New Energy for Global Partnerships?

DISCUSSION-PAPER | DEVELOPMENT POLICY | GREEN H2

New Energy for Global Partnerships?

Green hydrogen as an opportunity for development cooperation.

22. June 2021 Development Cooperation in Times of Climate Change The global energy transition is a key political challenge of our time. The implementation of the political measures for climate protection is one of the key challenges for the global economy. Entire branches of industry must reposition themselves technologically in order to shift production towards CO2-neutrality in the long term and to continue to create and maintain prosperity and jobs under changed conditions.

With the national hydrogen strategy, the German government has acknowledged the key role of technological innovation in combating climate change. German companies are leaders in many fields of hydrogen technology, and their innovative edge and global presence offer the opportunity to take a leading role in a global market for climate-neutral hydrogen, thereby contributing a decisive element towards the goal of global climate neutrality.

For Germany's international development policy, this strategic decision will reinforce the paradigm shift already underway towards closer cooperation with the private sector. In order to support developing and emerging countries with a view to successful participation in a global hydrogen market, new, market-based forms of cooperation are needed that are more long-term in their orientation, more open to take risks and more able to foster innovation, and that are implemented in partnership between official development cooperation and business.

For developing and emerging countries alike, successful participation in a global market for green hydrogen offers tremendous opportunities. In many of them, especially on the African continent, climatic and meteorological conditions offer a good basis for the production of green hydrogen. Its use locally and for export can make an important contribution to their sustainable growth on the basis of climate-neutral energy. The fact that they are already involved in the dialogue with Germany and Europe is an important signal for the implementation of the ambitious goals in a spirit of partnership.

Alexander Knipperts | International Cooperation, Security, Raw Materials and Space | a.knipperts@bdi.eu | www.bdi.eu

New Energy for Global Partnerships?

Table of contents Green hydrogen as a building-block of the global energy transition ............................................ 3 Market scenarios for green hydrogen ................................................................................................... 3 Decarbonising hydrogen production .............................................................................................. 3 „Hydrogenating“ energy supply ...................................................................................................... 3 Hydrogen and sector-coupling ....................................................................................................... 4 Technological innovation as a precondition for economic viability........................................................ 4 Climate Neutrality & Green Hydrogen Imports................................................................................. 4 Expansion of renewable energy as a prerequisite for climate neutrality ............................................... 4 Need for imports due to limited capacity in Germany and Europe ........................................................ 5 Hydrogen Markets in Emerging and Developing Countries -– Nothing new under the Sun ....... 5 Key Factors for Production and Export of Green Hydrogen .......................................................... 6 Sun, Wind and Water ............................................................................................................................ 6 Technology and transport infrastructure ............................................................................................... 6 Investment climate and business environment ..................................................................................... 7 Training for technical skills in hydrogen ................................................................................................ 7 Regulatory framework and certificates of origin .................................................................................... 7 Local demand for green hydrogen ........................................................................................................ 8 New Energy for Global Partnerships ................................................................................................. 8 New incentives for the cooperation between development policy and industry .................................... 8 Building on the SDGs and Agenda 2030 ....................................................................................... 8 Incentives instead of red tape ........................................................................................................ 9 Market run-up as a public-private-partnership ............................................................................... 9 Promoting innovation - not a contradiction in terms ....................................................................... 9 Hydrogen-development as an interagency process ...................................................................... 9 Training and Peer-to-Peer Learning ............................................................................................ 10 Fostering dialogue on regulation and standards .......................................................................... 10 Imprint ................................................................................................................................................ 11

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New Energy for Global Partnerships?

Green hydrogen as a building-block of the global energy transition In the context of international agreements to reduce greenhouse gas emissions, green hydrogen produced on the basis of sustainable energies is increasingly coming into focus. In the German and European hydrogen strategies, the German government and the European Union define climate-neutral green hydrogen as a central component of the global energy transition. The German government foresees a hydrogen demand of approx. 90 to 110 TWh by 2030.

