The European Green Deal sets an ambitious 20-million-ton (MT) target for renewable (“green”) hydrogen consumption in the EU by 2030. To reduce costs, imports are important to reach this target, and several African countries are well-placed to meet this demand.
Unlocking this potential requires policies that address three main barriers: Credible EU demand, lowering trade costs by infrastructure investments, and lowering risks to investments in Africa.
With their proximity to Europe and abundant solar and wind energy, the green transition is an opportunity for Northern African countries to become a major hydrogen hub. For the EU, importing relatively cheap hydrogen from Africa reduces the cost of its hydrogen strategy and increases security of supply.
In this brief, we use Copenhagen Economics’ global climate economic model, INTERSECT, to analyse costs of realising the EU hydrogen strategy and its derived trade effects based on region-specific cost structures.
To illustrate just how large the potential for African-European hydrogen trade is, we simulate a scenario where policies successfully address the three big barriers: Demand credibility, trade costs, and investment risks. We estimate that in this case African green hydrogen production can grow by over 500% from 1 MT to 5.4 MT in 2030. This will lower the cost of the European Green Deal by 1.9 billion euros in 2030 alone, see Figure 1, and would make the African hydrogen industry the 6th largest net contributor to the EU budget.
With a projected revenue of 410 billion dollars in 2030, the growing interest in the global hydrogen market is not caused by its size alone (in comparison, the chemical industry is set to reach 4.7 trillion dollars).[1] Still, hydrogen produced from renewable power sources such as solar and wind – often referred to as green hydrogen – is set to play a key role in the path to net zero emissions, because it enables decarbonisation in other sectors.
Green hydrogen offers a carbon-neutral alternative to fossil fuels in hard-to-abate sectors, such as steel, chemicals or long-distance transportation. For this reason, a key initiative under the European Green Deal is the EU Hydrogen Strategy. This strategy sets ambitious 2030 targets for both production (10 million tonnes) and consumption (20 million tonnes) of green hydrogen in Europe.
BUT… there is one catch: Green hydrogen is expensive to produce. Currently, “grey” hydrogen (produced from natural gas) costs around 1.5 euros per kg, whereas its green counterpart may cost 2-4 times as much to produce.[2] Therefore, policymakers in Europe should implement the Hydrogen Strategy in a way that reduces unnecessary costs to taxpayers and consumers.
To reduce transition costs, green hydrogen should be produced where it is cheapest. There are three key cost drivers: having accessible areas with solar and wind abundance, transportation costs, and the risk premium to the cost of capital, see Box 1.
For Europe to reach its ambitious demand targets by 2030 in a cost-effective way, this implies utilising its preferred sites (such as the Iberian Peninsula and the North Sea) to the extent possible, and importing from other regions once additional EU production is more costly.
Other regions are not as restricted in the construction of cheap green hydrogen. Countries in North Africa are examples of such places, where the availability of high-value natural resources for cheap electricity generation, and close connections to Europe can ensure a larger supply of low-cost green hydrogen, see Box 1.
As shown in Figure 2, imports present the most cost-effective path to achieving the 20 MT consumption target by 2030, assuming the domestic production target of 10 MT is met. In this scenario, additional production in EU-preferred sites would likely be unfeasible, resulting in a cost of 43 billion euros at non-preferred sites, compared to 28 billion euros when utilising imports. Unlocking the potential of the African hydrogen industry can reduce costs by an additional 2 billion euros. Note that this is only the cost in 2030. Reaching the full consumption target in 2030 will also require a credible demand in the previous years to build out the sector. In the next section, we will expand upon the main barriers to the African hydrogen industry and the needed tools to address them.
The hydrogen industry in Africa is at an emerging stage, with growing interest in harnessing the continent’s vast renewable energy resources. In the longer term, there is increasing recognition of hydrogen’s potential to support Africa’s energy transition, provide energy security, and drive economic growth, with further potential in derived products, such as e-fuels, for hard-to-abate sectors.[3] In the short term, regional carbon prices will not be nearly high enough to incentivize a demand shift towards green hydrogen from the African economies themselves. Additionally, there is little inter-regional infrastructure in Africa to accommodate this offtake. Instead, any significant growth will have to come from exports.
