Egypt signs more green hydrogen agreements with seven companies

Good morning, wonderful people. Climate news from MENA is then today, but we have plenty of interesting reads this morning.

We talked to EFG Hermes Research Head of Strategy Simon Kitchen at the Enterprise Climate X Forum on Tuesday about how climate is impacting CEOs across emerging markets — and how macro forces are shaping their freedom to invest and act. He talks to us about why the green transition is crucial specifically for emerging countries, what’s driving change for CEOs, where loss and damage funds should be placed, and his outlook for 2023.

^^ We have the rundown on our conversation in the news well, below.

THE BIG CLIMATE STORY- China and KSA are getting ready to talk a whole lotta energy. Chinese President Xi Jinping landed in Saudi Arabia yesterday — along with a delegation of companies — to attend the China-Arab Summit that kicks off tomorrow, with energy talks at the forefront of the visit. The two countries are set to discuss renewables, green hydrogen, and nuclear energy, Saudi Energy Minister of Energy Prince Abdulaziz bin Salman said, according to SPA.

AND- Egypt just gained more momentum on the green hydrogen file.

THE BIG CLIMATE STORY OUTSIDE THE REGION- The EU has a climate bone to pick with the aviation industry. The bloc agreed on a law that would see airlines paying more for the CO2 they emit in a bid to encourage the industry to decarbonize faster, Reuters reports. Domestic flights within Europe currently submit permits from the EU’s carbon market to cover their emissions and most of these permits are given to them by the EU at no cost. The new agreement would will phase out the no-cost permits by 2026.

WATCH THIS SPACE #1- Renewable energy sources are set to account for a larger share of our global energy mix than coal by 2025, according to a new International Energy Agency (IEA) report (pdf). Renewable energy capacity is expected to grow by some 2.4k GW — that’s the equivalent of China’s entire current installed renewables capacity. The IEA’s projection indicates that over the next five years, 90% of electricity expansion projects will be renewables-based.

WATCH THIS SPACE #2- Could EV rentals be coming to Egypt as early as next year? India-based car rental outfit Zoomcar plans to add 100 EVs to its Egyptian fleet by the end of 2023, a company representative told Enterprise Climate. The car rentals firm plans to expand into the Saudi Arabian market by next year, and boost the number of EV rentals in Egypt to some 500 vehicles by 2024.

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CIRCLE YOUR CALENDAR-

Saudi Arabia will host the China-Arab Summit tomorrow. The Chinese delegation — including President Xi Jinping — will discuss and potentially sign dozens of agreements with KSA and other Arab states covering energy, security and investments, according to Reuters.

Tunisia will host the International Renewable Energy Congress from next Tuesday, 13 December to Thursday, 15 December in Hammamet. The event will provide a platform for researchers and industry leaders to showcase trends in the renewable energy sector.

FURTHER DOWN THE LINE- Saudi Arabia will host the Future Minerals Forum on Tuesday, 10 January to Thursday, 12 January at the King Abdulaziz International Conference Center. The forum will discuss the region’s critical minerals supply and creating resilient and responsible minerals value chains for the energy transition.

Check out our full calendar on the web for a comprehensive listing of upcoming news events, national holidays and news triggers.

A deep dive into the macro factors shaping how corporates operating in emerging markets tackle climate change. Enterprise’s Climate X Forum on Tuesday saw us sit down with EFG Hermes Research Head of Strategy Simon Kitchen (LinkedIn) to discuss how business leaders across global growth markets are taking action to address climate change and what’s happening at a macro level to facilitate — or impede — action.

Kitchen flagged three key ways in which the green transition is critical for the economies and businesses of emerging markets:

1- Many EMs are particularly vulnerable to the effects of climate change — and have fewer resources with which to tackle the problem than do wealthy countries. Egypt’s Alexandria is under threat from rising sea levels, and high levels of salinity in the delta regions of Egypt and Vietnam regions affect arable land for agriculture — a critical pillar of their economies. Pakistan and Nigeria both faced severe flooding earlier this year, resulting in mns of USD of damages — and mn being displaced from their homes. “These are countries with mns of people who are vulnerable to the effects of climate change,” Kitchen said.

