Chile urged to build hydrogen economy, working on 'contracts for difference'

Work is advancing in Chile on a finance model designed to help get green hydrogen investment flowing and pickaxes finally swinging, BNamericas was told.

The project involves constructing a formal proposal for the introduction of so-called contracts for difference.

Coordinated by the local office of German development cooperation agency GIZ, the initiative is known as Team Europe for the Development of Renewable Hydrogen in Chile, which is co-financed by the EU and the German federal ministry of economics and climate protection (BMWK), 

A Chilean public-private working group meeting – involving government, regulator, pension fund, insurance and hydrogen sector representatives – is due to be held this month to advance the proposal, said Álvaro Castro, renewable hydrogen financial advisor at GIZ Chile.

“Our traditional instruments are not enough to mobilize project financing in Chile,” Castro said.

“The actual financial framework is in place in Chile, but we need to create an independent, private institution to manage things. It will involve a lot of public-private coordination, and our opportunity and goal at GIZ is to act as a bridge between the two.”

A CDF is a mechanism designed to stabilize revenue, in turn, incentivizing and derisking investment. 

In general terms, if the market hydrogen reference price is below an agreed strike price, the idea is to bridge the difference between the high prices at which hydrogen is currently being traded on the global market and the lower prices at which it can be sold on and used in economically viable ways at a regional level.

In the auction process, producers would submit their proposed strike price and project capacity, along with other factors. 

The likes of local pension funds and family offices could potentially invest money in the management company’s cash pot that will distribute and receive payments. Investment would fall under the alternative asset banner and performance is expected to follow the J-curve, being more profitable over time and matching the timeframe of the investment. 

Chile has more than 74 publicly announced green hydrogen projects, including several in the permitting phase. The central challenge now is securing offtakers and project financing in a context where green hydrogen is still more expensive to produce than the fossil fuels it would substitute.

“We need to mobilize investment,” Castro said. “This instrument would achieve this, mobilizing both traditional and non-traditional investors, including sustainability funds.”

WORKING GROUP

The working group, meanwhile, will analyze takeaways from a recent whistle-stop tour of Europe by GIZ and energy ministry and finance ministry representatives, who met with multiple public and private sector entities – BMWK in Berlin, H2Global in Hamburg, the Low Carbon Contracts Company (LCCC) in London and the European Hydrogen Bank in Brussels, a state-owned venture established to support clean energy investment. 

“This information that we obtained is raw material for us for our internal discussion,” Castro said, adding that the contract for difference model Chile may eventually adopt would be a hybrid of several in place in Europe. 

“We learnt that there are different ways to achieve objectives. Our focus is making a tailor-made model for Chile.”

Following the knowledge-building trip and based on the information obtained, initial work is underway on a proposal that incorporates elements of models used by LCCC, European funding schemes European Hydrogen Bank and H2Global and BMWK’s carbon contracts for difference funding program.

The Chilean proposal, whose central pillar will likely recommend the creation of a private company to manage corresponding contract auction processes, will be presented to the government. 

Chile’s public-private working group comprises representatives from the energy and finance ministries, financial market commission CMF, national energy commission CNE, the hydrogen sector – represented by industry associations H2Chile, H2 Antofagasta, H2V Biobío, and H2V Magallanes – and from the respective associations of the country’s pension fund, insurance and investment fund industries. 

LOCAL DEMAND

Along with learning about hydrogen contracts for difference, the delegation was told that Chile – dependent on imported oil and gas and in turn exposed to price volatility – should focus on building a hydrogen economy, a process that should start by decarbonizing local industry using green hydrogen and its derivatives.

Chile’s Biobío and Antofagasta regions are deemed ripe for hydrogen ecosystem deployment, given the multiple carbon-intensive industries in the areas.  

“In all our meetings in Europe, we were told we need to create internal demand,” Castro said, adding that European officials also urged infrastructure sharing and partnerships to keep costs down.

“Starting by developing a local market would get the wheels spinning. It would create internal demand, pave the way for creating products for export.”

While starting small would place upward pressure on costs, eventually achieving economies of scale would drive them down. 

Projects planned for Chile’s third main hydrogen production hub, far south Magallanes region, are chiefly geared to the export of e-fuels and green ammonia. The region has a small industrial base of potential offtakers. 

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