Hydrogen: Dreicon’s position on the proposed legislation

We share this note in infobae by Sergio Serrichio about the hydrogen law and the potential that our country has for the development of this energy. In the article, our COO, Gerardo Manhard, develops our position and describes the project we are proposing in Río Negro.

https://www.infobae.com/economia/2023/09/24/hidrogeno-una-carrera-energetica-en-que-la-argentina-empezo-tarde-pero-tiene-viento-sol-y-gas-a-favor/

Hydrogen: an energy race in which Argentina started late, but has wind, sun and gas in its favor

The Government presented a promotion law in May and this month a “national strategy” for the development of this fuel and crucial vector in the fight against climate change. The opinion of companies.

Posted: Sep 24, 2023 00:35 a.m. Updated: Sep 24, 2023 09:54 a.m. A.R.

Wind farm in Buenos Aires (Reuters)

In the midst of climate change and the push for a transition that accelerates the “decarbonization” of energy, hydrogen appears as a complement to electrification from lithium batteries and other critical minerals (nickel, cobalt, manganese, rare earths), although in a longer term: towards the middle of the century it would emerge as a kind of planetary salvation.

Hydrogen is the most abundant gas in the universe; Almost 150 years ago, in 1874, in his novel “The Mysterious Island”, Jules Verne mentioned it as manna of the air and sea and 20 years ago, in his book “The Hydrogen Economy”, the American essayist Jeremy Rifkin proposed it as main remedy to global warming.

The problem is that in nature hydrogen does not appear isolated. The main separation method is by electrolysis of water, but doing it on an industrial scale, packaging it, transporting it and using it as fuel requires solving enormous technological challenges, in which countries like Germany and Japan took the lead.

In this context, the Government sent its bill to Congress in May for the “Promotion of Low Carbon Hydrogen and Other Greenhouse Gases” and on September 12 it published its “National Hydrogen Strategy.”

View of the presentation of the “National Hydrogen Strategy” in Tierra del Fuego, one of the interested provinces

The norm, of 50 articles, creates a “National Hydrogen Agency” (AgenHidro) and a “Federal Hydrogen Council”, to join in supervision and regulation tasks to the already existing Secretariats of Energy (enforcement authority) and Industry and Productive Development, in addition to the National Institute of Industrial Technology (INTI).

In addition, it imposes two 0.5% rates on companies; one to finance a “Specific Affect Fund” to equip the “value chain” of the sector and another to finance the operation of AgenHidro, and stone carving and long-term export rights, something that no other competing country applies. and had already caused perplexity in May 2022, when the then Secretary of Productive Development, Matías Kulfas, admitted in an international forum on hydrogen, in Barcelona, that Argentina would impose withholdings on the export of something that it had not yet produced (and had not yet produces) to be an export force.

Rates, organizations and withholdings

Companies interested in benefiting from the regime and enjoying “fiscal stability” must pay 0.5% within the first 60 days of approval of their project and, although it is not specified, it is plausible that they must also pay another 0.5% to short term, which initially adds 100 basis points of financial cost to projects with enormous demands for initial capital and a long maturation period, in a context in which any investment in Argentina carries the backpack of a “country risk” that Today it is around 2,400 points.

The official project provides that the retention will be 0% during the first 10 years of the law for green or pink hydrogen and 1.5% for blue, aliquots that rise to 1.5% from the eleventh year. for the green or pink types and 3% for the blue and 3% and 4.5%, respectively, after the twentieth year.

The polychromy of hydrogen, whose “color” depends on the type of energy from which it is generated

“The excellent conditions for the production of low-emission hydrogen that exist in Argentina, mainly due to the quality of wind, solar, gas and biomass resources, make our country an attractive destination for investments. No less important is the opportunity for pink hydrogen, taking advantage of the Argentine nuclear tradition and especially the Carem project, a small modular reactor that can be applied to the production of hydrogen,” he wrote in the 72-page “Strategy” document. National “Hydrogen” Mercedes Marcó del Pont, Secretary of Strategic Affairs of the Government, who summarized the approach as a “multicolor strategy.”