The extent and the exact form of the contribution that the gas, described as the "energy carrier of the future", can actually make is still largely open. Depending on the scale at which hydrogen becomes established in various applications in the long term, different quantities will be needed. The contribution to climate protection that can be achieved depends foremost on the availability of additional capacities of renewable energies that are required for the climate-neutral production of hydrogen by means of electrolysis.

Market scenarios for green hydrogen The extent to which green hydrogen will be used in the future is still marked by considerable uncertainty. From the conversion of current fossil hydrogen production to green hydrogen, to the transformation of entire industrial sectors and processes that are difficult or impossible to electrify and a role as a storage and transfer medium for (surplus) renewable electricity, different demand quantities arise.

The extent to which green hydrogen will become established in the long term will be determined not least by overcoming a whole series of technical challenges along the H 2 value chain on the one hand, and on the other hand by the price at which green hydrogen can be made available in the long term compared to competing forms of energy.

Decarbonising hydrogen production Green hydrogen can directly replace the "grey" hydrogen that has so far been produced on a fossil basis (non-renewable electricity, natural gas, coal) and thus improve the climate footprint in a variety of chemical and industrial processes in which the gas is already used today. In the future, the current demand for hydrogen would be covered in a climate-neutral way by producing the industrial gas on the basis of renewable energies. Hydrogen is needed in various industrial processes, e.g. in the chemical industry, in the production of plastics and fertilisers and in refineries. These industrial processes would achieve an improved climate balance through the use of climate-neutral green hydrogen. „Hydrogenating“ energy supply However, in their strategy documents, the German government and the EU anticipate a far more extensive use of green hydrogen in the long term: As an alternative energy carrier for industrial processes and engines that are difficult to electrify and as a key component in a systemic conversion of energy production and distribution.

As the energy carrier of the future, green hydrogen and its derivatives are intended to replace fossil fuels primarily in areas where electrification is not technically feasible or economically viable in the foreseeable future. This includes areas of transport, e.g. heavy goods traffic and shipping, as well as

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New Energy for Global Partnerships?

aviation. The steel industry, the glass industry and cement production are also among the industrial sectors in which green hydrogen could be used to convert energy-intensive manufacturing processes based on fossil fuels in a climate-neutral way. In the long term, it is also conceivable that hydrogen could be used in private transport as an alternative to battery-based electrification by means of fuel cells or in heat generation, e.g. in private households, instead of fossil fuels.

Hydrogen and sector-coupling Green hydrogen also plays a key role in the concept of so-called sector coupling. The main systemic benefit of this approach is that renewable electrical energy can be converted into chemical energy by means of electrolysis and thus become storable. Green hydrogen could funtion as a "link" that can be flexibly stored, used according to demand and put to a variety of uses. For example, a (temporary, seasonal) surplus of renewable electricity would be used for the production of green hydrogen by means of electrolysis in order to make the surplus renewable energy storable and thus usable independent of the time of day or season, e.g. in fuel cells, in combined heat and power (Combined Heat Power, CHP) or in the chemical industry. In this way, the entire system of energy production, storage and distribution could be organised to improve flexibility, reliability and climate-efficiency through the use of green hydrogen.

Technological innovation as a precondition for economic viability The diverse applications of green hydrogen are, however, often dependent on technical feasibility and scalability as a prerequisite for the long-term economic viability of their widespread use. The development of innovative technical solutions and business models for production, conversion, storage and transport is a prerequisite for actually harnessing the full potential of green hydrogen for climate protection. The decisive factor for the size of the market for green hydrogen in the long term is price: In the long term, green hydrogen must be competitive with competing energy carriers. Only then will its widespread use become established and be able to make a sustainable contribution to reducing greenhouse gas emissions.

Climate Neutrality & Green Hydrogen Imports Expansion of renewable energy as a prerequisite for climate neutrality The "raw material" for the production of green hydrogen is electricity from renewable resources, which is converted into largely climate-neutral chemical energy through the process of electrolysis of water.