2- For fast-growing EMs, growth is at least partly dependent on the efficiency with which they use resources: “There’s a lot of scope for growth, and yet resources are finite,” Kitchen said.

3- Foreign investors and the companies to whom we export outside our borders are helping drive the transition for corporates in EM: “If you’re a textile producer in Pakistan, your client — Nike, for example — wants to know who you’re employing, what you’re doing with your waste, whether you’re using water effectively,” he explained.

What’s driving the green push in EMs? Multiple factors — including a heightened focus on accountability across the value chain: Subsidiaries of multinationals tend to be ahead of the game compared to some local corporates because they need to be compliant with the ESG policies of their parent companies, Kitchen noted.

The use of concessional financing — lower cost finance provided by, for example, development finance institutions — puts a focus on the end use of funds and generally ties the funding to specific climate goals. Heavily-polluting industries are among the companies making the fastest progress on climate.

The big driver for corporates is capital markets. More and more investors are looking at the climate, social and governance records of the companies in which they invest — generally because the people whose money they’re managing care about the issues.

Big emitters face pressure from investors, but full divestment from polluting industries isn’t at all realistic in developing economies. Some portfolio investors across emerging and frontier markets will rule out investments in companies that, for example, use coal or manufacture cement because of their climate impact, Kitchen noted. But it’s not realistic to “say to hundreds of mns of people that they can’t use coal anymore” in the absence of readily available clean energy when these are economies that are catching up on industrial development.

For companies wanting to stay attractive to foreign investors, the key is to show progress on climate metrics: “The more realistic portfolio investors want to see more disclosure and an improvement at the margin — a recognition, for example, that if you’re using 100% coal you can shift towards 80%, then 60%,” he said.

So, who is doing a good job of greening their operations? Sector-wise, some commonly-maligned industries are stepping up to the table: Industries like cement, tobacco and chemicals are actually doing more work than “cleaner” industries, Kitchen noted. Though this is partly driven by company boards and the broader investor community, Kitchen also flagged greater complacency in industries that aren’t obviously heavily polluting.

What are investors in climate businesses looking for in EM? Getting green projects off the ground in global growth markets still requires “some quite old-school fundamentals,” Kitchen noted. These include having a predictable investment environment, a fairly stable macro framework, and reliable sources of well-priced green energy.

Making it easier for investors to come in and do business will be key as countries across the region look to land green manufacturing projects. Egypt has started a world-scale push into hydrogen that will demand it increase its renewable generation capacity more than 10-fold. That’s an opening for countries to build new manufacturing industries — to land makers of components for the renewable power and hydrogen industries.

Some are doing better than others when it comes to ease of doing business: Egypt has fallen below potential on that for a number of years while Morocco has been able to provide credible incentives “in certain clusters” for long periods of time — which has led to the building of a critical mass, allowing for the development of local feeder industries, Kitchen said. Vietnam also has quite a good template, but Pakistan faces challenges today offering the stability and predictability that potential investors are seeking, he added.

When it comes to financing climate projects, costs are being driven up by rising interest rates and high inflation: “We’re coming out of a period in which money has been abundant. There’s been a lot of misallocation and waste. Money is going to become more scarce. Inflation is an issue and affordable financing is critical,” he said.

A new IMF facility shows how long-term, cheap financing could boost climate friendly projects: The IMF issued USD 650 bn in special drawing rights (SDRs) in 2021 for all of its member countries to help shore up their economies after the fallout from covid-19. The fund then started looking at how to channel some of those SDRs from developed member countries to a Resilience and Sustainability Trust for developing and vulnerable countries to invest in anything ranging from energy efficiency to building structures to protect from rising sea levels. So far only four countries have received funding from this trust, but it’s starting to be rolled out, he noted.