Currently, according to a report by the CRU Group, an international consulting firm, about 99% of global production is gray hydrogen, which is produced from methane or coal by reforming natural gas or coal gasification, while “green” hydrogen It represents just the remaining 1%.

But several countries and regions have set ambitious targets for “clean” hydrogen production as part of their roadmap to achieving zero carbon emissions. For example, the US Department of Energy set the goal of producing 10 million tons of clean hydrogen by 2030 and 50 million by 2050 and the European Union, with its Repower EU plan, aims to reach 20 million tons by 2030.

Decarbonization

Green hydrogen, says the CRU report, is considered “a critical solution to decarbonize complex sectors to reduce, such as the steel or fertilizer industry” and industries and production chains around the world are making large investments to achieve a significant reduction of carbon emissions and adapt to the changes and new dynamics of regulatory and environmental frameworks at a global level.”

The main environmental objection to large-scale generation of “green hydrogen” is the demand for large areas to install gigantic wind and solar parks, capable of affecting entire regions and threatening the preservation of a variety of birds and terrestrial species.

In the introduction to the official “Strategy”, Flavia Royón, Secretary of Energy, also referred to the importance of pink hydrogen, due to the “acquired capabilities” in nuclear matters, but highlighted that of blue hydrogen “because it has the second gas reservoir.” most important non-conventional in the world”, by Vaca Muerta. A preference probably biased towards YPF, the main contractor of that formation in the Neuquén basin. Blue hydrogen is derived from fossil fuels, but reforming/gasification plants are combined with carbon capture facilities. Still, the CRU report says, “this option is not emissions-free.”

A true “road map” and “effective regulation” are needed, more than the statements, creation of positions and project organizations (Storni)

Adolfo Storni, general manager of Hychico, a pioneer in hydrogen production in Argentina, told Infobae that “a true ‘roadmap’ and effective regulation is necessary, more than the statements, creation of positions and bodies of the official project. “which – he stressed – do not affect the productivity of the business.”

Hychico, from the oil and petrochemical company Capsa, was the first Argentine company that at the beginning of the century in the Golfo San Jorge Basin, 20 kilometers from Comodoro Rivadavia (Chubut), with wind generation and two hydrolyzers, developed a Green Hydrogen plant and the first natural reservoir of Hydrogen, 800 meters deep, which charges through a polymer hydrogen pipeline.

Vaca Muerta gas is one of the bets of the “National Hydrogen Strategy”, to produce it in its “blue” type

According to the company, it is necessary to generate investments by reducing financing costs and risks, but the creation of two 0.5% rates will only make the projects more expensive. In addition, the official initiative focuses more on blue hydrogen (from natural gas, with carbon dioxide capture) and pink (nuclear energy), points out that green hydrogen is still in the development stage and questions its effectiveness. It is true, says Storni, that there will be a transition from gray, pink and blue hydrogen to green, as some countries prioritize the lowest initial cost. But, he adds, “there are countries that go only for the green.”

The official initiative focuses more on blue hydrogen -from natural gas, although with carbon dioxide capture- and pink hydrogen -nuclear energy.

“There is an opportunity for those who come forward; Germany, the Netherlands, Norway, and Sweden already have demand projections for 2030 for green hydrogen; Argentina’s efforts should go towards promoting the three variants and not be biased towards some of them. Let the market and the industry define what to develop and when. Without a doubt we must take advantage of natural resources and gas plays an important role, but wind is also of utmost importance, with capacity factors of 55%; Argentina could well be a great exporter of gray, blue and green hydrogen,” stressed the general manager of Hychico.

A report by the consulting firm Economía & Energía had detected a strong interest from European countries in the development of hydrogen as an energy vector by 2021.

