The World Bank Expanding Clean Hydrogen in Brazil - Ceará Hydrogen Hub (P181511) @#&OPS~Doctype~OPS^blank@pidaprcoverpage#doctemplate Project Information Document (PID) Appraisal Stage | Date Prepared/Updated: 04-Oct-2024 | Report No: PIDIA00481 The World Bank Expanding Clean Hydrogen in Brazil - Ceará Hydrogen Hub (P181511) @#&OPS~Doctype~OPS^dynamics@pidaprbasicinformation#doctemplate BASIC INFORMATION A. Basic Project Data Project Beneficiary(ies) Region Operation ID Operation Name Expanding Clean Hydrogen LATIN AMERICA AND Brazil P181511 in Brazil - Ceara Hydrogen CARIBBEAN Hub Financing Instrument Estimated Appraisal Date Estimated Approval Date Practice Area (Lead) Investment Project 23-Sep-2024 10-Feb-2025 Energy & Extractives Financing (IPF) Borrower(s) Implementing Agency Complexo Industrial Complexo Industrial Portuario de Pecem (CIPP) Portuário de Pecém Proposed Development Objective(s) Enable clean hydrogen production in the Complex of Pecém. Components Component 1 Utility corridors and access infrastructures to the Export Processing Zone Component 2 Expansion of the Port of Pecém Multiple Utilities Terminal Component 3 Expansion of Pier 2 for ammonia operation @#&OPS~Doctype~OPS^dynamics@pidprojectfinancing#doctemplate PROJECT FINANCING DATA (US$, Millions) Maximizing Finance for Development Is this an MFD-Enabling Project (MFD-EP)? Yes Is this project Private Capital Enabling (PCE)? Yes SUMMARY Total Operation Cost 175.00 Total Financing 175.00 of which IBRD/IDA 90.00 Financing Gap 0.00 Page 1 The World Bank Expanding Clean Hydrogen in Brazil - Ceará Hydrogen Hub (P181511) DETAILS World Bank Group Financing International Bank for Reconstruction and Development (IBRD) 90.00 Non-World Bank Group Financing Counterpart Funding 50.00 Borrower/Recipient 50.00 Trust Funds 35.00 Climate Investment Funds 35.00 @#&OPS~Doctype~OPS^dynamics@envsocriskdecision#doctemplate Environmental And Social Risk Classification High Decision The review did authorize the team to appraise and negotiate B. Introduction and Context Country Context 1. Brazil’s economic activity continued to recover after negative GDP growth in 2014-2019 and the drastic impact of COVID-19. GDP grew 2.9 percent in 2023, after having achieved the rates of 4.8 percent in 2021 and 3.0 percent in 2022, on the back of robust private consumption, still supported by a strong labor market, fiscal stimulus to social transfers, declining inflation, and the monetary policy easing. A record grain harvest and a favorable external environment also boosted exports in 2023. With economic activity slowing since the second half of 2023 and 2023’s unusually high agricultural output not being matched in 2024, GDP growth is expected to moderate to 2.0 percent in 2024. Medium-term growth projections remain at around 2 percent per year, constrained by structural factors limiting total factor productivity (TFP) growth in services and industry sectors. The successful implementation of growth-enhancing structural reforms, including those related to trade openness, market competition, and the business environment could provide a boost to potential growth. 2. The State of Ceará is one of the poorest states in Brazil with over half the population living in poverty. The state of Ceará is home to 8.8 million inhabitants (cearenses) and contributes to around 2 percent of Brazil´s total GDP1. The main drivers of the economy are the services sector which account for approximately 70 percent of GDP, whilst industry and agriculture account for 24 percent and 6 percent respectively. The economic engine of the state is the capital city of 1 https://www.ibge.gov.br/explica/pib.php Page 2 The World Bank Expanding Clean Hydrogen in Brazil - Ceará Hydrogen Hub (P181511) Fortaleza which has 8th highest GDP of any city in Brazil and accounts for 37.7 percent of Ceará´s GDP. Despite this strong performance, there is significant inequality across the state as illustrated by a GINI coefficient of 0.518. The average GDP per capita of US$ 3,7072 is the fourth lowest nationally, with one in eight residents considered to be living in extreme poverty. As a semi-arid region prone to desertification, Ceará is vulnerable to the future effects of climate change, which could pose a risk to the expansion of hydrogen production that requires a heavy use of water. This is anticipated to have a disproportionate impact on women and minorities who represent the largest groups in semi-arid areas. Yet, the state is endowed with substantial renewable resource potential (> 800 GW) which offers significant potential to pursue a clean energy transition. Of particular interest at both the regional and national level is the Complexo Industrial Portuário de Pecém (CIPP), a large port and industrial complex connected to the national electricity grid and tied to a deep-water port. The CIPP has received significant interest from international investors to create a clean energy hub, with a focus on low carbon hydrogen3 to spur economic growth and support the decarbonization agenda. Sectoral and Institutional Context 3. Brazil is strongly committed to decarbonization and has pledged to reduce its emissions by more than 50% by 2030 with a long-term objective of achieving climate neutrality by 2050. Brazil’s is fully committed to the Paris Agreement and updated Nationally Determined Contribution2 (NDC) to the UNFCCC in 2023 increasing its ambition to reduce emissions by 48.8 percent in 2025, in comparison with 2005, and to 53 percent in 2030. Brazil’s electric sector i s among those with the highest share of renewable sources in its mix, which is largely