In order for green hydrogen to make a contribution to the reduction of CO 2 emissions in the overall balance, one important prerequisite must be met above all: Renewable electricity must be available in sufficient quantities for electrolysis, in addition to the existing demand.

Moreover, in electrolysis and in the production of derivatives, additional energy must be expended due to process-related conversion losses in order to meet the same total energy demand. Depending on the form of transport, e.g. as extremely low-temperature liquid hydrogen, additional energy must be expended. These additional needs must also be covered by renewable energy in order for the hydrogen ultimately to contribute to the reduction of greenhouse gases, i.e. the overall balance of energy consumption must also be "green".

Otherwise, with limited supply and increased demand, renewable electricity would be substituted with non-renewable electricity, with corresponding effects on the emission footprint, or an electricity

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shortage would arise or be exacerbated. The latter is a risk, especially in the countries of the global South, which would intensify already existing bottlenecks and set back efforts towards comprehensive electrification.

Need for imports due to limited capacity in Germany and Europe Studies project electricity demand for scenarios with extensive use of hydrogen and hydrogen-based synthetic energy carriers at an estimated 3,000 TWh per year for Germany. By comparison, the total amount of renewable energy in Germany in 2019 was 243 TWh. Even with a massive expansion of renewable energies in Germany, the limits of acceptance by the public and of economic viability of this target would make this amount appear unrealistic. The Fraunhofer ISI Institute estimates the expansion potential for the generation of renewable electricity in Germany to be limited to 700 to 1,100 TWh. In neighbouring European countries it is considerably higher at 15,000 TWh, but would still not be sufficient for a completes self-sufficiency of green hydrogen supply either.

Despite the varying estimates of total demand, due to the limited capacities of additional renewable energy, it appears all but certain that Germany and Europe will remain net energy importers and will have to import substantial amounts of green hydrogen in the foreseeable future. The hydrogen strategy of the German government and the European hydrogen strategy therefore address the expected necessity of hydrogen imports in detail and emphasise developing and newly industrialised countries as possible production locations – especially on the neighbouring continent of Africa. Various federal ministries have been pursuing preparatory and support initiatives for some time. They are intended to facilitate the integration of developing and newly industrialising countries as producers and consumers in a global green hydrogen economy.

Hydrogen Markets in Emerging and Developing Countries -– Nothing new under the Sun Even if developing and emerging countries are in focus as production locations in the current debate in Germany, it should first be noted that established hydrogen markets already exist in many of them.

Since the hydrogen is produced almost exclusively on a fossil basis, there is great interest in building up new production capacities for green hydrogen, also for reasons of climate protection.

Hydrogen has been used in developing and newly industrialised countries for many decades in just as many ways as in industrialised countries. Even if hydrogen is currently consumed in smaller amounts, there are dedicated hydrogen generation capacities for fertiliser production, for example. In addition, there are various exisiting applications, e.g. in decentralised energy supply, by means of fuel cells or in the transport sector, e.g. in buses.1 Some countries are thus in the process of formulating their own hydrogen strategies. Countries such as Morocco, which invested early in the expansion of renewable energies, are planning to expand their production capacities for green hydrogen on the basis of their own hydrogen strategies. South Africa is another country that has formulated its own goals for the decarbonisation of hydrogen production.

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De Sisternes Jimenez, Fernando Jose; Jackson, Christopher Paul. 2020. Green Hydrogen in Developing Countries (English).

Washington, D.C.: World Bank Group. http://documents.worldbank.org/curated/en/953571597951239276/Green-Hydrogen-inDeveloping-Countries

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Other countries have also shown interest in using the potential of green hydrogen for themselves and defining priorities.2 The motivations are diverse and often specific to the respective country context: Fossil-fuel producing countries are preparing for a decreasing demand in the context of global decarbonisation goals, energy importing countries see the opportunity for greater independence of energy supply, while for others the export potential is in the main aspect, especially in countries where the conditions for renewable energy production are favourable and green hydrogen can be produced at low cost.

