As a net importer of fuels, Chile has not been a significant player in global energy markets. But the sun-drenched, wind-rich South American country aims to become a titan in the burgeoning green hydrogen economy, setting a goal to become one of the world's top three exporters by 2040.
The hydrogen economy is still taking shape, and the world is waiting for the costs of the technology to fall. In the meantime, the Chilean government is offering up its country as a laboratory of sorts. Multinational companies are taking up the offer, looking to use Chile's rich renewable energy resources to make breakthroughs in green hydrogen and take advantage of potential government subsidies.
Chilean President Sebastian Piñera's outgoing administration launched its National Green Hydrogen Strategy in November 2020. The goal is to have 5 GW of electrolysis capacity under development by 2025 and to create the cheapest green hydrogen on the planet by 2030.
"Green hydrogen will enable us to export our renewable energy to a world that is quickly progressing toward decarbonization and that needs affordable clean energy," Piñera said in announcing the hydrogen strategy.
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Mining companies in the region are looking to hydrogen to slash operational costs by eliminating the expensive importation of diesel fuel. They also believe green hydrogen can be used for electricity at mining sites alongside cheap renewable energy resources. Any success would have global implications for the energy transition away from fossil fuels: Not only would it demonstrate that the world's dirtier industries can cut costs with hydrogen, but it would also help in the decarbonization of a global renewable energy supply chain that is heavily dependent on copper and lithium, of which Chile is a top exporter.
"We aspire to become the world's most competitive producer of green hydrogen," Juan Carlos Jobet, Chile's minister of energy and mining, told S&P Global Market Intelligence. Mining trucks will represent roughly one-third of hydrogen consumption in Chile by 2050, Jobet projected.
Beyond mining, companies are using Chile as a testing ground to create both ammonia and synthetic fuels from green hydrogen.
"There is a race for hydrogen production, and Chile, in particular, has a big comparative advantage in terms of producing it at a cheaper cost," Amir Lebdioui, a development economist at the London School of Economics, said in an interview.
As of June, roughly half of Chile's installed power generation capacity for 2021 was sourced with renewable energy resources, making the production of green hydrogen easier — as opposed to its dirtier cousins produced with fossil fuels. Operators of coal-fired plants in the country, including international firms AES Corp., Enel SpA and Engie SA, have announced plans in 2021 to shut down such facilities and increase investments in renewables.
The relationship between renewable energy and green hydrogen is symbiotic: Green hydrogen requires electricity from renewable resources for electrolysis to split water into oxygen and hydrogen, so realizing any green hydrogen targets will have a positive impact on achieving a higher share of renewable energy.
Yet there are challenges to Chile's hydrogen ambitions. The country, which has earned a reputation among investors as a stable market in the region, is in political transition. Voters in May rejected Piñera's right-leaning coalition, and a majority-left political assembly will draft a new constitution for a referendum in 2022. Presidential elections are slated for November, and it is unclear to what extent a successor to Piñera, who is not in the race, will continue the hydrogen push as voters call for more social spending to ease the economic pain brought on by the COVID-19 pandemic.
The political instability has rattled the mining industry and investors who fear that higher taxes are on the horizon. In the short term, raw materials costs in the renewable energy supply chain are skyrocketing. Some investors are withholding support for hydrogen, waiting for demand to materialize.
An open-pit mine in the Atacama Desert in northern Chile, where the government set aside 12,000 hectares for hydrogen projects. |
Chile draws global interest
Multinational corporations are nonetheless taking notice of the strategy.
Arlington, Va.-headquartered AES Corp., whose subsidiary AES Andes SA is a major power supplier in Chile, said it wants to be the first in the world to create green ammonia as a maritime fuel for large ships. During a March 3 investor conference, the company said it signed a memorandum of understanding with "one of the leading global providers of hydrogen" to provide green ammonia in Chile. AES did not disclose the partner's name in follow-up emails.
"This is fundamental to the economic strategy of Chile, and they're incentivizing the rapid adoption of green hydrogen fuels for transportation, for maritime shipping," AES Corp. President and CEO Andres Gluski told investors.
Ammonia, an organic compound made up of nitrogen and hydrogen, is used to fertilize the world's crops; its production accounts for 1.5% of global CO2 emissions, according to Siemens AG. AES and Siemens are among the companies that want to use electrolyzers powered by renewable energy to extract hydrogen from water and then combine it with nitrogen to make ammonia, as opposed to using fossil fuels.
Gluski said if the results of a feasibility study are positive, "we could have a major project by 2025, and it would require almost 1 GW of green energy to produce green ammonia."
Siemens is pursuing its Haru Oni project, a synthetic fuels venture that aims to take advantage of the strong winds in the Magallanes, in Chile's southernmost region, for the production of green hydrogen. The hydrogen would be combined with air-captured CO2 to produce synthetic methanol, which would then be converted to synthetic gasoline for transport. Siemens projects it will create 130,000 liters of the fuel annually by 2022, ramping up to 550 million liters annually by 2026.
