Hydrogen from Renewable Sources or Fossil Fuels? The Panama Question

Green economy

Ships wait their turn to cross the Panama Canal from the Pacific to the Atlantic Ocean. Author: Emilio Godoy / IPS

PANAMA, August 9, 2024 (IPS) – In 2021, the Panama Canal welcomed a French experimental vessel on a world tour: Energy Observer, the first electric vessel powered by a combination of renewable energy and a hydrogen production system using seawater.

The ship is an example of Panama’s aspirations to become a regional hub for hydrogen, the world’s most abundant gas, but it must decide whether to produce it from renewable sources or fossil gas.

The Central American country of just over four million people is developing, albeit with delays, the first phase of its roadmap to implement the National Green Hydrogen and Derivatives Strategy, approved in 2023.

Juan Lucero, coordinator of the National Climate Transparency Platform at the Ministry of the Environment, believes that green hydrogen would be the best solution, given its renewable energy source, strategic location and the influence of international policies aimed at reducing greenhouse gas (GHG) emissions from maritime transport.

“Panama has natural gas and companies are interested in being part of that business, in this case blue hydrogen. If Panama wants to be a hub, blue is a good option,” he told IPS.

“For Panama, the priority has always been to provide services, to be an energy center. We have the tradition, the experience, the history as a bunker supply center. It’s about achieving this transformation”: Juan Lucero.

He stressed that “for Panama, the priority has always been to provide services, to be an energy center. We have the tradition, the experience, the history as a center for supplying bunker ships (crude oil distillates). The point is to achieve this transformation.”

Hydrogen production, which the fossil fuel industry has been using for decades, now comes in a range of colors, depending on its origin.

Therefore, “grey” gas comes from gas and its transportation depends on the adaptation of pipelines.

In comparison, the “blue” has the same origin, but the carbon dioxide (CO2) that comes out of it is captured by plants. Production is based on steam reforming of methane, which involves mixing the first gas with the second and heating it to obtain synthesis gas. However, this releases CO2, the main greenhouse gas responsible for global warming.

Meanwhile, “green” hydrogen is obtained through electrolysis, i.e. separating it from oxygen in water using electric current.

This last type joins the range of clean sources to move the energy transition away from fossil fuels and thus develop a low-carbon economy. However, hydrogen currently still largely comes from fossil fuels.

Panama, which comes in a variety of colors, joins Argentina, Brazil, Chile, Colombia, Costa Rica, Ecuador, Paraguay, Peru and Uruguay in having national hydrogen policies.

The Penonomé wind farm located in the central Panamanian province of Coclé. Source: Emilio Godoy / IPS

Ambition

In 2022, the Panamanian government established the Green Hydrogen High-Level Committees and the Green Hydrogen Technical Committees to implement the roadmap in this direction.

However, there has been no progress in creating duty-free zones for trading and storing green hydrogen and its derivatives, updating regulations or encouraging ports to use electric vehicles, install decentralised solar systems, introduce energy-saving solutions and generate heat from solar energy.

The green hydrogen strategy, approved in 2023, includes eight goals and 30 action lines. It envisages annual production of 500,000 tons of this energy and its derivatives, which is to cover 5% of shipping fuel supplies by 2030.

It is estimated that within 20 years fuel demand will amount to 40% of shipping demand.

However, such potential would require the installation of 67 gigawatts (GW) of renewable capacity, a significant figure in a country whose economy is heavily dependent on the Pacific-Atlantic Interoceanic Canal, which opened in 1914 and was expanded a century later with a project that doubled its capacity and became operational in 2016.

In 2023, Panama’s energy mix was based on hydropower, gas, wind, bunker fuels, solar energy and diesel, with installed capacity at the beginning of 2024 standing at 3.47 GW. Panama currently has at least 31 photovoltaic plants and three wind farms.

In 2021, electricity generation was responsible for approximately 24 million tonnes of CO2 emissions, with the largest shares coming from the energy sector (70%) and agriculture (20%).

However, in 2023, the country declared itself carbon neutral, meaning its forests absorb pollutants released into the atmosphere, resulting in a negative greenhouse gas emissions balance.

