On 3 November 2020, Chile's Ministry of Energy presented a "National Strategy for Green Hydrogen" with three main objectives:

1. To have 5 GW of electrolysis capacity under development by 2025
2. To produce the cheapest green hydrogen in the world by 2030
3. To be among the world's three largest hydrogen exporters by 2040

These ambitions are accompanied by proposed measures that include extending USD50 million to pilot projects, promoting hydrogen-based end-user applications, possibly implementing carbon pricing mechanisms, and launching "green hydrogen diplomacy" to position Chile internationally. Together, the initiatives could make Chile a leading participant in future hydrogen-based economic activity.

Chile has surplus renewable resources and a power market environment well-positioned to produce hydrogen at globally attractive pricing. Significant solar and wind resources and business-friendly power regulations already permit renewable electricity generation - the primary variable in hydrogen production costs - at among the lowest cost levels globally. The country's power market is oversupplied, and its renewables target for 2025 has already been met, leaving renewable players eager for new business opportunities involving hydrogen.

Favorable new legislation and international partnerships are needed to develop globally pre-eminent hydrogen capacity

Like most countries around the world, Chile lacks regulations specific to hydrogen production, storage, transport, and consumption. Yet, to meet its objectives, it needs to give certainty to investors. This requires the development of well-drafted and investment-friendly regulation, state support for business initiatives, and strategies to attract international development partners.

Developing these foundational blocks must be done quickly. Several countries and regions worldwide - Australia, the southwest United States, and Colombia, for example - share characteristics that make Chile attractive for green hydrogen production, and they also have ambitious hydrogen objectives. As a result, Chile is looking to progress with urgency its policy development, the approval of project permits, and the delivery of financial support.

Proposed policy measures demonstrate Chile's strong commitment to green hydrogen

Proposed policy measures - most of which are still at the design stage - as part of Chile's "National Strategy for Green Hydrogen" include:

• Accelerating research and development. The Ministry of Energy will encourage hydrogen research and development at research centers and universities
• Offering financial support to projects. The government has committed to provide up to USD50 million to help finance pilot projects that may not be initially competitive while operating at a small scale.
• Accelerating permit processes. A task force will help with the provision of permits for new projects and the development of pilot programs.
• Applying economic and volume incentives. The government will discuss the possibility of carbon-pricing mechanisms to make hydrogen more competitive with conventional fuels. Another policy option is to impose quotas for green hydrogen in gas pipelines.
• Planning land use and creating production hubs. The government is reserving almost 12,000 hectares to develop solar projects for green hydrogen. Legislation may also prioritise zoning for wind projects and promote hydrogen production hubs.
• Improving transportation infrastructure. A legislative framework will be considered to resolve infrastructure bottlenecks and transform seaports to handle hydrogen exports.
• Finding hydrogen offtakers domestically and abroad. Specific applications, such as refining, ammonia production, and heavy goods vehicles, are identified for hydrogen consumption.

However, Chile is seeking to be a pioneer in a field it knows little about. Domestic experience in hydrogen is largely limited to production at two oil refineries owned by the state oil company ENAP. The government's co-operation with external advisers to identify gaps in the regulatory framework is encouraging and should help in attracting finance for the sector while companies and agencies incorporate new standards into their operations.

A process to rewrite the constitution and the impact of COVID-19 are likely to delay the green agenda

Chile faces a period of political and social instability. Social unrest in late 2019 led to a referendum in October 2020 to start drafting a new constitution. Changing the constitution became a key demand by demonstrators during social unrest in late 2019, with the current document viewed by objectors as consolidating a neoliberal economic model that perpetuates deep inequalities. The new constitution is likely to increase the role of the state in the economy.

The constitutional process, which is likely to last at least two years, threatens to change the regulatory framework that has characterised Chile's business-friendly environment and raises legal uncertainty for investors. However, the constituent convention will likely have a similar composition to Congress and each article of the new constitution will need a two-thirds majority to be approved, mitigating the risk of more radical left-wing groups succeeding in advancing significant state interventionism in the economic model.

The next government to be formed in March 2022 - the presidential election is due in November 2021 - is likely to maintain the policy to develop green hydrogen, given the cross-party support for the country's sustainable development goals, particularly given Chile's lack of hydrocarbon resources and its historical position as a net energy importer.

The policy to promote green hydrogen faces a risk of being delayed into 2021-22, with the government confronted by the more pressing issue of reactivating Chile's economy after the COVID-19-virus pandemic (IHS Markit forecasts a 5.8% contraction in Chile's GDP for 2020).

Posted 22 January 2021 by Carla Selman, Principal Research Analyst, Country Risk, S&P Global Market Intelligence