Key Factors for Production and Export of Green Hydrogen Sun, Wind and Water Alongside water, electricity from solar-, wind- and hydropower is the most important "raw material" in the process of splitting water molecules into oxygen and hydrogen by means of electrolysis. With regard to climatic and meteorological conditions for the production of renewable energies, many of the most favourable locations are in developing and newly industrialised countries. Since solar radiation is much more intense in regions of the earth that are near the equator than in more northern latitudes, a significantly higher degree of capacity utilisation of the of solar power plants can be achieved, i.e. same plant generates significantly more electricity under these conditions than in more northerly latitudes.

Apart from the substantially higher intensity and average duration of solar irradiation near the equator, some locations also offer the additional advantage that several types of renewable energy are available in combination. The possibility of combining solar energy with wind and hydropower allows for increased plant utilisation in hydrogen production. For example, modern hydropower plants achieve high and largely constant numbers of full load hours and are thus able to compensate for natural fluctuations in solar radiation and wind. Since the production of green hydrogen is capital-intensive, plant utilisation plays a key role in the price of the hydrogen produced. Production costs decrease significantly with increasing number of full load hours.

Some of the locations in developing and emerging countries thus not only offer the possibility of producing large quantities of renewable energy, but also of being able to convert it particularly efficiently into green hydrogen.

Technology and transport infrastructure A suitable infrastructure is needed to export the green hydrogen produced. Various methods of transporting hydrogen as a pure gas or bound to other molecules by ship or pipeline are currently being tested. Many technical challenges remain in this part of the value chain and their resolution will determine whether and to what extent global trade in green hydrogen will be economically feasible.

In principle, it is possible to transport both pure hydrogen and derivatives by ship. The prerequisite for export is access to suitable ports or gas terminals. One option that has already been widely tested is the transport of ammonia, a gas produced as a conversion product from hydrogen and nitrogen (HaberBosch process). Due to its properties, it is much easier to transport than pure hydrogen. The technical feasibility of transporting pure hydrogen by ship is also currently being tested in a pilot project between

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Ludwig-Bölkow-Systemtechnik GmbH, INTERNATIONAL HYDROGEN STRATEGIES Final Report, commissioned by and in cooperation with the World Energy Council Germany, September 2020

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Australia and Japan. New methods of reversibly binding hydrogen to organic molecules by means of so-called liquid organic hydrogen carriers (LOHC) are also being tested.

Another possibility is to transport hydrogen through pipelines. Hydrogen can be transported from the point of production to the consumer markets alone, as an admixture or converted into a gaseous derivative. One advantage of this approach is that existing infrastructure can be used, such as the natural gas pipelines between North Africa and Europe. However, there are technical hurdles here as well: While blending hydrogen with natural gas for pipeline transport is relatively uncomplicated from a technical point of view, they have to be technically adapted for the transport of pure hydrogen. Locations in Morocco, Algeria and Tunisia, which already have a pipeline infrastructure to Europe, are the main candidates for this.

In addition to the different technical requirements, the transport modalities also differ in terms of the implications for flexibility in site selection and pipelines create a fixed geographic link to specific producers: Suppliers and customers of green hydrogen tie themselves to each other through long-term contracts. Transport by ship, on the other hand, is more flexible: Although a specialized transport and loading infrastructure is required here, the hydrogen can be transported back and forth between different production and application sites as needed.

Investment climate and business environment In addition to the basic requirements for the production and transport of green hydrogen, the general investment climate and the economic framework conditions for investments in renewable energies and electrolysis capacities play just as central a role as for other plant investments. In this respect, this sector of the future is no different from other industrial sectors. This is one of the reasons why the capital-intensive and technically complex installation of plants for the production of green hydrogen is currently being tested on a larger scale almost exclusively in industrialized countries: Stable framework conditions allow for a more reliable weighing of costs and risks.