due to the employment of hydropower. Yet, transport and hard-to-abate industry in the country are large emitters. While for transport, the Government of Brazil has a policy to scale up of biofuels and other sustainable fuels, for the decarbonization of the industry, it is implementing the 2024 New Brazil Industry Policy (Nova Industria Brasil) as a neo industrialization policy to be implemented by the federal government during the next decade to foster sustainable development. One of the key objectives of this policy is to promote green industry, reducing CO2 emissions by 30 percent per value added from Industry, increasing the share of biofuels in the transport energy matrix and increasing the technological and sustainable use of biodiversity by industry at 1 percent per year. 4. In 2022, the Brazilian Government launched the National Hydrogen Program to explore the potential for low- carbon hydrogen (LCH). The National Hydrogen Plan (PNH2) envisions a huge potential for industrial decarbonization through hydrogen development, which is also been seen as a relevant technological solution for decarbonizing domestic industry in the hard-to-abate sectors. In Brazil, the metallurgy and cement segments are responsible for 52 per cent of the Brazilian industrial sector’s GHG emissions. There is also potential for the use of green hydrogen to produce new fuels (ammonia, methanol and other synthetic liquid hydrocarbons like Hydrotreated Vegetable Oil, a biofuel made by hydrogenating vegetable oil), which can offer promising alternatives for decarbonizing the aviation and shipping sectors. The Plan emphasizes the opportunity for Brazil as a hydrogen (H2) exporting country through hydrogen hubs4. Several countries have adopted hubs as the main mechanism for promoting investment in the infrastructure needed to make low- carbon hydrogen viable for export in the medium term. The PNH2 comprises three phases: ✓ Up to 2025. To set up clean hydrogen pilot plants in all regions of the country. ✓ Up to 2030. Consolidate Brazil as the most competitive producer of clean hydrogen in the world. ✓ Up to 2050. Consolidate clean hydrogen hubs in Brazil. 2 Converted at a foreign exchange rate of US$-BRL 4.90 with GDP per capita sourced from: https://www.seplag.ce.gov.br/2022/12/16/fortaleza- detem-maior-fatia-do-pib-estadual/ 3 Per the draft bill (PL 11247/2018) clean hydrogen is hydrogen that, in the life cycle of the production process, results in an initial value less than or equal to 4 kilograms of carbon dioxide equivalent per kilogram of hydrogen produced (4 kgCO2eq/kgH2). 4 An area in which all the infrastructure to produce, store, distribute and/or transport hydrogen. Page 3 The World Bank Expanding Clean Hydrogen in Brazil - Ceará Hydrogen Hub (P181511) 5. Owing to the high penetration of low-cost renewables, Brazil’s electricity matrix can be the foundation from which to launch an energy transition, driven by clean hydrogen. Renewable electricity accounts for 87.9 percent of generation when taking into consideration the impact of isolated systems and self-production. In terms of the national transmission grid (Sistema Interligado Nacional) which connects all the states with the exception of Roraima and excludes isolated systems, the renewable share of generation is 92.1 percent. The electricity matrix has a total installed capacity of is 206 GW, of which the base load is hydro (109 GW and accounts for 63.1 percent of generation in 2022. Other renewable sources which account for 24.2 percent of generation are onshore wind (12.1 percent), solar (7.7 percent) and biomass (4.4). The largest non-renewable source of electricity is natural gas which accounts for 6.2 percent of generation. Owing to the low-carbon intensity of the electricity matrix, Brazil has a unique opportunity to leverage the electricity grid to support the decarbonization of hard-to-abate sectors by enabling developers to draw electricity directly from the grid and receive low-emission electricity which complies with carbon intensive measures for export markets. Furthermore, as Brazil operates a sophisticated and liberalized electricity market with a strong track-record and stable institutions, there is a clear opportunity for to attract foreign direct investment for businesses that are seeking to decarbonize their operations and require clean electricity sources. In terms of future renewable potential, it is estimated that Brazil currently has a potential renewable energy pipeline of over 100 GW through to 2030, with a further 200 GW potential for offshore wind. Much of this pipeline is located in the Northeast region of Brazil which is endowed with excellent wind and solar resource. The Federal Government has already recognized the Northeast region as a critical clean energy hub and has authorized transmission auctions to construct new lines to export electricity so that renewable energy can continue to be developed in the region. 