The key to the trust’s financing is that it’s very long-term, Kitchen said. Countries repay over 20 years, with a grace period of 10.5 years and low interest. “So it’s very long-term and very cheap. And it can be used for governments to invest in projects to mitigate and adapt to climate change.”

What is still needed? Mechanisms that ensure that the financing is channeled as directly as possible to the private sector — with low capital costs for particular projects that can generate not just a financial returns, deliver significant results on adaptation or mitigation, he said.

And loss and damage funding — a big W at COP27: “I think the key with loss and damage is that you need money to go to the private sector,” Kitchen said. “The danger is, if it just goes into the general pot, governments will use it to fund general expenditures or subsidies.” Globally, we’ve seen the energy crisis push governments to roll out subsidies, ultimately encouraging dependence on wasteful, hydrocarbon-based energy, he added.

Meanwhile: Debt forgiveness isn’t the answer, Kitchen believes. Instead, we’ll probably see more restructuring of unsustainable debt, as we’re already seeing in Sri Lanka, Zambia and Argentina — and is likely to happen in Pakistan, he noted. But it’s a more complicated process than it used to be, because creditors are far more diverse than just the small group of lenders led by the so-called London Club and Paris Club. “Now you have China and India as creditors, along with a lot of non-banks.” Private investors in EM debt are going to be much more reluctant to take haircuts on investments or to forgive debt than are most state actors and multilateral institutions.

General debt forgiveness that isn’t directed specifically to investment projects “seems to me as just a sort of pass,” Kitchen said. While it could be seen as a kind of reparation, it also hits on the same danger as loss and damage funding — that if these funds are broadly allocated to governments, what you’re really doing is temporarily removing constraints on general national budgets, rather than specifically investing in projects that could more effectively address climate-related issues. Kitchen noted that the Jubilee 2000 movement to write off the debt of the world’s poorest countries was a mixed blessing, where some worthwhile investments were made but a lot of the money was wasted.

2023 will likely bring some pain to EMs from continued high interest rates and inflation: Increased capital costs will likely have a major, long-term impact on the macro environment affecting EMs, Kitchen said. This will require some readjustment, because for nearly 15 years now, money has been so relatively cheap, he added. Inflation will also remain high for some time — spurred partly by insufficient investment in commodities, copper and oil and gas.

But 2023 could be a good year if you’re a buyer: Valuations across EM are very attractive right now if you’re a buyer, Kitchen said, though less so if you’re a seller.

And a push for supply-chain security could open up opportunities for EMs: Ultimately, businesses want supply security, so relying on a handful of factories concentrated in one geographic area for production is no longer enough. “It’s no longer a case of China being the workshop of the world and everyone enjoying low prices,” Kitchen noted. Continued reassessment of that value chain will open up opportunities for countries like Egypt, Morocco and Vietnam, he added. If Egypt could pitch its strategic advantages — like geographic proximity to Europe and markets in the Gulf, and its potential as a secure and stable site for manufacturing, there’s a definite advantage there, Kitchen said.

** We want to thank our friends at USAID, HSBC, Mashreq, Attijariwafa Bank, Etisalat by e&, Hassan Allam Utilities, and Infinity for making the event possible.

More green hydrogen momentum for Egypt: Egypt signed MoUs with seven companies and consortiums to begin conducting feasibility studies on new projects to set up facilities to produce green hydrogen and its derivatives, according to a cabinet statement. The statement does not provide further details on the potential investment size, production capacity, or timeline for any of the projects.

Who’s signing? Saudi renewables player Acwa Power; a consortium of Benchmark and the Holding Company for Chemical Industries; China Energy; Germany’s DAI; India’s Ocior Energy; BP; and a consortium of France’s Voltalia and Egypt’s Taqa Arabia.