The necessary policy mix has three components: First, EU demand must be credible. The Hydrogen Strategy provides the direction but challenges in implementation remain, for example, downstream green value chains remain complex and undeveloped. The EU should ensure that national schemes will be timely, sufficient and credible to incentivize demand, for example by supporting standards towards RFNBO certification. Without any credible EU demand, we find that there will be no significant green hydrogen production by 2030 in Africa. Second, African-European transportation costs have to be minimised by significant and long-term infrastructure investments. Steps have already been taken here by constructing new pipelines or repurposing existing gas pipelines, e.g. the planned South Central Corridor that will transform existing gas pipelines connecting Germany to Tunisia.[4] Finally, the cost of capital-gap between Africa and the developed markets needs to be shortened if not eliminated. This can be achieved partly through institutional reforms in the target countries and partly by the use of so-called blended finance. To reduce its transition costs, the EU should consider ramping up its loans and investments into renewable energy and electrolyser capacity – e.g. by extending the mandate of the European Investment Bank.
As displayed in Figure 3, we find that a policy mix with the latter two components can lift the production of renewable hydrogen by 4.4 MT in Africa given a credible EU demand from around 1 MT to 5.4 MT in 2030 – almost all of which is exported to the EU.
| There are three drivers of the price of green hydrogen: 1. Capital costs, in particular investments in electrolysers 2. Operating expenditure, in particular, electricity costs to run the electrolysers 3. Transportation from the production site to the consumer Capital costs vary significantly across regions based on the investment risk of the projects. Costs are thus higher in countries in Africa compared to Europe where there is lower country- and project risk and more government support. Electricity costs depend on the availability of high-value renewable energy resources and often the possibility of behind-the-meter production to avoid grid costs. Transportation costs depend on the distance and the state of the hydrogen. Closer distances allow for cheaper pipeline transportation, either by new pipelines or repurposed ones, transporting the hydrogen directly. Shipping requires conversion of hydrogen to a derivative product such as ammonia and possibly a re-conversion (so-called cracking) near the use point. Based on these factors, the expected regions to be in a position to deliver the green hydrogen that Europe needs are South America, the US, the Middle East, and Africa.[5] In Figure 4 we show our forecasted costs of hydrogen in 2030 for Europe and the likely import regions. Production costs in Europe depend on the availability of so-called preferred Smart Integrated Renewable Energy Systems (SIRES) such as offshore wind in the North Sea or solar PV on the Iberian Peninsula (the Iberian Peninsula is expected to have lower production costs for renewable hydrogen but is located farther from the current main demand areas in Belgium, the Netherlands, and Germany[6]). However, natural resources from these preferred sites are likely insufficient to reach the full consumption target of 20 MT, especially given the time horizon. Producing large amounts of hydrogen outside of these sites is associated with higher costs. As such, it will be more cost-efficient to utilise imports together with internal production A report published by The Hydrogen Council[7] finds that the cost of capital in developing markets can be between 4-12 percentage points higher than in developed markets. Working with a baseline of 10 percentage points higher, the cost of capital corresponds to an approximate 25% increase in direct costs (cf. Figure 4).  The lower cost in South America, the Middle East, and Africa is often driven by higher load factors in solar PV, with some countries in these regions, such as Morocco and Mauritania, having the possibility to combine this with efficient wind power. Northern African and Middle Eastern countries are, with their proximity to Europe, in a position allowing pipeline transportation at a lower cost than shipping, whereas imports from South America and the USA necessitate conversion to derivative products for transport and possible re-conversion to hydrogen. |
[1] Markets and Markets (2024), Hydrogen Market
[2] European Commission (2020), A hydrogen strategy for a climate neutral Europe
[3] White & Case (2023), Green hydrogen in Africa, A continent of possibilities
[4] Euractiv (2023), Rome, Berlin plan massive hydrogen pipeline to Africa
[5] Morocco, Mauritania, and Egypt are countries, which with proximity to Europe can integrate into a European hydrogen pipeline network and export hydrogen directly. Other counties, such as, South Africa, Kenya, and Namibia are more posed to export derivatives such as green ammonia by sea transport.
[6] CIP Fonden (2023), Roadmap for the future, Available here.
[7] The Hydrogen Council (2024), The Africa Hydrogen Opportunity
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