Endowed with abundant wind and solar energy potential, an integrated, low-carbon power grid and geographic advantages to export to Europe and the east coast of North America, plus a significant domestic industry, Brazil has the opportunity to become one of the world leaders in the production of green hydrogen.
The total opportunity will amount to USD 15-20 billion in revenues by 2040, the majority (USD 10-12 bn) to serve the domestic market, especially trucking, steel production and other energy-intensive industries. Another USD 4-6 bn could come from exports of green hydrogen-derivatives to the US and Europe, as the landed costs of Brazilian green hydrogen would be competitive versus exports from other countries.
To enable such an accelerated scenario, some USD 200 bn must be invested in green hydrogen, including 180 GW in additional renewable power generation – which is more than the current installed capacity in the country. This article describes the current scenario, presenting numbers and projections and concluding with a brief plan to help business participants to unlock the industry’s full potential.
Why hydrogen, and why now?
Climate change and global warming are increasingly evident in our daily lives, demonstrating the need for a profound change in the energy matrix that drives our economy. Hydrogen was first brought up as a viable solution in the 1970s, following the first major oil crisis. As a fuel, it has several advantages: it is abundant in nature, non-toxic to the environment, dissipates easily and can be stored, thus enabling clean energy to be shipped across oceans and large distances. The most common form of hydrogen nowadays is what is known as gray hydrogen1, according to the international color code. It is produced from natural gas in a highly polluting process (steam reforming) that produces 10 kg of CO2 for every kilogram of hydrogen. When the resulting CO2 is captured and stored, it is called blue hydrogen — which is less polluting, emitting between 1 and 3 kg of CO2 per kilogram at hydrogen. However, to date, there is no technology to store all of the resulting CO2. Another way to produce hydrogen is by splitting water through electrolysis using renewable energy. This yields what we call green hydrogen. and oxygen. Hydrogen can also be made from biomass, this is what we call moss hydrogen (Quadro 1).
So far, hydrogen use is limited to very specific situations, such as oil refining or ammonia production, but this is quickly changing — the growing investment in renewable energy sources, mainly wind and solar, whose costs are decreasing, and the technological and industrial evolution of electrolyzers have generated a major drop in the cost of green hydrogen production. Furthermore, meeting the goals set by the Paris Agreement will require reducing CO2 emissions by 60% by 2050, and only green hydrogen will enable the decarbonization of industries such as steel and fertilizers. Brazil's energy matrix is made of 85% renewable energy, mostly hydro, but with increasing wind, solar and biomass sources. Investments to produce green hydrogen in this country could take advantage of the existing electricity grid, as 70% of hydrogen cost comes from energy.
Its transportation remains a major challenge. Hydrogen can be transported as a gas (typically compressed), as a liquid, or as a different chemical (a carrier), such as ammonia or methanol. We expect a network of pipelines to carry gaseous hydrogen to be developed, especially in regions such as Europe that are likely to become large markets. For long distances, or in the absence of an established infrastructure, ammonia is the most favored carrier. However, further investments are required to produce green ammonia and, if necessary, to extract the hydrogen at the destination (in some applications ammonia may be used directly).
Let's get down to numbers.
A. Competitive advantage
Current industry overview
Brazil is ranked # 7 on the global list of energy generators, with a current installed capacity of 175 GW (2021). However, when it comes to renewable energy, Brazil is behind only the US and China. Percentage-wise Brazil is leading, with 85% of its energy coming from renewables2. Hydro plants account for most of this (63%) but going forward, this source will reduce its relative importance.
Increasing solar and wind energy
Wind and solar are the fastest-growing energy sources. In 2020 they accounted for 10% and 2% of Brazil’s generating capacity respectively, but these numbers should rise to 30% and 17% by 2040 — this growth is largely driven by the lower cost of energy produced from these sources. The current Levelized Cost of Energy (LCOE3) for wind energy in the Northeast of Brazil is around R$ 119 - 142/MWh and should drop some 27% by 2040. The LCOE for solar energy is around R$ 145 - 184/MWh in the Southeast, and R$ 129 - 169/MWh in the Northeast, with a downtrend of 46% by 2040.
By 2030, the LCOE for wind energy could reach USD 20-24/MWh, dropping to USD 17-21 by 2040. Solar energy LCOE could reach USD 17-21/MWh in 2030, and USD 13-17 by 2040, even cheaper than wind energy. In Brazil, wind and solar can be combined at the same location (such as at the countryside of the states of Ceará, Piauí and Bahia), thus optimizing hydrogen production projects.
The cost of Brazilian green hydrogen
Brazil is one of the most competitive places in the world to produce green hydrogen. This study shows that the Levelized Cost of green Hydrogen (LCOH4) produced in Brazil would be around USD 1.50/ H2 kg in 2030. This is in line with the LCOH of the best locations in the US, Australia, Spain and Saudi Arabia. By 2040 this cost could drop to approximately USD 1.25/kg.
