Tax incentives and subsidies are being looked into, to support the development of South Africa’s green hydrogen industry.
Such incentives still have to be revenue neutral, says the PCC’s Crispian Olver.
The US, through its Inflation Reduction Act, has introduced major incentives for green industries, which other counties have to compete with.
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A key driver of South Africa’s green hydrogen industry would be subsidies and other incentive schemes, say experts.
Green hydrogen – produced using renewable energy as opposed to fossil fuels – is an alternative, low-carbon fuel to power emissions-intensive industries such as steelmaking.
Developing the green hydrogen industry is also one of the focus areas in South Africa’s efforts to decarbonise the economy to meet climate commitments. The other two are the development of an electric vehicle industry as well as shifting the fossil fuel-dominated energy industry to renewables.These plans stem from a $8.5 billion offer by rich nations – UK, US, Germany, France and the EU – during COP26 to assist South Africa’s just transition.
Green hydrogen is an emerging industry which needs all the support it can get to de-risk projects and crowd in further investment.
Among the support mechanisms required includes subsidies, which is what other countries have opted for, highlighted Dr Rebecca Maseremule, chief director of hydrogen and energy at the Department of Science and Innovation.
Maseremule was speaking during a panel discussion hosted by French industrial gases company Air Liquide last week.
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A study commissioned by the African Union, the European Investment Bank and the International Solar Alliance similarly identified incentive schemes as among the success factors for unlocking Africa’s green hydrogen.
Maseremule explained that moving from aspirations (as outlned in hydrogen strategies) to actual projects on the ground requires that the investment risk be mitigated. While the UK is offering grants to companies to produce green hydrogen, Australia and Canada are looking into subsidies.
South Africa has a comparative advantage when it comes to producing hydrogen-renewable energy resources like solar PV and wind. But the cost of producing green hydrogen is more expensive – because there are no subsidies for the private sector, Maseremule said.
With the Biden administration’s Inflation Reduction Act (IRA), there are also major subsidies for green industries to set up shop in the US. “…What are we giving the private sector to start to produce hydrogen in SA?” Maseremule put forward.
Maseremule is confident in South Africa’s capabilities to support a green hydrogen sector, research and development work has been under way for about 15 years. South Africa also launched its Hydrogen Society Roadmap, which sets out the priorities for developing th green hydrogen industry, last year.
The green hydrogen commercialisation strategy is the next important document which will be submitted to Cabinet for approval, explained Joanne Bate, chief operations officer at the Industrial Development Corporation. Bate said that this strategy points out the need for tax incentives for the budding industry. There are already existing tax incentives for renewable energy.
“However, we do believe there are going to be subsidies that are necessary,” said Bate. Among the recommendations is to have a task team look into modelling the cost benefit of providing subsidies. “We do believe an active investment in the ecosystem of green hydrogen will create significant jobs and associated tax revenues, new industries, new small businesses and new medium enterprises which have ancillary tax benefit to the country…” said Bate.
“…The benefit to the country is greater than any cost incentive that needs to be paid, but we need analysis in order to substantiate he investment,” Bate added.
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Bate acknowledged that the country is fiscally constrained – but there is a “case to be made” for subsidies and other incentives to be provided by the fiscus.
Bate said that the IDC had been approached by other countries looking to support the hydrogen industry through grants. The IDC would also continue to look into these potential opportunities. “We will leverage the global grants that are available to de-risk green hydrogen and to create the models that demonstrate how South Africa can actually support the private sector in creating economic opportunity,” she said.
So far German development bank KfW is providing €23 million in grant funding to support the early-stage development of green hydrogen projects. This coming week, Dutch Prime Minister Mark Rutte will be visiting South Africa with a focus on the counties cooperating on the energy transtion, and green hydrogen.
The IDC is supporting 21 hydrogen projects – including its derivatives like green ammonia, and sustainable aviation fuels and marine fuels.
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Crispian Olver, executive director of the Presidential Climate Commission (PCC), said with incentives, the aim is that they be implemented over the medium term and are revenue-neutral.
“You are giving a discount upfront on the expectation that you will stimulate a whole range of enterprises and make it back to the fiscus. That would be the principle,” said Olver.
He advised against going into “revenue-negative” territory – winding down the income of the state in an “unsustainable way”. South Africa has competitive advantages – such as solar and wind resources, as well as the technologies, companies and engineering skills and high levels of commitment from government and business to support the industry and these strengths should be played too.
Olver pointed out that there are broader energy transition “issues” that need to be addressed to support the green hydrogen industry. For one, there needs to be a massive upgrading and expansion of the national grid to support more renewables.
“We must ramp up renewable rollout at an incredible scale estimated between 6-7GW per annum coming on to the grid each year for the next 30 years,” said Olver. Hydrogen requires that we double the rollout of renewables to about 12GW per year, he added.
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