A report from the consulting firm Economía y Energía, headed by Nicolás Arceo, who was vice president of Finance at YPF during the second government of Cristina Fernández de Kirchner, shows – with data until 2021 – that Germany and other European countries are – by far – the biggest drivers and main potential markets for the export of Argentine green hydrogen (see above)

The report highlights the very high renewable generation potential of Argentina, due to the high “load factors” (amount of time they generate) of the winds in Patagonia and solar irradiation in northwest Argentina, as can be seen in the maps attached.

Another illustration from the Economy & Energy report, which highlights the natural advantages of Argentina to produce “green hydrogen”

Regarding regulation, Storni noted: “too many organizations, and all with a long learning path, too much regulation and a strong management role instead of only exercising the function of controller, in contradiction with an article that establishes that the authority of application is the Ministry of Energy.

National Component

As with withholdings, the rule incurs state micromanagement regarding the “national component” of the projects. Article 11 provides different percentages depending on the “color” of the hydrogen to be produced and the moment of the investment. In the case of green, a national integration of 35% is required for projects executed between years 1 to 5 of the law, 45% for projects executed from years 6 to 10 and 50% for projects between years 11. and 30 after the law was passed.

According to Storni, setting minimum national components can make the development of projects difficult, since it is not certain that the country can afford the provision of components to meet these thresholds “in sufficient quantity and quality, since the projects are large scale.” And in other cases, he said, the requirement would make financing difficult by foreign credit agencies that require, precisely, a certain percentage of provision by companies in their countries.

For Gerardo Manhard, founding partner and project director of Dreicon, a company that began as a consultancy but is already a developer of energy projects, the main disadvantage of the official project is not providing any support in the gestation stage of the projects, in addition to then impose 100 basis points of extra cost on them. “I’m not saying that this leaves them out, but it can set them back compared to other countries that do not have those costs. For green hydrogen, we must think about incentives in line with those of regional competitors such as Brazil and Chile,” he told Infobae.

For green hydrogen, we must think about incentives in line with those of regional competitors such as Brazil and Chile

The same goes, he added, for the exchange rate regime, availability of foreign currency and export withholdings. “We have to tune in with other countries,” Manhard highlighted.

Dreicon develops transition, renewable, decarbonization and energy efficiency projects. It recently won a tender for renewable generation at peak hours from a solar source in Añatuya, Santiago del Estero. The State ensures the firm purchase of that energy for 15 years in pursuit of “energy diversification.”

In Río Negro, in addition, the company is working on a project to generate green hydrogen from wind energy on 5,000 hectares of countryside, with access to the sea coast, key for access to ports and water for desalination. “We need to build a wind farm of half a GW, measure the wind resource for two years, each mast costs between 100,000 and 120,000 dollars and we have to install five. It is very difficult to face it with Ebitda. The law arrives late and does not contemplate these types of things,” said Manhard, who in any case considered it positive that the project is sanctioned, as a sign of a national decision to move forward on the matter.

Solar energy is a source to produce “Green Hydrogen”. In the image, a view of the Caucharí solar park, in Jujuy

Manhard considered the “multicolor strategy” of simultaneously targeting blue, pink and green hydrogen to be positive. “Blue hydrogen is not something minor, in Norway it is being used heavily and they see us as a leading country. There is also the possibility of pink hydrogen. For decarbonization, Argentina has already taken a very big step, because coal is less than 1% of its energy matrix, and gas more than 50%. And in green hydrogen we have very great advantages, with load factors almost double that of other countries and a lot of suitable surface area; in Hamburg (Germany), in Rotterdam (Netherlands), in Madrid (Spain) they have received us very well, there are many potential buyers, starting with Germany,” said the executive.

Industrial Hubs

For his part, Francisco Romano, partner of the Pagbam law firm (Pérez Alati, Grondona, Benites and Arntsen), director of the Energy Institute of the Universidad Austral and co-author, with Cecilia Giralt and Marina Paradela, of the “Study of technical standards and regulations necessary for the development of hydrogen in Argentina”, financed by the Inter-American Development Bank (IDB), said that if what is contemplated in the “Strategy” is effectively carried out, new industrial hubs will emerge aimed at the production of hydrogen and its derivatives, such as ammonia and methanol, which can be applied in products such as fertilizers, green fuels and green steel.