The national strategy includes the construction of a 160 megawatt (MW) solar power plant and an 18 MW wind farm in the central-south of the country, as well as a second 290 MW photovoltaic power plant in the northern province of Colón.

The province is planning to build a green ammonia plant to meet future marine fuel demand. Annual production is expected to be 65,000 tons, with an investment of $500 million.

The global shipping industry sees hydrogen, ammonia and its derivative, methanol, as viable options. The latter, which is also used to produce fertilizers, explosives and other goods, can be obtained from green hydrogen.

By 2040, demand for green ammonia is forecast to reach up to 280,000 tonnes per year, which will require the installation of 4.2 Gw of electrolysis.

Leonardo Beltrán, a foreign researcher at the non-governmental Institute of the Americas, spoke to IPS about the process of creating the strategy, the institutional vision, and the short-term, medium-term and long-term goals.

“They have taken giant steps in a relatively short period of time. They already have the infrastructure, the canal. If that demand is met, it could be a breakthrough. If they can connect the canal to other ports, to the United States or Europe, they could have that (green) corridor that would anchor that demand. That would increase local generation and also regional generation,” he said from Mexico City.

With the support of the Inter-American Development Bank (IDB) and the United Nations Environment Programme (UNEP), Panama is developing preliminary study projects for the production of green hydrogen, its conversion into ammonia and the installation of an ammonia dispatch station as a clean marine fuel, as well as the production of green aviation paraffin.

The roadmap suggests that hydrogen production in Panama, importing green ammonia and processing green marine fuel will be more feasible.

Panama aspires to become a regional hub for green hydrogen, derived from water and renewable energy sources, including gas and ammonia plants. Infographic: National Energy Board

In addition, the country is considering producing green paraffin for aviation, given that the region is home to an air freight hub. Although testing is still in its infancy and requires a much longer process than sea freight.

Harmonization

The hydrogen strategy is a result of Panama’s logistical, energy and climate change needs.

Panama currently has 10 fossil fuel tax-free areas, with storage capacity of more than 30 million barrels (159 liters) equivalent, as well as one liquefied natural gas area, which are tax-exempt and could become a model for future hydrogen production areas.

In 2021, the country shipped 42.79 million tons of the fuel to more than 44,000 ships, a number that is expected to rise by 2030. By comparison, hydrogen flowing through the canal would total 81.84 million tons in 2030 and 190.96 million in 2050.

As part of its voluntary climate commitments under the Paris Agreement, Panama has committed to reducing its total energy sector emissions by at least 11.5% by 2030 compared to 2019 levels, and by 24% by 2050.

At the same time, since 2021, the Panama Canal, through which 6% of world trade flows, has been implementing its own Sustainable Development and Decarbonization Strategy.

The autonomous Panama Canal Authority’s plan includes introducing electric vehicles, tugboats and boats powered by alternative fuels, replacing fossil-based electricity with photovoltaic cells and using hydropower, which will make the country carbon neutral by 2030. The investment will amount to about $8.5 billion over the next five years.

The canal reduces CO2 emissions by approximately 16 million tonnes per year.

The largest source of income is road tolls and shipping services, which is why the development of marine fuels based on clean hydrogen is so important.

In the first nine months of 2023, 210.73 million long tons (1,016 kg) were transported via interoceanic infrastructure, compared to 218.44 million in the same period in 2022.

Of the total cargo, one third is fossil fuels. The main means of transport are container ships, chemical tankers, gas carriers and bulk carriers.

Lucero said the country is looking to invest in renewable energy sources, especially green hydrogen.

“This market must develop in an orderly manner. Demand must be driven; otherwise, the investment will not be profitable. There are uncertainties, but the line taken is that hydrogen is the future and we want to move away from being followers to becoming leaders, seize the moment to grow and be prepared when the boom comes,” he stressed.

According to expert Beltrán, if the government that took office on July 1 had followed this path, it would have sent a clear signal to the sector and encouraged it to move towards an energy transition.

“Replacing imports with a local product is more convenient, and the way to do that would be to use available, renewable resources. This would have an impact on local development and contribute to the energy transformation program,” he said.