Congress puts subsidies, Itaipu and oil in the race

Congress and the federal government are competing in a race to regulate and stimulate the production of so-called green hydrogen, considered the “fuel of the future”.

Parliamentarians propose mechanisms that range from tax relief and other discounts to the transfer of money from Itaipu and oil to finance the new fuel.

The government outlines a plan with ambitious goals but, without money, does not offer financial incentives, even though the presidents of state-owned companies Petrobras and BNDES also defend the use of resources from oil and gas exploration.

Among all the substitute sources for fossil fuels, green hydrogen is one of the main bets in the energy transition. It has the potential to meet global demand, can be applied in various sectors, such as industry and transport, and helps meet carbon emissions reduction targets.

Brazil stands out in this scenario, thanks to the abundance of energy sources such as wind and solar. This is because, to be called “green” or “low-carbon”, hydrogen must be obtained through the electrolysis of water, with electricity obtained from sources considered clean and renewable.

The European Union promises to invest 2 billion euros (around R$10.7 billion) in green hydrogen in Brazil. Petrobras also says it is in this race and intends to allocate resources to fuel production. Fertilizer manufacturer Unigel is building a US$120 million (around R$600 million) plant in Bahia. In Ceará, the port of Pecém has already signed at least 20 memorandums of understanding with multinationals for the installation of green hydrogen projects in its Export Processing Zone (ZPE).

But, amid so many intentions, experts point out obstacles to making contributions to the sector. One of the biggest challenges is the high cost of production and infrastructure, especially when there is no scale, which makes it difficult to compete with other fuels. Another barrier is the lack of a regulatory framework that provides legal certainty and incentives for investors.

When demanding regulation, those interested in betting on the new fuel refer mainly to production incentives – things like subsidies, tax exemptions, tariff discounts and market reserves in electricity tenders. Brazil needs, according to them, to oppose the billion-dollar plans launched by European Union countries and the United States to encourage investments in their territories.

Chamber and Senate have projects and commissions on green hydrogen

Legislation proposals to regulate the classification, uses and incentives for hydrogen production abound. Congress analyzes bills authored by parliamentarians, and both the Chamber and the Senate have special committees to discuss the matter. The federal government, meanwhile, is also preparing its project.

In the Senate there are two PLs being processed, one of them authored by the then senator Jean Paul Prates, now president of Petrobras. The House also houses a Special Commission on Green Hydrogen (CEHV).

In the Chamber is Bill 2,328/2023, which includes green hydrogen in the National Energy Policy. The House also hosts the Special Committee on Energy Transition and Green Hydrogen Production, which is expected to vote on the report with proposed legislation on Tuesday (24).

In addition to establishing tariff discounts and market reserves in energy auctions, the draft provides for the transfer of money from Itaipu and government oil shares to boost the production of green hydrogen – resources that are already disputed by other areas.

In parallel, the Ministry of Mines and Energy (MME) is designing its own project. Announced in August, the National Hydrogen Program (PNH2) was expected to be presented in September, which did not happen. It is still under discussion within the government and the expectation, according to the department, is that it will be ready this year.

What has become public about the government plan suggests great ambitions. According to the MME, the objectives include installing pilot plants in all regions of the country in the next two years, and by 2030 transforming Brazil into the most competitive producer of green hydrogen in the world.

As far as we know, however, the plan being developed by the government focuses on defining the regulatory agency, classifying the fuel and certifying production, and does not include the announcement of incentives such as those suggested by parliamentarians.

Even though the Minister of Finance, Fernando Haddad, is committed to his portfolio’s Ecological Transition Plan and has cited the energy transition as Brazil’s priority ahead of the G20, his difficulties in eliminating the deficit in public accounts are well known.

Haddad has already defended on several occasions a reduction in tax exemptions, which according to the IRS take more than 4% of the Gross Domestic Product (GDP) from the federal coffers every year. Agreeing new tax exemptions, therefore, would sound contradictory.

Committee in the Chamber votes on green hydrogen proposal on Tuesday

After several debates and studies, the Chamber’s Special Committee on Energy Transition and Hydrogen Production scheduled the vote on the report prepared by deputy João Carlos Bacelar (PL-BA) for Tuesday.

In the preliminary opinion, the rapporteur proposes the creation of a legal framework for the sector. The document deals with governance, certification, taxonomy and incentives and suggests that certifying companies will be accredited by the National Agency for Petroleum, Natural Gas and Biofuels (ANP).

The preliminary report also includes the production of hydrogen in the list of priorities for granting the use of water and proposes the Special Incentive Regime for the Production of Low Carbon Hydrogen, called Rehidro.

According to the deputy, the incentives will be proportional to the amount of emissions avoided, involve relief from capital (Capex) and operational (Opex) expenses and can be used by companies and export processing zones (ZPEs).

Other incentives proposed for the sector are discounts on energy transmission and distribution tariffs – a type of subsidy that has historically been paid for by consumers – and a 5% quota in electricity capacity reserve auctions from 2028 onwards.

The project also foresees that resources coming from the “economic surplus” of the Itaipu hydroelectric plant should be allocated to the hydrogen program; 5% of the Union’s share in special oil participations; and 10% of the revenue from the Union’s excess oil portion in sharing contracts.

The use of oil money – more specifically, from the eventual exploration of the Equatorial Margin, on the country’s north coast – to boost hydrogen production is defended by the presidents of Petrobras and BNDES, Aloizio Mercadante.

Green hydrogen bills in the House and Senate

Also in the Chamber, Bill 2,328/2023 is being processed, which includes hydrogen in the National Energy Policy, currently made up of oil and derivatives and biofuels in general, such as ethanol.

The text awaits the opinion of the rapporteur at the Mines and Energy Commission (CME) and must then be analyzed by the Constitution, Justice and Citizenship Commission (CCJ).

“Based on the definition of these fuels in law, it will be possible to establish technical standards for the production, storage and distribution of hydrogen, guaranteeing its safety and efficiency as an energy source”, says the author of the PL, deputy Gilson Marques (Novo- SC).

In the Senate, PL 725/22, authored by Prates, sought to stimulate demand through mandatory mixtures of hydrogen in the country’s gas pipelines, reaching 5% in 2032 and 10% by 2050. But, last Wednesday (18), the Environment Commission (CMA ) voted for a substitute that excluded this obligation. The project will now be analyzed by the Infrastructure Commission (CI).

Recently, Prates criticized the separation of hydrogen routes by color, which he called a “watercolor of denominations”. Today the main denominations are blue, gray and green, depending on the form of production.

Green hydrogen comes from the electrolysis of water, using renewable electricity; blue, from natural gas; and gray, from natural gas and methane. According to Prates, this hinders the understanding of the potential emissions levels of each route.

“As for the decanted taxonomy, in particular the use of a ‘watercolor of denominations’, we purposely left it out, as we consider that it only serves to limit, unduly and self-interestedly, the technological routes for obtaining hydrogen”, said Prates, according to the agency EPBR.

The replacement for his project approved by the CMA uses the expression “low-carbon sustainable hydrogen”.

Another project being processed in the Senate, PL 1,878/2022 creates a regulation and production policy for green hydrogen energy purposes.

The proposal, authored by the Environment Committee, is in the Special Committee on Green Hydrogen. The latter has already prepared a draft bill regulating what it called the “low-carbon hydrogen industry”, with its structure and sources of resources.