InsightsChile’s green hydrogen odyssey: promises, pitfalls and politics

Chile’s green hydrogen odyssey: promises, pitfalls and politics

What are the critical risks for investors?

The surge of interest and investment in Green Hydrogen (“GH2”) in Chile has positioned the country as a key player in the global pursuit of clean energy solutions. From the ambitious National Green Hydrogen Strategy championed by former Chile’s Minister of Energy and Mining, Juan Carlos Jobet, to the environmental and logistical hurdles tied to water usage, electricity generation and infrastructure development, the discussion unfolds to unravel the intricate dynamics shaping the industry’s trajectory. 

In 2020, former Minister, Juan Carlos Jobet, championed the National Green Hydrogen Strategy. The appeal of this emerging clean fuel extends beyond driving decarbonisation; it also captivates European states and investors, with notable names like the German automobile firm, Porsche expressing interest. Green Hydrogen holds the promise of fulfilling the European Union’s crucial energy autonomy, a necessity underscored by Russia’s invasion of Ukraine in 2022.[i] 

GH2 has recently gained significant prominence in Chile, attracting enthusiastic investments from countries such as Germany, France, Austria, Italy and Japan. These international investors have placed their trust in Chile to spearhead ambitious GH2 projects. 

So, why Chile? According to experts, “Green Hydrogen produced in the Atacama Desert [Antofagasta Region] and in the Magallanes Region will achieve the lowest levelised cost on the planet by 2030.”[ii] The Chilean government is ambitiously targeting the use of GH2 for mining CAEX hauling trucks before 2030, an industry representing over 10% of the country’s GDP. Subsequently, GH2 is expected to expand into the shipping and aviation sectors from 2033. 

What distinguishes this hydrogen as ‘green’? While hydrogen itself results in zero-emission combustion, the way it is obtained varies in terms of environmental impact.[iii] The cleanest production method, utilising renewable energies to electrolyse water and obtain hydrogen and oxygen, aligns seamlessly with the concept of green hydrogen.[iv] 

Despite the myriad of opportunities presented by the Chilean GH2 industry, potential investors should remain vigilant in 2024. There are inherent risks that demand careful attention to navigate successfully in this complex landscape. 

GH2 production: navigating the H2-Oh-No 

Water, being the fundamental element required for GH2 production, is a critical factor in the process. The production of 1 kg of GH2 demands a substantial amount of water—specifically, 9 kg of water per 1 kg of fuel.[v] Unfortunately, Chile finds itself among the 25 countries globally facing “extremely high” baseline water stress.[vi] When focusing on the country’s reality, the northern Antofagasta Region, a primary hub for renewable energies, experiences the highest restrictions on water use.[vii] Antofagasta, a naturally arid region with the Atacama Desert, the world’s driest, has faced exacerbated water scarcity due to 14 years of severe drought.[viii] On top of that, the local mining sector consumes a staggering 65% of the remaining water.[ix]  

The second crucial element in GH2 production is electricity, utilised in the hydrolysis of water. Similar to Argentina, Costa Rica, Peru and Uruguay, Chile has witnessed a significant decrease in renewable power generation costs, including wind generation, since 2010.[x] Despite the attractive costs, environmental concerns have surfaced. An executive from the power generation industry pointed out potential resistance, citing the impact of wind-generated power on birds, as wind farms can alter their flight paths. Additionally, discussions were raised about the shadow flicker generated by turbines during the development of such projects. In 2022, the Chilean-based Patagonian Ecological Group warned about environmental deficiencies in one wind generation project, specifically regarding installations, water use and concerns related to local aerial fauna.[xi] Local scientists have also expressed similar apprehensions during the same year.[xii] 

GH2 infrastructure: Chiles port puzzles and roadblock woes 

In 2021, Pablo Terrazas, former Executive VP of Chile’s Production Development Corporation Agency (“Corfo”), highlighted the critical role of infrastructure in the local Green Hydrogen sector.[xiii] Both roads and pipelines are necessary to transport GH2 from production points to ports for export, primarily to European markets. The existing deficit is evident: Chile’s container port traffic (TEU: 20-foot equivalent units) stands at 4.58 million, surpassing Peru’s 2.87 million but significantly lower than Panama (8.62 million), the UK (9.84 million) and Germany (14.71 million).[xiv] 

The National Oil Company (“ENAP”) entered into an infrastructure agreement with GH2 firms operating in the Magallanes Region last year.[xv] However, experts paint a grim picture, confirming, “the last significant investment [Chile made] in infrastructure was during Sebastián Piñera’s first administration (2010 – 2014). After that, we stopped investing. Moreover, port concessions will end soon, and we still don’t know who is awarding them.” The expert continued, “The ships have become bigger and Chilean ports have remained the same.” Another specialist argues that there is no “political will” to drive port infrastructure development. 