Training for technical skills in hydrogen One apparent hurdle for an extensive expansion of both the supply side and the demand for green hydrogen in developing and emerging countries is the low number of available skilled workers for installation, operation and maintenance of plants along the hydrogen value chain. Both electrolysers and hydrogen derivative production plants and fuel cells require highly specialized technicians for regular maintenance and servicing to ensure safety and reliability of operation.

Here, countries with existing experience in dealing with natural gas production and processing are often at an advantage because the existing expertise is easier to expand and extend to hydrogen.

Elsewhere, it has to be built up from scratch. Promoting the exchange of knowledge between Germany and the partner countries in the field of hydrogen would be helpful, as would accompanying opportunities for peer-to-peer learning between countries with and without prior experience.

Regulatory framework and certificates of origin Regulatory frameworks play a special role in the production of green hydrogen. Uniform rules and standards must be established to ensure that the hydrogen produced and shipped as well as its P2X downstream products meet technical and ecological requirements. In addition, reliable and internationally compatible certification systems must be established to ensure that the gas or the P2X products

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derived from it meet the agreed standards, especially with regard to their climate neutrality along the entire production and supply chain.

If, for example, the electricity required is obtained from the regular power grid and not from a closed system for the production and distribution of renewable energies, it must be ensured that only green electricity was used in the production of green hydrogen and its downstream products and that these are therefore actually climate-neutral through reliable certification. This aspect is particularly relevant for developing and emerging countries because the definition, application and enforcement of international rules and standards place special demands on government and public administration.

Local demand for green hydrogen Using the demand for green hydrogen in the partner countries themselves as a criterion for selecting suitable locations helps to ensure that the complex interplay of local political, economic and social factors is taken into account. This can increase local acceptance and benefits by enhancing existing value chains. Past experience shows that entering into dialogue at an early stage on the basis of a partnership of equals is superior to solutions developed on the basis of theoretical considerations. In addition, the already existing demand for hydrogen makes it possible to drive forward the decarbonization of the hydrogen economy locally at an early stage, even before the infrastructural, logistical and regulatory prerequisites for export are created.

New Energy for Global Partnerships New incentives for the partnership between development cooperation and industry Despite the many uncertainties and technical challenges, green hydrogen is both an energy source and a source of hope for achieving global climate targets. It is in the interest of developing and emerging countries to become successful players in a global market for green hydrogen in the long term, as well as in the interest of their German and European partners. The goal of reducing greenhouse gases worldwide and thus achieving the climate targets by 2050 will only succeed in cooperation between industrialized countries and the global South.

Whether a global market for green hydrogen makes a potentially decisive contribution to achieving the global climate targets will also depend on efficient interaction between political and private-sector actors: Governmental framework conditions and incentives for the development of an international hydrogen market must be set in such a way that the innovative strength of companies and the efficiency of the market produce economically viable and thus sustainable solutions in the long term. This also poses new challenges for official development cooperation.

Building on the SDGs and Agenda 2030 The pivotal role of the private sector in reducing poverty for people around the world was first highlighted as a key factor in development cooperation as part of the Millennium Development Goals in 2000. The interplay between government and business engagement in developing and emerging countries was further developed with the Sustainable Development Goals as part of the Agenda 2030. The intensified cooperation between development policy and the private sector has produced a whole range of new cooperation mechanisms in Germany over the past decades. Development policy and business share an interest in harnessing the innovative capacity and know-how of technology leaders for the benefit of developing and emerging countries in the interests of climate protection.

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Incentives instead of red tape In order to encourage and shape investments in capacities for the production, conversion and use of green hydrogen with a multi-decade horizon jointly, classic funding and cooperation instruments with predefined funding phases will not suffice. A new cooperation framework based on long-term goals must be developed that leaves behind the small-scale and bureaucratic application-and-approval process and relies more strongly on market-based incentives, because in the long term, the market will decide whether and in what form green hydrogen can become established.

