Perspective on

Hydrogen
Lanzamiento de mesas técnicas
17 June 2020

CONFIDENTIAL AND PROPRIETARY

Any use of this material without specific permission of McKinsey & Company
is strictly prohibited
 1 Hydrogen is required for deep decarbonization
Direct electrification can serve max. 60% of today's energy demand in many
parts of the world, though Chile could achieve its target of net 0 in 2050 with
limited use of hydrogen

2 Unprecedented global momentum

Driven by 4 underlying trends – decarbonization, falling renewable costs,
strategic government push, and industry coordination
In brief
Our perspective 3 The global potential is large: 10x of today's hydrogen market
Growth in feedstock, transport, buildings, industrial heat, and electricity
on the potential of
hydrogen and why 4 Costs are coming down fast, but are still challenging
Chile could have In industry feedstock and some transport applications, low-carbon hydrogen
could become cost competitive before 2030.
an edge For steel, high-grade heat production and some residential heating, hydrogen is
the lowest-cost decarbonization option – but needs regulatory support to
compete with fossil fuel alternatives.

5 Chile has great potential to profit from hydrogen development

Leveraging the ultra low-cost renewables, stable environment for long-term
investments, good exporting options, and some internal demand e.g. in mining,
Chile could tap into hydrogen
1. Hydrogen is a solution in "hard to abate" sectors and could abate
~15% of global emissions by 2050

Sectors where hydrogen can contribute

Greenhouse gas emissions by sector

MtCO2e
Oil & Gas Other
Agri machinery
Food
Pulp & Paper
Cement Modern
Short-range cars Residential

Other industry
Other industry

Long-range cars
Long-range cars Modern Baseload Land and cattle
Commercial
Other minerals
Light trucks
Light trucks

Iron & steel Heavy trucks and buses Older

Residential
Rail
Waste processing
Chemicals Aviation

Older Peak
Petroleum refining Shipping Product use
Commercial

Industry Transport Buildings Power & Heat Other Total

McKinsey & Company

3. In a decarbonized world, Hydrogen demand could grow up to 10-fold
Global energy demand supplied with hydrogen, PWh

22

18%
3
Power generation,
buffering
of final energy demand
Transportation
6

6 Gt
Building heating annual CO2 abatement
3 and power

8
5
Industry energy $2.5 tn
annual sales (hydrogen and
equipment)

4 3 New feedstock
2
3

3
(CCU, DRI)
Existing feedstock
30 m
jobs created
uses
2015 2020 2030 2040 2050

Source: Hydrogen Council: Scaling Up, McKinsey McKinsey & Company 3

5. Europe, Korea, Japan and likely also China will
require hydrogen imports – creating a sizable global
market opportunity for competitive hydrogen producers
Cost of green hydrogen in different regions, in USD/kg in 2030: USD < 1.5/kg USD 1.5-2/kg USD 2-3/kg USD > 3/kg Regional energy demand supplied
with hydrogen1, in TWh

China Europe
2,000 2,300
2020 30 2050
1,200
700 400 700

There are 4 main regions with

significant projected hydrogen
demand growth
USA might be able to produce
sufficient for internal consumption
Europe has closer import options
from Middle East
Korea and Japan USA Korea, Japan, and maybe China
2,100
could be good opportunities for
900 600
100 200 400 Chilean exports

Source: IEA, FCHJU - Hydrogen Roadmap Europe, McKinsey - US hydrogen industry road map, Chinese Government Whitepaper, Hydrogen Roadmap Korea, McKinsey & Company 4
Hydrogen Strategy Japan
 5. Chilean export to Asia could be
competitive vs. Australia
Cost of liquid H2 at destination harbor, USD/kg, 2030
Preliminary
Global hydrogen transport routes Hydrogen transport vectors
Norway to
Russia to Europe For distribution
Europe LH2
Middle East Requires technical development
Middle East
to US to Europe
For medium distances
CH3
Leverage CNG infrastructure

Chile to
Middle East For ammonia end-uses
Japan & Chile NH3
Australia Korea to Japan Leverage existing infrastructure
to US
& Korea
to Korea &
Japan Binds hydrogen in liquids
LOHC
3.5
Binding/ unbinding requires energy
2.9 3.1
Distribution 1.2 Import terminal 0.2
1.1
1.5 Shipping 0.7 LNG H2 reforming in target country
Production 2.2 2.0 CO2
1.4 Liquefaction, export 0.5 CO2 return to CCS via shipping

McKinsey & Company 5

5. Green H2 in Chile could become competitive vs grey H2 by 2030
Hydrogen production cost1, USD / kg
Preliminary

9
8 Breakeven with 50 USD/ton
CO2 carbon tax
7
6 Breakeven without carbon tax
5
4
Green from onshore wind2
3
Grey from natural gas3
2
1 Green from solar PV4
Green optimized solar + wind
0
2020 25 30 35 40 45 2050
1. Based on 7% WACC
2. Based on onshore wind located in the South with 24% load factor and LCOE decreasing from 59 USD/MWh in 2020 to 46 USD/MWh in 2050
3. Based on steam methane reforming (SMR) and natural gas prices increasing from 8.13 USD/Mmbtu in 2020 to 11.22 USD/Mmbtu in 2050.
High case includes 50 USD/ton CO2 carbon tax
4. Based on solar PV located in the North with 28% load factor and LCOE decreasing from 31 USD/MWh in 2020 to 12 USD/MWh in 2050

Source: McKinsey Hydrogen Cost Model McKinsey & Company 6

 A multiparty coalition is required to produce
significant amounts of green hydrogen

Steps to follow
Offtaker group
Develop business case
Main stakeholders creating and leading
the partnership and guaranteeing ▪ Competitive cost of production
volume demand; could be also investor
▪ Clear demand vs. other technical
1 options
Build viable plan with timing
Identify gaps in technical capabilities
required and
Fuel production 5 6 2 Financing investors Attract funding
Responsible for operating the Positive, stable Willing to enter a disruptive
▪ Different ownership models
production process conditions set energy market in Latin
by regulator America ▪ Include financial players
Ensure regulatory certainty
▪ What are must haves
4 3
▪ Which risks can be taken on
Electricity provider / developer Engineering and technology
Current or dedicated for project Firm contributing with design, build and
operate know how; EPC could be separate
McKinsey & Company 7
 Possible next steps to make it happen
Chile could provide a
significant portion of the
world’s green hydrogen
Capturing 50% of Japanese and
Korean market and 20% of
China in 2050 would mean:
25 Mt H2/year
>30 bn USD revenues/year
5% of global hydrogen demand
1% of global energy demand
Develop the business case for Chile: Export opportunities to build
scale. Champions that want to lead locally (mining, airline, shipping).
Secondary use cases that become cost efficient at marginal cost.
Articulate the overall vision: Where to start. Sequence in building out
infrastructure. Public milestones and targets.
Define the regulatory framework: Required context to deliver the
business case. Long-term certainty independent of political cycle. Right
conditions to enable the investment.
Build multiparty coalitions: Build industry support for most promising
cases. Bring the right players together from different sectors. Ensure
international cooperation to bring expertise where required.
McKinsey & Company 8