The infrastructure shortfall is already impeding the growth of the GH2 industry. It hampers the adoption of GH2 in the internal market at both industrial and household levels. An energy sector source points out, “A litre of green hydrogen costs five times as much as a litre of petrol, because transport and production are very expensive.” 

Chile’s political tightrope 

Chile’s political landscape poses potential challenges for keen investors, and several factors warrant consideration. One significant aspect is President Boric’s precarious situation, marked by a 62% disapproval rate at the close of 2023. His remaining supporters, primarily the youth and the political left, are deeply concerned about environmental issues.[xvi]

President Boric, hailing from the Magallanes Region, one of the two Green Hydrogen exporting hubs in the country, faces added scrutiny. If environmental concerns arise regarding GH2 projects, the self-proclaimed “first ecological government in Chile’s history”[xvii] may adjust its stance and regulations to appease the 33% of voters still supporting Boric. Experts are already urging the reinforcement of institutions to safeguard environmental permits,[xviii] putting the president under substantial pressure. 

Adding to the complexity, Chileans are set to elect their mayors in 2024. While they may not directly influence project operations, the ruling leftist coalition has political incentives during the campaign to criticise emblematic projects, particularly in the mining, infrastructure, forestry and energy sectors. These tangible projects can impact local communities, making them susceptible to political manoeuvring. 

Furthermore, the approval process for large investment projects has become increasingly challenging. The National Productivity Commission highlights that approval times for priority permits often exceed regulatory timeframes. There are more pending priority permits than those in the pipeline, with water-related permits facing high rejection rates. For instance, the approval process for a water desalination plant, crucial for preserving Chile’s strained water resources, could extend beyond 11 years under current processing times.[xix] 

Another critical consideration is the potential challenges posed by local indigenous communities. The Indigenous Peoples of Chile gained prominence during the past Constitutional process,[xx] and radical elements, linked to Colombian FARCS, have utilised the “Mapuche conflict” in southern Chile for political purposes.[xxi] Violent incidents in the region have surged significantly, from 150 in 2011 to 1,786 in 2021.[xxii] While current GH2 production sites are presently free of such conflicts, investors must remain vigilant in monitoring these communities throughout project development. 

GH2 gambit: navigating Chiles political chessboard 

Optimists express the belief that “approvals for major mining and infrastructure projects are likely in 2024.”[xxiii] However, this optimism may not align with the unpredictable climate, impacting Green Hydrogen and other large-scale extractive projects. Chile’s persistent infrastructure deficit further lacks a clear and foreseeable solution. President Boric faces multifaceted challenges, including securing victory in the 2024 municipal elections, maintaining a majority in the National Congress, and sustaining his coalition in office. Such intricate pressures commonly prompt political leaders in Latin America to act capriciously. 

A cautious approach is advisable; rather than focusing on high-level social events and investing in expensive lobbyists, a more prudent strategy involves engaging with local communities and closely monitoring local authorities. This approach acknowledges the intricate dynamics and uncertainties that characterise the current landscape, ensuring a more informed and strategic investment approach. 

While the prospects for Green Hydrogen in Chile are promising and have garnered significant international attention and investment, the path forward is fraught with challenges that demand careful consideration. From environmental effects and local opposition to infrastructure deficits and political and regulatory risks, the landscape is complex and dynamic. The ambitious goals of the National Green Hydrogen Strategy, driven by both economic and environmental imperatives, underscore the potential of GH2 in reshaping Chile’s energy landscape. However, potential stakeholders must exercise caution, recognising the multifaceted risks inherent in the industry. As the sector evolves, a prudent strategy must involve engaging with local communities and closely monitoring political and regulatory developments. This approach is imperative for investors to thrive in the long term and contribute to the sustainable growth of Chile’s emerging GH2 industry.  

________________________________________________________________________

[i] European Commission, Developing Chile’s Green Hydrogen potential, 2023 https://international-partnerships.ec.europa.eu/policies/global-gateway/developing-chiles-green-hydrogen-potential_en

[ii] National Green Hydrogen Strategy of Chile, 2020 https://energia.gob.cl/sites/default/files/national_green_hydrogen_strategy_-_chile.pdf

[iii] NationalGrid. The hydrogen colour spectrum, 2024 https://www.nationalgrid.com/stories/energy-explained/hydrogen-colour-spectrum#:~:text=Blue%20hydrogen%20is%20produced%20mainly,produced%20as%20a%20by%2Dproduct

[iv] Bartlett, Chile apuesta al hidrógeno verde, 2022 https://www.imf.org/es/Publications/fandd/issues/2022/12/country-case-chile-bet-on-green-hydrogen-Bartlett