Differences in the competitiveness of specific projects
The competitiveness of specific projects in Brazil and abroad may differ considerably from the average. In the case of Brazil, we evaluated hypothetical projects in different regions of the country, such as Ceará, Pernambuco, Bahia, northern Minas Gerais and the countryside of São Paulo. These could be on-grid or off-grid. A large-scale off-grid project in the Northeast would yield an all-in unit cost to produce hydrogen in 2030 of around USD 1.90/kg. This includes estimated costs of hydrogen storage and transportation for use in some typically associated applications. If this same project is on-grid, the cost of the hydrogen would drop by some 10% to ~USD 1.70/kg. Connection to the grid means the electrolyzer and renewable generation can be sized more accurately. Furthermore, excess energy can be sold, and additional energy bought from the grid as necessary. In the Southeast of Brazil, which does not have the same natural advantages as the Northeast, the difference would be even larger – the cost to produce on-grid green hydrogen in the SE would go from ~USD 2.30 to 1.60/kg.
Connecting a plant to the grid however raises another question, as the electricity used by an on-grid plant is not necessarily 100% renewable. This hydrogen might or might not be certified as green, depending on the criteria.
Certifications being discussed
An electrolyzer with a significant share, say 80% of its capacity dedicated and renewable, thus using 20% grid power, would use 97% renewable energy, therefore having low carbon emissions. However, depending on the international certification criteria, this hydrogen might not be considered green. This would significantly impact Brazil's competitiveness and its possibility to use the integrated national grid as a competitive advantage.
The certification trends currently being discussed cover issues such as which sources can be considered renewable, how to include guaranteed sourcing in contracts, how to achieve a real reduction in emissions, synchronicity between energy use and generation, proximity or co-location of generation and electrolysis, and additionality (see the following chart).
B. A USD 15-20 billion opportunity
As mentioned, the domestic market is the largest opportunity, potentially generating revenue of USD 10-12 billion by 2040, primarily driven by trucking and steel, as well as other industrial energy uses. Exports to the US and Europe could add another USD 4-6 bn as the landed cost of Brazilian green hydrogen in these regions should be competitive vis-à-vis the main potential competitors.
Brazil has the potential to be competitive and fight for a share of the US and EU import markets, capturing USD 1 to 2 billion by 2030. By 2040, exports could reach USD 4-6 billion, or 2-4 million tonnes of green hydrogen.
The domestic market is the largest opportunity for Brazil, and by 2040 could reach USD 10-12 billion (7- 9 million tonnes), driven mostly by trucking (~3 million tonnes), green steel (~2 million tonnes) and other industrial energy uses (~1 million tonnes).
In this study we selected 11 potential applications to analyze the domestic market, split into the three most important categories for hydrogen use (across the world we have already analyzed over 30 applications). These were chosen based on our global experience and initial hypotheses for domestic demand. These are:
- Industry feedstock
- H2 for steel Green hydrogen can be used to produce DRI5 and HBI6 used in both BOF7 and EAF8 routes, or to replace PCI9 in the BOF route. HBI in particular can be exported, which would combine Brazil's competitiveness in iron ore and green hydrogen to export low-carbon iron.
- Ammonia for fertilizers and chemicals Green ammonia can be used as feedstock to produce fertilizers and explosives, with a much lower carbon footprint than using gray ammonia.
- H2 for refineries Green hydrogen can directly replace gray hydrogen used in refining processes.
- H2 for passenger cars Passenger cars can be decarbonized by replacing internal combustion and diesel engines with either batteries (BEV) powered by electricity, or fuel cell (FCEV) powered by hydrogen.
- H2 for long-distance rail freight Rails could be decarbonized by using hydrogen or electricity to replace diesel.
- Ammonia or methanol for bulk/ container ships Maritime cargo shipping can be decarbonized by replacing heavy fuel oil ships with ones using ammonia or methanol as fuel. Bulk carriers are an important market in Brazil, as large volumes of iron ore and agricultural grains are shipped mainly to Asia.
- Road freight (mid and heavy-duty trucks)
- Mining trucks Overland road freight, particularly heavy loads over long distances, and mining haul trucks can be decarbonized by replacing diesel internal combustion engines (ICE) with either batteries (BEV) powered by electricity or ICE and fuel cell (FCEV) powered by hydrogen.
- Heat and power for industry
- H2 for mid and high-grade heating Hydrogen can be used to generate medium grade heat (277°C to 650°C) or high-grade heat (>650°C) used for industrial processes (e.g. pulp & paper, cement and steel industries).
- H2 for combined cycle turbines Hydrogen can be used as mono-fuel or blended with natural gas in combined cycle gas turbines for electricity generation.
- H2 for blending with natural gas Hydrogen can be blended in small amounts with natural gas in the existing national gas network for residential and commercial uses.
In a scenario where there is some form of pricing for carbon emissions, demand for hydrogen in Brazil could reach ~9 million tons in 2040. This is a USD 10-12 bn potential domestic demand, accounting for 5 to 10% of the nation's energy matrix. In the absence of a carbon tax, demand would be around 7 million tonnes.
Most of this demand would be for trucking — some 3 million tonnes. Trucks using hydrogen fuel cells could reach Total Cost of Ownership (TCO) price parity with diesel trucks before 2030.