The H2 Global concept developed by the Gesellschaft für Internationale Zusammenarbeit (GIZ) on behalf of the German Federal Ministry of Economics and Technology points the way forward. The German Federal Ministry for Economic Cooperation and Development has already signaled that it will promote its own tenders within the framework of the concept for developing and emerging countries and also use this market-based mechanism in international cooperation.

Market run-up as a public-private-partnership State aid and subsidy law should also be reviewed and, where necessary, modernized to support investment in the technologies and infrastructure of the future. The rules of competition in mature markets set tight limits on state support for individual companies with good reason. The extensive potential of cooperation in the production and trade of green hydrogen, however, will only be leveraged if state and private sector investments can be targeted and efficiently directed toward achieving economies of scale, especially during the market run-up. This is especially true for investments in developing and emerging countries, where the complex risk profile of hydrogen investments is particularly significant.

Development banks such as KfW and the EIB have a key role to play here, especially in developing local markets for green hydrogen. By supporting the local market run-up, including the investment costs, the commercial risk becomes more manageable and thus also attractive for much larger privatesector investments at an early stage (bankability).

Promoting innovation - not a contradiction in terms In order to develop solutions for the many hurdles on the way to a global hydrogen economy, development cooperation must find new ways to provide stronger innovation incentives for companies in Europe and in the partner countries of development cooperation. To ensure that new technical solutions can be brought to market quickly, government funding through development cooperation must also share some of the risk in developing markets. The co-financing of feasibility studies in developing and emerging countries, such as those offered by KfW Group's development bank Deutsche Investitionsund Entwicklungsgesellschaft (DEG), is one example of an innovation-friendly approach to support business investment. Further smart and bold solutions are needed in this area, e.g. in the promotion of start-ups and in the modalities for write-offs for private investments. Closer integration of universities, research, companies and state actors can also make an important contribution here.

Hydrogen-development as an interagency process The German government's hydrogen strategy integrates the individual initiatives of various federal ministries in developing and emerging countries into an overall strategic concept. By the same token, the government's commitment to building a global market for green hydrogen requires an interdepartmental approach to implementation with regard to developing and newly industrializing countries, so as not to revert to patchy and unsustainable projects through the back door. Clear leadership and

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coordination of government activities with and investments in developing and emerging countries reduce the risk of leaving the economic potential of economies of scale untapped. In this context, it will also be necessary to consider how the various initiatives can count towards the ODA quota to provide a true reflection of development policy engagement across the board.

Training and Peer-to-Peer Learning The shortage of skilled workers in the growing hydrogen industry is already evident. Especially in countries without experience in energy production, the technical know-how needed to expand and operate their own hydrogen industry is not sufficiently available. Here, the extensive experience of development cooperation in promoting training and employment in cooperation with private companies can play an important role. Initial approaches to building up expertise in close cooperation with companies in Germany and the partner countries, based on the model of the development ministry's special initiative on training and employment, can provide a promising blueprint in this regard.

Fostering dialogue on regulation and standards Within the framework of the German Economic Ministry's energy partnerships, a format for a structured dialogue already exists to discuss regulatory aspects of energy cooperation with the partner countries.

The regulatory framework is particularly important in order to create the conditions for an extensive role for green hydrogen in the partner countries themselves. In addition, quality standards must be defined and certified in order to make the green hydrogen tradeable on the international market. An interesting model of cooperation between the relevant institutions in the partner countries, the German development cooperation and the companies can be found in the Alliance for Trade Facilitation and the Alliance for Product Quality of the German Federal Ministry for Economic Cooperation and Development (BMZ).

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Imprint Federation of German Industries (BDI) Breite Straße 29, 10178 Berlin www.bdi.eu T: +49 30 2028-0 Editors Matthias Wachter Director, International Cooperation, Security, Raw Materials and Space T. +49 30 2028-1579 m.wachter@bdi.eu Alexander Knipperts Business Scout for Development International Cooperation, Security, Raw Materials and Space T. +49 30 2028-1609 a.knipperts@giz.bdi.eu

BDI Dokumentennummer: D 1434

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