poses to vulnerable economies.

Where you sit in the sphere of geopolitical alliances will influence how and where you can access technology and finance for your transition.

The US’s IRA will throw huge subsides, to the tune of $369-billion, towards building a green industrial base which will include green hydrogen, electric vehicles and batteries. The US is also looking to compete with Russia and China on small modular nuclear reactors. If the US can establish itself as a premier cluster for green technologies (with respect to which it has lost ground already to China), and given its substantial market leverage of its own gas and oil reserves, as well as its capacity of reach into Canada and Latin American (gas and including investments in hydrogen in Chile) it will become a major player in global energy transitions.

It is a case of who controls the energy transition also controls the world.

US subsidies are already making Europeans nervous, and were a major point of discussion for French President Emmanuel Macron during his visit to the US in December last year. The subsidy debate will likely end up at the World Trade Organisation (WTO), but the WTO dispute resolution process will take a long time, given that the adjudication tribunal board itself is almost nonexistent.

The Americans have initiated a subsidy war with a weakened WTO and the Europeans were hoping to rely on protectionist instruments.

The Americans may have blindsided the European Union (EU) as the EU sought to introduce its own form of green protectionism even though it has recently passed the carbon border tax adjustment mechanism in the hope that it could steal a lead in the race towards decarbonisation. The IRA must be seen for what it is – an attempt to reindustrialise the US. It is already causing consternation in Europe. Germany, for example, is worried that some of its industrial capabilities and strategic industries will move to the US if Germany’s energy costs remain as high as they are.

We are in the throes of a two-track process – certainly in the case of advanced economics, which are changing the geopolitics of their fossil fuel dependence (through diversification) and are intent on speeding up investments in alternative sources of energy to fundamentally alter future energy dependences and enhance self-reliance.