In the second article of our Africa Energy series, Thomas Parker, an Associate Director on S-RM’s sub-Saharan Africa Corporate Intelligence team, reflects on lessons learnt from the green hydrogen boom in Southern Africa.
Southern Africa has proved fertile ground for the development of green hydrogen. An abundance of renewable energy sources, an international market eager to invest in clean energy, and a host of local governments in need of such investment, have driven the development of Southern Africa’s green hydrogen sector forward at a rapid rate, with Namibia, South Africa and Mozambique emerging as the region’s leaders.
What is green hydrogen?
Green hydrogen is the clean energy source drawing increasing interest from governments as they seek to meet decarbonisation goals. It is produced through the electrolysis of water using renewable energy sources like wind and solar power, making countries rich in these resources ideal destinations for green hydrogen projects. Although it is still in the early stage of commercial adoption, green hydrogen is expected to play a critical role in decarbonising heavy industry, fuelling transportation, and power generation.
Of the three countries, Namibia has moved the fastest, buoyed by investment from the European Union, Germany and the Netherlands. The country currently has eight projects at various stages of development, led by a EUR 10 billion Germany-backed project set to begin construction in early 2025. South Africa, equally endowed with the renewable energy sources needed to produce green hydrogen, is not far off this mark. It too has recently received investment grants from the European Union and has several projects underway, although most of these are still in the planning stage. While Mozambique still has its hands full with the development of its abundant gas reserves, it has signalled its openness to investment in green hydrogen, and has recently announced its first project with a British energy firm. All three countries have hardwired green hydrogen into their future energy mixes by working it into their official energy transition strategies, and it is likely that other countries in the region will follow suit, particularly considering the acute energy shortages in neighbouring countries like Zambia and Angola.
These developments have unfolded at pace, with the most significant of them occurring over the past 12 to 24 months. It is not surprising then that friction points have begun to show, which could prove defining for the sector’s future development. Four of these areas are discussed below, informed by our recent experiences of guiding investors through their entry into Southern Africa’s green hydrogen market.
Regulatory framework in flux
The formulation of regulatory frameworks for the governance of green hydrogen has struggled to keep up with the speed of development. Barring Mozambique, where the sector is still nascent, investors and developers have been pushing local governments for much-needed certainty on this front in order to reassure their stakeholders. While Namibia and South Africa have set the design of these frameworks in motion, progress has been hampered by political in-fighting over the direction of energy policy and by sea changes in both countries’ political leadership.
The formulation of regulatory frameworks for the governance of green hydrogen has struggled to keep up with the speed of development.’’
In parallel to its promotion of green hydrogen, Namibia has been marketing its oil and gas reserves with equal tenacity following several major discoveries in the Orange Basin over the last two years. This is pulling policymakers in two directions as they face pressure to bring clarity to the regulation of production, given the promise of first oil. The sudden death in February 2024 of Namibia’s erstwhile president, Heige Geingob, following nine years in power, has also brought uncertainty to the direction of policy. The development of green hydrogen was a personal vision of Geingob’s, and he was instrumental in bringing international partners and backers to the table. His death created a leadership vacuum in the country, which will only be filled once national elections take place later this month. Geingob’s nominated successor within the governing party is noted for her conservative political stance, which may affect the momentum of green initiatives should she be elected.
South Africa has similarly been side-tracked by the demands of its oil and gas sector, which currently does not have the same momentum as Namibia’s, but has long held the interest of international and local investors. A new bill to bring a necessary separation of the regulatory frameworks for the country’s mining and oil and gas sectors has kept policymakers occupied for the better part of the last five years, and industry pressure is high as the bill edges closer to the finishing line. This is unfolding in the context of a dramatic political shift in South Africa, as the country’s liberation party experienced its first electoral loss since coming to power, and was forced into coalition in July of this year. While this has given more business-friendly parties a seat at the table, policy development has been slow in the wake of this transition, and investors are on alert for signs that the ideologically opposed coalition partners might not play well together.
In the absence of a clear regulatory framework for green hydrogen, investors we have advised have taken solace in the robustness of both Namibia and South Africa’s broader legal frameworks. Both countries have balanced constitutions, and elements relevant to the development of any project – such as contract law – are well-catered for and enforced through an independent judiciary. For the time being, host governments have been turning to existing regulations for their better-established traditional energy sectors to chart a course forward for green hydrogen.