"Exports in the form of liquid fuels are the best way to take advantage of the wind energy readily available in Magallanes," Siemens said on its website.
Martyn Briggs, a thematic investing strategist for BofA Securities, said Chile's hydrogen plan includes a "well-thought-out global supply chain of who they want to export to," such as Asian markets.
The current challenge for the country — and the global economy — is waiting for innovation in transport, heavy industry and power to create customer demand for green hydrogen.
"Investors are not always convinced that that's going to happen," Briggs said. Policy clarity from governments will help free investment of risk.
Chile is "one of the most advanced hydrogen markets, not only because of its potential low cost for energy production but also because of its regulatory stability, open market approach, advanced financing market and regulatory support by the Government of Chile," Luis Sarrás, green hydrogen and fuels director for AES South America, said in an email.
Chile's hydrogen strategy envisions prices between $1.30 and $1.80 per kilogram by 2030, which would make it competitive with fossil fuels such as natural gas. Sarrás said such prices are possible but only if electrolyzer prices fall, similar to what happened with solar panels.
In the short term, hydrogen prices will be higher, which is why it "is crucial for the full value chain engagement" in AES' initial hydrogen projects, Sarrás said.
An electric shovel in a copper mine in Chile. The nation is a top exporter of copper. |
Mining industries of the future
Tim Buckley, director of finance studies for Australia and South Asia for the Institute for Energy Economics and Financial Analysis, said miners, with their well-established shipping operations, are in a good position to solve a key issue with hydrogen: transporting it across oceans at cost.
Mining companies operating in Chile could leverage that industry knowledge to enable the export of green hydrogen to countries in the Asia-Pacific region, such as Japan and South Korea, that have already expressed interest, Buckley said.
It is a "huge opportunity for Latin America to develop the mining industries of the future," Buckley said.
In the past, "nobody thought that it was viable to export LNG," said Benigna Cortés Leiss, a nonresident fellow at Rice University's Baker Institute for Public Policy and former general director at Chevron Corp.'s Mexican operations. But "terminals were built. So it's a process; it takes money, and it takes commitment."
"To get a green hydrogen economy moving, the domestic market is likely to be key," Leiss wrote in a paper published in April. "This strategy can further decarbonize Chile's economy, in particular its mining industry. This translates into decarbonization of the global economy, given the importance of lithium for batteries and energy storage and copper for electric vehicles."
The copper mining sector in Chile has committed to quadrupling the share of renewable sources in its electricity consumption by 2023, according to government calculations. Government estimates show that the sector will face a rising need for electricity, resulting in a demand of 26.7 TWh in the next two years. Of that, roughly 13.13 TWh, or almost 50%, will come from carbon-free power.
Jobet, Chile's energy minister, said there are 40 green hydrogen projects in Chile. Among them is a collaboration between Resource Group TRG AS subsidiary Mainstream Renewable Power Ltd. and Aker Horizons ASA subsidiary Aker Clean Hydrogen AS to build 1 GW of renewable energy to generate green hydrogen for ammonia production. Retail giant Walmart Inc. is working on a project to replace lead-acid batteries in forklifts with green hydrogen fuel cells.
French utility Engie is partnering with Chilean mining explosives manufacturer Enaex SA, a subsidiary of Sigdo Koppers SA, on a feasibility study to produce green ammonia with green hydrogen in a project that will require 2 GW of renewables. Engie is also working on a project to use hydrogen in mining trucks.
U.K.-based Anglo American PLC is developing a zero-emissions hydrogen truck. Its fleet of heavy-duty trucks accounts for up to 80% of on-site diesel consumption.
"Whilst this program is still in the proof of concept stage, when we look to expand it, we will likely prioritize those sites which already have access to renewable power, such as our Latin American operations, given that to power the truck, we need to generate hydrogen from electrolysis on- or near-site," an Anglo American spokesperson said.
Official records show that mining haul trucks account for 45% of the industry's energy consumption, generating 7,000 Mt of CO2 each year. Total annual energy consumption for the industry, according to government statistics, stands around 22.3 TWh as of 2020. In all, the industry emitted 16,366 Mt of CO2 in 2019.
"Mining plays a central role in promoting the green hydrogen industry in Chile and taking advantage of opportunities that this new market will offer to clean its productive capacity and lower its carbon footprint," Jobet said.
But, rich as it already is in renewable energy, Chile needs more of it to realize its ambitious green hydrogen goals.
Sarrás of AES said Chile will have to more than double its current renewable installed capacity to reach its hydrogen production target of 1 million tonnes in 2030.
"In other words, only with renewable energy can the country achieve the approximately 42 additional GW needed by 2030 for the hydrogen strategy," Sarrás said. "We hope to be able to lead this growth."