It can give birth to new production and service sectors that will demand advice and equipment linked to value chains.

This can give rise to new production and service sectors that will demand advice and equipment linked to value chains, such as, for example, hydrogen certification services, engineering, transport and port logistics, electrolyzer manufacturing, linked capital goods. to the generation of renewable energy, carbon capture and storage and water desalination, among others, Romano added.

In the case of green hydrogen, the evolution of “levelized” costs (that is, taking into account the useful life and load factor of the projects) of generation projects for Argentina a rapid decrease towards 2030, which would continue until 2050, putting the country among the most competitive in the world in the matter. Courtesy of the Patagonian winds, the NOA sun, the Tropic of Capricorn and an extensive maritime border.

Romano, Giralt and Paradela also studied the hydrogen “roadmaps” of competing countries that were ahead of Argentina.

South American competition

Chile, for example, launched its “national strategy” in November 2020, and Uruguay launched its own in June 2022, promoting the development of the domestic market in its Phase 1 (2022-24) and laying the foundations for the first export projects. in its Phase 2 (2025-29), have the first operational export projects (such as e-methanol).

Colombia published its strategy (which promotes the blue and green “colors”) in October 2021, with the goal of producing green hydrogen at a value of $1.7 in the Northern Caribbean by 2030 “where the best renewable resources are concentrated.” per kilo, while blue costs $2.4 per kilo.” By 2050, Romano said, Colombia would produce green and blue hydrogen at around $1 per kilo, a highly competitive price.

In South America, Brazil leads the development of hydrogen in the different phases of the value chain (Romano-Giralt-Paradela)

According to the study by Romano and Giralt, “in South America, Brazil leads the development of hydrogen in the different phases of the value chain. “It does not have a national strategy, but it has an R&D program on the energy use of hydrogen, and it co-led the United Nations High Level Energy Dialogue, presenting an energy pact on hydrogen as a voluntary commitment,” to accelerate the fulfillment of the Sustainable Development Goal (SDG 7), targeting both the national and export markets.

Paraguay, meanwhile, through the document “Towards the green hydrogen route” proposed it as a vector for the development of the energy sector, applied mainly in transportation and taking advantage of the large surpluses of hydroelectricity.

What is it used for?

Illustration from an official report shows the uses of hydrogen as an energy fuel

Until now, hydrogen was mainly used as an industrial input in petrochemistry (hydrocarbon refining, in the pharmaceutical sector, steel, metallurgy, food sector and fertilizer production, through the production of ammonia.

In the future it would continue to supply those sectors, but it will also power trucks, trains, ships, airplanes and will be the primary source of successively larger portions of electricity for industrial use in different countries around the world.

In its Economy & Energy report, the Arceo consulting firm recalls that global demand for hydrogen, which was barely 18 million tons in 1975, reached 90 million in 2020 and is expected to exceed 200 million tons in 2050, as the world accelerates decarbonization to reduce as much as possible the calamities brought about by climate change.

A green hydrogen storage plant in Spain, one of the countries interested in Argentine production potential (AP Photo/Bernat Armangué)

Although late compared to its neighbors, the promotion bill and the “national strategy” for hydrogen are an attempt to respond to a global call and the advantages that nature gave the country.

But the lyrics are not enough, as experience shows. In August 2006, Law 26,123 “On the Promotion of Hydrogen” was passed; Articles 13 to 16 created the “National Hydrogen Promotion Fund” (FonHidro) and from 17 to 19 a “promotional regime” and tax incentives were instituted to invest in the sector. The standard established a validity period of 15 years, but it was never regulated; For a decade and a half it was a dead letter, and finally lost its validity.

The country continues to have nature on its side. It would be a matter of adding the best possible policies and carrying them out.