There are plenty of familiar names there: French renewables company Voltalia has also been mulling new solar and wind energy investments since last year, while Acwa Power is planning a 1.1 GW wind farm in the Gulf of Suez with our friends at Hassan Allam.

Demand is high for Egypt’s green energy hub projects: The new MoUs come after Egypt signed agreements with 16 other companies and consortiums to establish green hydrogen and green ammonia projects, including nine framework agreements for projects that would, if implemented, bring in USD 83 bn of investments.

MEANWHILE- Australia’s Fortescue Future Industries (FFI) could begin production at its planned USD 10 bn, 9.2 GW green hydrogen plant in Egypt in 2027, with the company currently in talks with the Suez Canal Economic Zone (SCZone) for land allocation, FFI’s Middle East, North Africa, and Central Asia President Moataz Kandil said, according to local media outlet Al Borsa. The company expects to complete the plant by 2030, Kandil said in a separate interview with Bloomberg Asharq (watch, runtime: 7:53).

REFRESHER- FFI signed an MoU with the Sovereign Fund of Egypt (SFE), the SCZone, the Egyptian Electricity Transmission Company and the country’s New and Renewable Energy Authority to begin conducting feasibility studies on its planned green hydrogen project back in August.

The details: The project comprises a number of renewable energy production stations with a combined 7.6 GW capacity to produce as much as 330 tons of green hydrogen annually by the time the project’s construction is completed, Kandil told Al Borsa. FFI signed a framework agreement with the government to set up a green ammonia production facility with an annual production capacity of some 2 mn tons on the sidelines of COP27.

Where is the money coming from? The project will be financed through “equity capital, loans from multilateral development banks and commercial banks, and possibly a bond issuance,” Kandil told Asharq. The government is planning to chip in with 20-25% of the cost of the project.

It’s mainly about export: The company is planning to export its production output to Europe, including Germany, with which FFI has contracts to export 5 mn tons annually starting 2030, Kandil told Asharq.

There’s quite a few rounds of applause due today:

• Egypt’s Health Care Authority, Abu Dhabi’s Department of Health, Lebanon’s Bellevue Medical Center, and KSA’s Almoosa Specialist Hospital all received the Gold Champion accolade in the ‘Visionary Leadership in Healthcare Sustainability’ category as part of the Arab Healthcare Climate Challenge. (Statement)
• Omani start-up 44.01 was awarded the USD 1.2 mn Prince of Wales' Earthshot Prize in the Fix Our Climate category in recognition of their carbon mineralization tech which extracts carbon from the atmosphere and petrifies it. (BBC)
• Etihad Airways received the Centre for Aviation’s “environmental sustainability innovation of the year” and Business Traveler USA’s “best airline for sustainability 2022” awards for its efforts to bolster decarbonization, waste management and the protection of biodiversity through its sustainability program. (Zawya)
• Aluminium Bahrain received two awards for sustainable investments — the Gold Green World Award and Green World Leader of 2022 — during the Green Apple Awards ceremony in London. (Statement)

Airbus is working on a hydrogen-powered engine to power up a modified A380 superjumbo, according to a statement. The French aviation company had previously worked on designs for liquid hydrogen fuel and combustion engines, but found that fuel cells alone may be able to power small commercial aircrafts. Test flights are estimated for 2026, as part of the Airbus ZEROe initiative to launch a zero-emission aircraft by 2035.

How it works: Fuel cells would convert the hydrogen into electricity to power up propellers. “At scale, and if the technology targets were achieved, fuel cell engines may be able to power a 100-passenger aircraft with a range of approximately 1k nautical miles,” Airbus’ VP of Zero-Emission Aircraft Glenn Llewellyn says.

Rolls Royce is also on a net zero flight hunt: The luxury car maker is currently testing the use of hydrogen to power jets, but it looks like they still have a long way to go — the low-carbon fuel requires four times as much space as the traditional aviation fuel used to fly the same distance.