The potential for green hydrogen in Latin America

By Manuel Fernandes, lead partner of KPMG's Energy and Natural Resources practice in Brazil and South America, and Ricardo Marques, lead partner of KPMG's Metal and Mining practice in Brazil

The production of steel using green hydrogen is one of the possible routes for the steel industry to achieve decarbonization goals and contribute to the global energy transition. Although the number of green steel projects on the pipeline falls short of existing needs, especially in Latin America, the key to improving current performance is to reduce the cost of producing green hydrogen, which is currently between US$3 and US$12 per kilo, according to the International Energy Agency.

Although currently only part of the hydrogen produced globally is low carbon, the agency has also highlighted that the share of low carbon hydrogen could change in the coming years, especially if the costs incurred with producing renewable energy would fall to produce electricity, as well as the costs of the technologies used to generate clean hydrogen.

If this downward trend continues, fuel generation costs could fall to the range of US$2-US$5 per kilo by 2030, when generated by solar energy, reaching even lower figures in Latin America, which is emerging as one of the cheapest producing regions in the world. By 2050, costs could be lower than US$2 per kilo in Argentina, Chile and Brazil, to mention some examples.

A significant number of green hydrogen projects are currently in operation in Latin America, and the Cachimayo manufacturing plant in Peru is the largest and longest-running power plant in the region. In Argentina, we cannot forget the hydrogen plant of Hychico in Comodoro Rivadavia, which has operated since 2008. In Brazil, the greatest facility is EDP’s project located in Complexo de Pecém, in Ceará. In Chile, Haru Oni is located in Cabo Negro, in the Magallanes region. Other countries in the region, such as Colombia, Costa Rica, Paraguay, Mexico and Uruguay, are also planning and developing initiatives aimed at producing hydrogen.

Although the International Energy Agency has pointed out that several countries in Latin America share characteristics that make them indisputable candidates for leading the production and export of green hydrogen in the future, it is important to note that obstacles could prevent this process, particularly the lack of technologies that allow the capture, transport and storage of carbon dioxide, the need to optimize the operation of the value chains that produce and use that fuel, and to develop new infrastructure.

Higher levels of investment are also necessary to leverage economies of scale, which in turn requires changes in the regulatory and financial frameworks in order to foster a business-friendly environment. To that end, it is important to set rules that encourage the production and use of low-carbon fuels, strengthen renewables and generate direct and indirect tax incentives, among others.

In addition, promoting public-private partnerships will be important for the development of hydrogen and green steel projects, as well as public projects to cover capital funding and operating costs and, among other initiatives, promoting low-carbon standards and certifications. An additional obstacle in the region that must be taken into account in this transition is how the costs of renewable energy will evolve from now on and how this may affect green hydrogen.

Finally, steel will be essential for decarbonization, not only because it is required to build multiple renewable energy sources, but also because the journey towards zero carbon and the need to produce in a cleaner manner using hydrogen-based technologies are of utmost importance for achieving a sustainable fall in emissions by 2030 and, above all, in 2050, which is when the industry expects to be closer to achieving the transition goal.

Latin America has an opportunity in this scenario. Being one of the regions with the best prospects in terms of hydrogen from renewable sources and projected minimum production costs, the gradual increase in the number of initiatives focused on green steel or produced using low-carbon technologies seems to be the logical path to follow in the medium and long term.

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