The prospects in Brazil for low-carbon hydrogen

Brazil has an increased focus on low-carbon hydrogen. Brazil’s National Hydrogen Policy, adopted in July 2021, identifies the development of a low-carbon hydrogen industry as a national priority.

This article describes Brazil’s intention to forge a position of leadership on hydrogen development, addressing the current status and the legislative initiatives which will underpin the Brazil’s hydrogen industry. Transforming this goal into reality will create opportunities for both the national public and private sectors.

Several factors contribute favourably to Brazil’s ­ability to achieve its goal. First, and strategically important, Brazil is market-leading in both the biomass and biofuel industries. Second, posting a daily national production output of natural gas of around 4MM m3 barrels of the oil equivalent, Brazil may become a major player in blue hydrogen. Third, renewable energy is exceedingly ­available at ­rapidly decreasing prices.

Where Brazil is currently positioned

Public and private entities are currently moving towards low-carbon hydrogen implementation and other forms of sustainable investment.

On a national level, the National Development Bank (BNDES) and the Brazilian Central Bank have issued ­policies to foster decarbonization and development of green projects. A new credit line linked to ESG targets offers progressively lower rates to companies that meet recognized ­climate and social targets.

A further relevant instrument for green initiatives is incentivized debentures. In 2019, the volume of issued debentures attained a record level of BRL 33.7 billion. This momentum was maintained in 2020. Infrastructure debentures registered historic growth, primarily driven by the energy sector. The Brazilian Federal Government also extended incentives prioritizing financing of key infrastructure projects that proffer environmental and social benefits.

Meanwhile, Brazil’s private sector is wasting no time. The latest national bid for power-purchase agreements saw project registration of 55GW of solar and onshore wind, with a remarkably low price of USD 0.038/kWh. Competitive green hydrogen production will inevitably boost carbon reduction nationwide, especially when factoring the ­substantial production of Brazilian steel, cement and fertilizers. These hard-to-abate industries are implementing on-site low-carbon hydrogen in the attempt to reduce their carbon footprint.

Moreover, the combination of low-price renewable energy and project proximity to port provides fertile ground for green hydrogen, both for generation, export and use in long-haul shipping.

R&D in hydrogen projects are also favoured by the surge of incentive. In addition to fast-track approval for hydrogen R&D, power generation and oil and gas companies are now positioned to heavily invest in hydrogen with the investment obligation existing under governmental contracts. As such, this provides valuable cashback for both company and country.

So, what has yet to be developed?

Brazil will be required to address its longstanding chicken-and-egg dilemma, which drags on both supply and demand.

Hydrogen supply and distribution is generally viewed as easier to promote. Following recently-passed legislation, the natural gas grid will be permitted to house hydrogen, and supply will be guaranteed via the upcoming creation of considerable natural gas infrastructure.

Recent additions in the electricity regulatory framework defined guidelines for implementation of mechanisms that factor in environmental benefits. To implement what is conventionally known as “consideration of environmental benefits”, carbon pricing emerges as an efficient instrument to attach the social and environmental impacts generated by GHG emissions into production costs whilst further enhancing low-carbon hydrogen attractiveness.

Other measures must be taken to promote demand. For instance, the creation of a cap-and-trade or emission ­trading system (ETS), such as that existing in the EU, would benefit demand both locally and abroad.

Regulation for project development of hydrogen is also pending, including that related to transport and storage, specific taxation and industry incentive, if the use of water for electrolysis will be regulated, how offshore wind-energy projects will be regulated.

Finally, the yet to be approved Bill of Law for creation of a Regulated Brazilian Carbon Market will introduce specific rules and limitations for each sector of Brazilian industry. This expected regulation shall unveil a new ­market based on a low carbon economy, in which hydrogen will most certainly play a significant role.

 

Article written by Thiago Luiz Silva and Pietro De Biase, Vieira Rezende

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