[v] ACS Energy Lett. Does the Green Hydrogen Economy Have a Water Problem? (ACS Energy Lett, 2021). Available at: https://pubs.acs.org/doi/10.1021/acsenergylett.1c01375#

[vi] World Resource Insitute. 25 Countries, Housing One-quarter of the Population Face Extremely High-Water Stress, 2023 https://www.wri.org/insights/highest-water-stressed-countries

[vii] Isidoro Losada. Green hydrogen: Chances and barriers for the Energiewende in Chile, 2022 https://www.sciencetalks-journal.com/article/S2772-5693(22)00088-3/fulltext

[viii] Boletín de sequía (Dirección Meteorológica de Chile, December 2023). Available at: https://climatologia.meteochile.gob.cl/application/publicaciones/documentoPdf/boletinSequia/boletinSequia202312.pdf

[ix] Water-Energy Nexus in the Antofagasta Mining District: Options for Municipal Wastewater Reuse from a Nearly Energy-Neutral WWTP (Campo, G. et al., 2023). Available at: https://www.mdpi.com/2073-4441/15/6/1221

[x] IRENA. Renewable Power Generation Costs in 2022, 2023 https://mc-cd8320d4-36a1-40ac-83cc-3389-cdn-endpoint.azureedge.net/-/media/Files/IRENA/Agency/Publication/2023/Aug/IRENA_Renewable_power_generation_costs_in_2022.pdf?rev=cccb713bf8294cc5bec3f870e1fa15c2

[xi] Ovejero Noticias, Agrupación Ecológica Patagónica se refiere a proyecto eólico de para hidrógeno verde en Magallanes, 19 October 2022 https://www.ovejeronoticias.cl/2022/10/agrupacion-ecologica-patagonica-se-refiere-a-proyecto-eolico-para-hidrogeno-verde-en-magallanes/

[xii] Science Magazine. Green energy threatens Chile’s Magallanes Region, 21 April 2022 https://www.science.org/doi/10.1126/science.abo4129

[xiii] El Pingüino. Puertos de la región serán el mayor reto para llegada del hidrógeno verde, 13 May 2021 https://elpinguino.com/noticia/2021/05/13/puertos-de-la-region-seran-el-mayor-reto-para-llegada-de-hidrogeno-verde?utm_source=dlvr.it&utm_medium=facebook

[xiv] World Bank. Container port traffic (TEU: 20-foot equivalent unit), 2021 https://data.worldbank.org/indicator/IS.SHP.GOOD.TU?locations=CL-GB-NL-PA-DE-PE

[xv] Deheza Ltd. Green Horizons, 6 December 2023 https://www.deheza.co.uk/green-horizons/

[xvi] CADEM Research, Plaza Pública 3 December 2023 https://cadem.cl/estudios/aprobacion-del-presidente-boric-sube-3-puntos-a-33-mientras-la-desaprobacion-alcanza-el-62/

[xvii] Programa de Gobierno de Gabriel Boric, 2021 https://observatorioplanificacion.cepal.org/sites/default/files/plan/files/Plan%2Bde%2Bgobierno%2BAD%2B2022-2026%2B%282%29.pdf

[xviii] Diario Financiero. Actores evalúan gestión del primer gobierno ecológico: positiva, pero faltan avances en institucionalidad y combustibles fósiles, 29 March 2023 https://www.df.cl/df-lab/cambio-climatico/actores-evaluan-gestion-del-primer-gobierno-ecologico-positiva-pero

[xix] Comisión Nacional de Productividad. Análisis de Permisos Sectoriales Prioritarios para Invertir August 2023 https://cnep.cl/wp-content/uploads/2023/11/AnalisisPermisosSectorialesV9.pdf

[xx] Zlosilo, Cruz-Infante. Chile: Whither the Constitutional Process? 7 March 2022 https://aulablog.net/2022/03/07/chile-whither-the-constitutional-process/

[xxi] Frías. El conflicto Mapuche: terrorismo en la Araucanía chilena, 2022 https://dialnet.unirioja.es/servlet/articulo?codigo=8494517

[xii] Ex-Ante. El mapa de violencia en la Macrozona Sur en los últimos 11 años, 20 May 2022 https://www.ex-ante.cl/el-mapa-de-la-violencia-en-la-macrozona-sur-en-los-ultimos-11-anos/

[xxiii] EIU. Chile Economy, Politics and GDP Growth Summary, 2024 https://country.eiu.com/chile

About the Author

Carlos Cruz Infante
Carlos Cruz Infante
Carlos is a former Chief of Strategic Content at the General Secretariat of the Presidency of the Chilean Government. With 14 years of experience, he has advised the Chilean Mission to the OECD and the Vice-Ministry of Housing and Urbanism of Chile, focusing on Latin American geopolitics and political economy.
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