3 Key Geopolitical Considerations that will Affect Emerging Hydrogen Value Chains in Africa
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3 Key Geopolitical Considerations that will Affect Emerging Hydrogen Value Chains in Africa
By Saniya Syeda, Research Analyst, Botho Emerging Markets Group
February 23, 2023
It is widely argued that a hydrogen-driven global order is likely to reduce geopolitical vulnerability and be less prone to international security risks than the current hydrocarbon-driven one. It is expected to do so by increasing the share of energy produced domestically, shifting geostrategic competition from a focus on grabbing resources—a long-standing concern in Africa—to mastering technology and offering states opportunities for economic diversification. However, geopolitical and security risk trends in Africa suggest that hydrogen value chains will likely exacerbate previous fault lines created by regional power plays, derived resource geopolitics, and historic colonial political influences.
Green hydrogen is susceptible to derived-resource geopolitics
As an energy carrier, hydrogen relies on natural resources for its production, depending on whether it is derived from renewable energy and fresh water, as in green hydrogen, or from hydrocarbons, as in blue hydrogen. According to estimates, global demand for green hydrogen is estimated to be twice that for blue hydrogen by 2050, putting further pressure on the diminishing water resources on the continent. In regions where freshwater resources are limited, specifically in drought-prone areas of the continent, hydrogen generation-induced scarcity may be a trigger for local tensions despite ESG (Environmental, Social and Governance) studies by project developers and independent power producers (IPPs) in regions like the Maghreb. Additionally, it has the potential to exacerbate existing international rifts and create interstate competition for water resource control. This is especially true in the cases of Ethiopia and Egypt, two countries with hydrogen ambitions, also locked in a dispute over the Nile River's water resources. While there is a workaround to addressing the water question in the form of desalination, the desalination process is energy-intensive, environmentally questionable and raises the costs of green hydrogen production, making it a debatable solution in the short term.
Blue vs. green considerations for regional hydrogen policymaking are likely to be contentious
Regional policymaking will play a crucial role in the development of hydrogen markets in Africa. As countries develop these policies, they must address how existing regional power pools adapt to hydrogen trading in the long run by addressing questions about carbon trade, financing, and regulation, all of which will affect the lucrativeness of blue and green hydrogen. Regional power pools, such as the Southern Africa Power Pool, will have to decide whether to incentivize one type of hydrogen over another to benefit member countries like Angola, which is prioritizing green hydrogen due to its cleaner footprint, or focus on building traction across the board, as South Africa does now without differentiating between the origination process. While green hydrogen is the cleaner fuel and has higher export traction, especially in the EU market, blue hydrogen is likely to be a cheaper alternative in the short term, as it offers an opportunity for existing and emerging hydrocarbon producers to tap into existing infrastructure for hydrogen production.
Moreover, based on the natural resources available to them, countries will have the incentive to set standards to maintain their competitive advantages, especially when it comes to green and blue hydrogen. For instance, African countries looking to produce hydrogen for regional export, such as Kenya, are likely to favor certification schemes that cover only emissions generated during production and exclude those that arise during transport to maintain competitiveness. Similarly, countries with large natural gas reserves and transportation systems, such as Nigeria, are likely to be more lenient towards greenhouse gas emission thresholds that favor the blue production pathway, thus incentivizing the production of one form of hydrogen over the other. These considerations can create tensions as countries look to balance environmental commitments with national and economic interests while also seeking to achieve harmonization through power pools and setting trade standards.
Countries managing the monetary exchange risk might gain better off-taker access
As many unknowns surround the nature of price discovery in international hydrogen trade (e.g., hubs, benchmarks, pricing mechanisms, contract types), the currency denomination and pricing mechanism of internationally traded hydrogen are two crucial areas of consideration. The European Union, which is expected to become a key import market, is attempting to denominate future hydrogen imports in euros. If successful, this will provide a competitive advantage in mitigating currency exchange risks for West and Central African countries, as well as countries like Morocco, whose currencies are fully or partially pegged to the euro. In the long run, if a hydrogen-based economy takes off, this competitive advantage will disincentivize regional integration efforts (such as the adoption of a common eco-currency for West Africa) that seek to break free from colonial ties that motivate African countries to prioritize European trading interests.
In addition to the aforementioned risks, other geopolitical and security risks are likely to affect hydrogen value chains due to the operationalization of international trade supply chains. For example, as Morocco moves closer to signing hydrogen deals with Germany, the eventual transportation of hydrogen energy through pipelines may rekindle tensions with historical rival Algeria, which has long competed for European pipeline deals. In this context, besides the usual enabling environment and resource availability considerations, data informing various geopolitical plays and security risks associated with the hydrogen sector at the micro level will be a key determinant of the continent's hydrogen political economy. This data will also answer whether hydrogen is truly the more risk-averse commodity, especially since current trends indicate that it only resets the considerations rather than reducing them significantly.
Saniya Syeda is a Research Analyst at Botho Emerging Markets Group