6. The Complexo Industrial e Portuário do Pecém (CIPP) in Ceará is the leading location for a hydrogen hub in Brazil and has ambitions to drive an energy transition, supported by the State and Federal Government. In addition to having abundant onshore wind and solar generation and some of the most favorable offshore wind resources in the world, Ceará is home to the Complexo Industrial e Portuário do Pecém (CIPP), a deep-water port and industrial export free zone (Zona de Processamento de Exportação (ZPE)) that provides businesses operating within its confines with attracting tax incentives in comparison to other regions. The location also provides a connection to the high voltage electricity grid which is vital to secure for developers as this is the most cost-effective option. Furthermore, as the CIPP encompasses an industrial zone there are several potential local hydrogen offtakers in the vicinity to support the establishment of the hydrogen industry, including existing cement, steel, iron, and ceramics’ plants. This positions the CIPP at the forefront of Brazil’s ambition to create a regional energy hub which was endorsed by the Federal Government in February 2021 and supported by the State of Ceará who were the first to issue an environmental license for hydrogen production. To date, as part of the creation of this hub (“Pecém Verde�, green Pecém), the CIPP has signed over 32 Memoranda of Understanding (MoUs) with national and international green hydrogen developers to invest within the industrial zone and six pre-contracts for land leases within the industrial zone that could unlock up to US$ 10 billion in private capital for investments in the production of green hydrogen and derivatives over the next decade. To expand the value offered to investors in the CIPP area, the CIPP has ambitions to set up a research center within its premises, focused on the products that can be derived from the production of hydrogen (such as sustainable aviation fuels). IBRD is supporting this undertaking with Bank-executed technical assistance to help delineate a viable research center strategy and business model. C. Proposed Development Objective(s) Development Objective(s) (From PAD) Enable clean hydrogen production in the Complex of Pecém. Page 4 The World Bank Expanding Clean Hydrogen in Brazil - Ceará Hydrogen Hub (P181511) Key Results D. Project Description @#&OPS~Doctype~OPS^dynamics@pidaprlegalpolicy#doctemplate Legal Operational Policies Triggered? Projects on International Waterways OP 7.50 No Projects in Disputed Area OP 7.60 No Summary of Screening of Environmental and Social Risks and Impacts The Project’s directly-financed interventions – including off-shore (TMUT and Pier 2), on-shore physical interventions (utilities corridor) – and Associated Facilities (GH2 production plants and ammonia storage areas to be installed concomitantly to Project implementation) will be located within the Port of Pecém industrial zone (brownfield Project), but are likely to generate a wide range of significant adverse risks and impacts on human populations (health and safety issues because the handling and use of dangerous chemical products – and, particularly, the production, storage and transportation of ammonia) and the environment (including three surrounding conservation units, environmental protection areas – water bodies’ buffer zones and dunes – and the marine ecosystem). In consequence, the E&S risk has been classified as High. These risks and impacts have already been identified and assessed through E&S impact assessment studies (ESIAs) required by national and state laws and commissioned by CIPP to independent consultancies. The team is proposing the adoption for the Project of these E&S documents required under national law and prepared by CIPP for licensing its operations, with potential complementarities that will be further assessed during preparation. According to the existing studies, no additional land acquisition is expected and distinct social and cultural groups possessing the four characteristics set out under ESS 7 are not present at the Project Area. Both aspects will be further assessed during Project preparation. E. Implementation Page 5 The World Bank Expanding Clean Hydrogen in Brazil - Ceará Hydrogen Hub (P181511) Institutional and Implementation Arrangements The Project will be implemented by the CIPP through a Project Management Unit. The CIPP is a public-private company registered as a joint venture, formed by the State of Ceará (70 percent of shareholders) and the Port of Rotterdam (30 percent). It was created in 1995 and it is subjected to the State-Owned Enterprises Law and adopts the Brazilian Corporation Law. The CIPP is linked to the Ceará Economic Development Secretariat and is also subject to rules and decisions of the GoCE competent bodies such as the State’s General Procurement Authority (PGE). The CIPP has established a Project management unit (PMU) under the CEO. The PMU will carry out financial management of the project, procurement, implementation, as well as environmental and social (E&S) management activities drawing from CIPP experts and staff from the existing Directorates of the company (technical, fiduciary, safeguards, and legal directorates of the CIPP). The PMU has a full-time Project Coordinator that reports directly to the CEO. The PMU will also monitor and report on project indicators and will oversee the Project’s financial reporting @#&OPS~Doctype~OPS^dynamics@contactpoint#doctemplate CONTACT POINT World Bank Page 6 The World Bank Expanding Clean Hydrogen in Brazil - Ceará Hydrogen Hub (P181511) David Vilar Ferrenbach Senior Energy Specialist, Program Leader Pierre Audinet Lead Energy Specialist Borrower/Client/Recipient Complexo Industrial Portuario de Pecem (CIPP) Implementing Agencies Complexo Industrial Portuário de Pecém Hugo Figueiredo Director hugo.figueiredo@complexodopecem.com.br FOR MORE INFORMATION CONTACT The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 473-1000 Web: http://www.worldbank.org/projects @#&OPS~Doctype~OPS^dynamics@approval#doctemplate APPROVAL Task Team Leader(s): David Vilar Ferrenbach, Pierre Audinet Approved By Practice Manager/Manager: Gabriela Elizondo Azuela 02-Sep-2024 Country Director: Johannes C.M. Zutt 04-Oct-2024 Page 7