Brazil sails for green hydrogen power are already unveiled

Brazil sails for green hydrogen power are already unveiled

The effects of ongoing climate changes and the sanitary and economic crisis arising from the Covid-19 pandemic on a global scale have uncovered certain flaws of the current economic development model, revealing the need for governments and companies to take action towards reviewing the way of dealing with natural resources in general.

It has become clearer that the relationship between people, companies and nations with the environment must be reassessed and remodeled and, to address such growing concern, companies, leaders and countries have driven more recently their attention to good business governance practices and social and environmental responsibility, focusing their decision-making on sustainable investments.

After decades of being considered and perceived as an energy source with great potential and a disruptive channel for the future (as indicated in the Brazilian National Energy Plan 2050), hydrogen has nowadays become a strategic goal for governments and companies in different parts of the globe. Even though there are still significant technological and market challenges, hydrogen has gained its momentum in a post-pandemic scenario to foster the rebounding of the economy and of accelerating the energy transition in several countries. Endorsing such fact, Hydrogen Council, an initiative that brings together CEOs of 92 global companies, estimates that green hydrogen will account for about 20% of all energy demand in the world by 2050, thus creating a market valued at US$ 2.5 trillion and 30 million direct and indirect jobs worldwide.

In such scenario, Brazil has emerged as one of the prominent leading countries of a future global green hydrogen market given its potential to produce large scale green hydrogen volumes based on its great renewable energy and agricultural capacities, without prejudice to the use of biomass gasification process and urban waste (biogas). Also, the Brazilian industry represents a relevant domestic market, and the country seems to have or being capable of developing the adequate technology and supply chain to support the new sector.

New frontiers for the use of hydrogen generated in Brazil may be developed in the segments of transport, electricity generation (including for sectors with difficult electrification), energy storage and industrial processes. Specifically, in regards to energy storage, due to its versatility of use, hydrogen is considered a resource capable of promoting the sector coupling between the fuel, electrical, industrial, and other markets, with studies advocating that this could not only contribute towards deepening decarbonization of the world economy, but also promoting broader and decentralized competitive dynamics by means of such sector coupling.

In terms of agricultural sources, green hydrogen could be produced, for instance, from sugarcane alcohol, biodiesel originated from soybeans and sunflowers (among other plants).

Moreover, Brazil is one of the countries with the greatest potential for renewable energy generation and has one of the most competitive marginal production costs. For instance, in 2019 the country’s electrical matrix contemplated 9% of wind and 2% solar photovoltaic power generation, albeit such percentages are expected to increase to 16% and 8%, respectively, by 2029, in accordance with Brazil’s 2019-2029 Energy Expansion Ten Year Plan, published by the Ministry of Mines and Energy of Brazil (MME).

Evidencing such prominence, since February 2021, six memorandums of understanding were signed by the States of Ceará, Pernambuco and Rio de Janeiro with several multinational enterprises, having investments estimated at around US$ 22.2 billion, in connection with green hydrogen production projects based on renewable sources.

On the institutional and regulatory fronts, the Brazilian government and other relevant players have engaged in international partnership initiatives and projects to accelerate the formalization of the national hydrogen strategy, which resulted in the inclusion of hydrogen in the National Energy Plan 2050, approved in December 2020 by MME.

For instance, the Chamber of Commerce and Industry Brazil-Germany of São Paulo and Rio de Janeiro (AHK) have launched the Brazil-Germany Alliance for Green Hydrogen, which aims at seeking companies interested in supplying the energy to the European country through private tenders. The private tenders will be brokered by the recently created Hydrogen Intermediary Company (HIC) and the supply contracts shall provide for a partnership of at least ten (10) years.

On the other hand, Allianz Global Corporate & Specialty has recently disclosed a report laying out certain risks associated with hydrogen production, such as: (a) fire and explosion hazard arising from the mix of hydrogen and air, in addition to the difficulties for identifying leaks without dedicated detectors since hydrogen is colorless and odorless; (b) breakdown and business interruption; and (c) material embrittlement (e.g., piping, containers or machinery components). According to such report, one of the major disadvantages is the costs associated with transport and storage of hydrogen, which requires large investments and support from local governments.

In order to address the associated risks, challenges and explore the potential of green hydrogen production, in August 2021, MME has presented to the National Energy Policy Council (CNPE) the guidelines for Brazil’s National Hydrogen Program of Brazil (PNH2), which in a nutshell, is structured based on the following pillars:

•        Strengthening science and technology;

•        Human resources training;

•        Energy planning;

•        Legal and normative regulatory framework;

•        Opening the market and increasing competition; and

•        International cooperation.

The implementation of the PNH2 will be coordinated by a technical committee to be created according to the guidelines of the PNH2, which shall periodically approve the work plan provided thereunder and may also submit such work plan for public consultation.

Because of the capital-intensive nature of the hydrogen industry, one of the main concerns for the consolidation of a green hydrogen industry in Brazil relates to the required funding for development studies, human training and project construction, which funding may originate from local and international financing and capital markets. To this point, it is worth noting that the above-mentioned guidelines provide that the PNH2 shall identify sources and instruments for international financing, such as green funds, international cooperation agencies, multilateral development banks, investment funds and blended finance instruments.

In this context, having a solid and reliable legal and regulatory framework is of upmost importance to attract foreign funding into this incipient sector and legal initiatives such as draft laws No. 7,063/2017 and No. 5,387/2019 – currently under analysis by the National Congress and clearly providing for the possibility of foreign currency indexation of local offtake contracts in different infrastructure fields – would certainly be helpful, particularly in connection with projects where there is no natural export hedging. In the meantime, stakeholders may succeed in increasing the spectrum of possible foreign lenders and investors by using creative approaches in the structuring of local green hydrogen projects to address, from legal and contractual standpoints, certain risks, such as the foreign exchange mismatch (including to potentially allow indexation to foreign currency in the underlying offtake contracts regardless of any change in law).

Written by:

Thiago Vallandro Flores & Rodrigo Murussi

Thiago Vallandro Flores, Partner
Rodrigo Murussi, Associate