Pick your partners
One element of the regulatory environment that often raises questions from investors is local content. A key pillar of the policy agendas of both Namibia, South Africa and Mozambique’s governing parties has been the increased participation of previously disadvantaged groups in key sectors of the economy. Debate as to the degree of participation is a common point of tension between these governments and foreign investors, with politicians often campaigning for more stringent regulations in the run-up to elections. In reality, none of these governments have legislation that definitively requires the participation of local companies in energy projects, but investors are frequently advised to incorporate these partners to future-proof their investments.
The landscape of local partners for green hydrogen projects is a patchwork that is still taking form. While it includes players with established track-records in traditional energy projects who are looking to diversify their portfolios, it has also attracted lesser-known players looking to capitalise on the boom. The region’s local content policies have faced criticism in this regard, particularly for their vulnerability to exploitation by politically connected actors. Practices such as the acquisition of state licences by local companies with little to no track-records, and the recommendation by government officials of local partners closely linked to them, are known to have occurred in the traditional energy space, and have been attempted in the green energy space too. The track-record and political network of a proposed local partner requires careful scrutiny, particularly when that partner will play a role in the project’s government relations.
The landscape of local partners for green hydrogen projects is a patchwork that is still taking form.’’
Beyond local participation, the capacity of operational partners and suppliers warrants consideration too. Both Namibia and South Africa’s rail networks are entirely controlled by rickety state-owned enterprises, established during phases of state-led development and kept alive as a policy lever to boost local employment. South Africa’s freight rail operator has been hamstrung by underfunding and corruption under its former president, which has resulted in significant infrastructure maintenance issues over the last decade. Last year, South Africa’s main export terminal exported its lowest levels of product since the early 1990s due to the rail operator’s lack of capacity, and Namibia’s rail operator has been operating at a loss since at least 2011. Under pressure from investors, these issues have galvanised stakeholders into action – South Africa is set to open its rail network for private operators by the end of this year, and a network of private road logistics companies have sprung up in Namibia to address the capacity deficit.
Community voices
Southern Africa is a large area geographically, rich in sources of renewable energy such as wind, sun and hydropower. It is also host to a variety of fragile ecosystems, and a large rural demographic hold claim to tracts of land through land restitution policies. Navigating access to land, and the social and environmental impact of an energy project, is a balancing act that requires careful engagement with multiple stakeholders, often with different sets of priorities.
Navigating access to land, and the social and environmental impact of an energy project, is a balancing act that requires careful engagement with multiple stakeholders, often with different sets of priorities.’’
In 2022, oil and gas supermajor, Shell, had its exploration rights for an oil block off the southern coast of South Africa revoked following a legal challenge by a group of local environmental organisations. The court determined that the company had not engaged adequately with local communities or properly considered the environmental consequences of its exploration activities. The ruling was a watershed moment for environmental groups in South Africa, and has empowered similar groups across the region. The widespread media coverage of this event also placed these issues firmly in the public’s consciousness. A year later, one of Namibia’s foremost green hydrogen projects began to face public opposition for its proposed development in a national park. Local environmental groups have argued that the development will threaten the biodiversity of the park, and there are suggestions that the project was not initially approved through appropriate government channels. The developer has taken these objections seriously – it is in the process of conducting a full environmental impact assessment, and has broadened the group of stakeholders it is engaging with. Both of these cases highlight the need for a community to secure the social licence to operate before they can really start developing any of these opportunities.
Water scarcity
The significant fresh water requirements of green hydrogen production are also relevant here. Both Namibia and South Africa are water-scarce, with the region as a whole experiencing one of its most severe droughts between 2018 and 2021. This threatened food security throughout the region, and significantly impacted electricity production in countries reliant on hydropower, the effects of which are still being felt today. Developers have turned to desalination and groundwater solutions, but these sources come with their own sustainability concerns. Desalination plants are energy intensive, and can have an impact on marine ecosystems through their intake of seawater and emission of brine waste. Groundwater, on the other hand, is scarce in arid regions, and its use risks threatening the water source of communities in a large geographical area. These issues are emerging just at a time when biodiversity and water security are moving up investor agendas with a slew of new reporting requirements on the horizon. As the region starts to see its first green hydrogen projects become operational, the impact of any solutions will need to be carefully considered.
Conclusion
The development of green hydrogen in Southern Africa stands at a crossroads where immense potential intersects with significant challenges. The region's ability to harness this opportunity will depend on regulatory advancements, community engagement, and sustainable resource management. With careful navigation of these complexities, Southern Africa can position itself as a key player in the global energy transition.