The following chart summarizes estimated demands for the applications analyzed:
Comparison between blue and green hydrogen
We should consider the possibility that, in Brazil, blue hydrogen (made from natural gas) may serve as a transition product to green hydrogen. If there is abundant natural gas exploration from pre-salt, market growth based on the new gas law, and expanding infrastructure, gas prices could fall significantly over the medium and long terms. This could restrict the domestic market for green hydrogen.
In a scenario of low-cost gas, the moment of cost parity with green hydrogen solution is similar, but blue hydrogen would be more competitive for some years. It is hard to say if this transition period would encourage the use of blue hydrogen, but the possibility certainly exists.
Comparison between green and moss hydrogen
As Brazil has a well-established ethanol manufacturing, distribution and storage, we must consider that this industry would also look for opportunities in the hydrogen market. Although in the very long-term we expect passenger vehicles to become electric, heavy vehicles such as buses and trucks are more likely to resort to hydrogen fuel cells for decarbonization.
As flex (gasoline/ethanol) engines dominate the Brazilian market, and based on the assumption that ethanol cost reference will remain at approximately 70% the price of gasoline, moss hydrogen would have limited competitiveness. However, especially in regions with a high yield of ethanol production, this solution could capture a significant share of the energy matrix, with ethanol being shifted to producing hydrogen at fuel stations.
In short, the market for biofuels could help further develop the hydrogen industry as new technologies mature.
C. What is needed to enable a green hydrogen industry in Brazil
In a fast-paced scenario, green hydrogen will require USD 200 billion in investments, including 180 GW in additional power capacity from renewable sources. This is more than the country's entire generating capacity in 2020. The cost of capital perceived by renewable energy investors is also higher in Brazil than in competing countries (8-9% vs. 7%). In either case, numerous themes must be addressed to allow green hydrogen to develop in Brazil across the value chain.
The main challenges in power generation and transmission are related to regulations to accelerate the expansion of energy generation from renewable sources. For on-grid configurations, the main challenges include taxes and the industry charges applicable in the medium and long term for PPAs and self-generation, which may significantly affect the competitiveness of Brazilian green hydrogen. We also need a tracking system to monitor energy generation in quasi-real-time for renewable energy purchasing agreements.
For off-grid configurations, the major regulatory challenges are the construction of transmission lines to enable off-grid configurations, environmental impact and rights of way.
The main challenges for hydrogen production, transportation, and storage are related to the initial efforts to develop the market. Uncertainties regarding long-term demand (in volume and prices) create risk for investors and could inhibit the funding of large projects.
Regarding regulations, there are questions as to which regulatory functions will be the responsibility of which government agency, and regulations governing the use of hydrogen. Technical standards for hydrogen facilities and transportation must also be developed, such as when adding hydrogen to natural gas flowing in pipelines.
Regarding the end-use of green hydrogen and its derivatives, the main challenges are in certification trends. In international markets, the requirement that only wind and solar energy be used may limit the use of the clean integrated grid that exists in Brazil, which constitutes a significant competitive advantage. Internally, regulations to support other sources of energy and the non-existence of carbon pricing make traditional solutions more competitive in the short term, delaying the domestic adoption of hydrogen.
Need for increased generation
To produce green hydrogen Brazil would need to accelerate the expansion of its power infrastructure by 7% a year, or 3 percentage points more than the 4% annual expansion rate of recent years. By 2030 an additional 19-39 GW would be required, or 11-22% of the current capacity. By 2040 this need would be further increased to 129-178 GW.
On the other hand, the total potential for renewable energy should not be an issue in 2040, as by then the main potential sources, wind and solar, should be able to supply 100% of the demand for green hydrogen. The total wind power capacity by 2040 is estimated at 185-206 GW, with the total potential in Brazil being as high as 247 GW using 100 m turbines; solar energy capacity should be 134-155 GW by 2040 and could reach as high as 307 GW with the best locations.
The expanding generation will require doubling or at least reinforcing the current transmission infrastructure.
Pathway for green hydrogen in Brazil
A pathway for green hydrogen targeted to industry participants could help unlock the sector's entire opportunity. Some initiatives will require joint public and private discussions. The following proposal presents four steps to materialize 2040 goals.
The focus for next year would be to continue developing the Brazilian regulatory framework (e.g., the National Hydrogen Plan), participate in international discussions regarding certification criteria, and foster qualification and training of talents and R&D investments.
Short term (by 2025), Brazil must work to establish long-term domestic and international demand to provide backing for project funding, define sources of funding and development, and ensure effective implementation of the first projects and associated infrastructure.
Medium/long term (2025-2040), the main goal is to consolidate Brazil as a global industry leader by continuously evolving regulations, promoting the use of green hydrogen in new applications, and capturing synergies of scale, preparing for an industry free of incentives.
The following chart has more details on these 4 horizons.
Brazil can use its natural resources sustainably and become one of the global leaders in green hydrogen, stimulating the growth of numerous industries that will be driven by this new commodity. To enable this, we must start acting now.