Australia’s plan to lead the green hydrogen industry
Australia is part of a global race for nations to position themselves as major players in the “green” hydrogen industry. Industry experts forecast a massive future demand for “green” fuels from multiple sectors, including in co-firing in power generation, the shipping sector, heavy industry such as steel, chemicals and mining, as well as the heavy transport and aviation sectors and for industrial feedstocks and heating. Some commentators predict the “green” hydrogen industry will become a USD2.5 trillion market by 2050.
In a recent report, Standard & Poor’s has commented that it expects clean hydrogen to emerge as a fuel for buses and heavy trucks possibly in the second half of this decade, but for cars it would lose out to batteries which are “significantly more energy-efficient”. S&P has also voiced doubts about the pace that hydrogen would emerge in sectors such as steelmaking, noting that net zero commitments imply the full decarbonisation of hard-to-abate sectors which cannot be easily electrified such as steel, but using hydrogen to do so would be extremely costly. According to S&P, it expects existing end markets for hydrogen such as oil refining, chemicals and later on possibly fertilisers to be among the early adopters of hydrogen. It also sees hydrogen playing an important role beyond 2030 in power generation to provide storage and firm back-up power as the share of electricity generated through renewables increases.
To become a global player, Australia will need to build renewable energy supplies, hydrogen and ammonia production facilities, large scale and import export facilities suitable for bulk hazardous liquids, ports, ships and logistics facilities to get the product to the countries where the demand exists. It will also need to demonstrate that a domestic market exists for hydrogen.
In an article published earlier this year, we noted that the Federal Government sees “green” hydrogen as a key industry of the future in Australia capable of generating over 8,000 new jobs and A$11 billion a year in GDP by 2050.
In this regard the Federal Government proposed that thirteen regional hydrogen technology “clusters” be set up around Australia to help smaller companies gain a foothold in the rapidly emerging hydrogen sector and build up national expertise in an area awash with international initiatives to support the development of the clean fuel. The development of a national hydrogen cluster was identified by the 2019 National Hydrogen Strategy as an important component to scale up Australia’s domestic industry to become a global hydrogen competitor.
National Energy Resources Australia (“NERA ”) has now formed a network of hydrogen technology clusters across Australia, providing seed-funding in partnership with governments and industry to build the skills, capability and commercialisation opportunities in the emerging hydrogen industry. NERA is facilitating connections and knowledge sharing between the cluster network to lead the formation and early development of an overarching industry-led Australian Hydrogen Technology Cluster — Hydrogen Technology Cluster Australia (H2TCA) — that will expedite rapid development of the hydrogen supply chain and drive market activation, establishing a global identity and recognised brand for Australian hydrogen technology and expertise.
The Federal Government has also entered into a series of partnerships with Germany (to develop a hydrogen supply chain), South Korea, Japan and the United Kingdom to explore the possibility of future hydrogen exports.
Since our last article in March this year, a number of important further developments have occurred which we describe and comment on in this article.
ARENA grant funding
In May this year, the Australian Renewable Energy Agency (“ARENA ”) announced that it plans to grant A$103.3 million (USD79.1 million) to three projects, as part of its Renewable Hydrogen Deployment Funding Round as follows:
up to A$42.5 million to a 10 MW electrolyser project being developed by Engie Renewables Australia (“Engie ”) and Yara Pilbara Fertilisers (“Yara ”) in Karratha, Western Australia (“WA ”);
A$28.7 million to ATCO Australia's 10 MW electrolyser for gas blending at ATCO's Clean Energy Innovation Park at Warradarge, WA; and
A$32.1 million to Cheung Kong Infrastructure subsidiary Australian Gas Networks Limited (“AGIG ”) for a 10 MW electrolyser being developed in AGIG's Murray Valley Hydrogen Park in Wodonga, Victoria.
Engie and Yara will use “green” hydrogen to produce ammonia while ATCO and AGIG will use “green” hydrogen for gas blending in existing pipelines. Blending of hydrogen into the local gas grid provides a ready-made market for the fuel as there is a use for the hydrogen and a customer from day one. We comment further on this development below.
The parties which have been granted ARENA funding must now satisfy a number of development conditions and achieve financial close before funding is released. The successful applicants can also apply for debt and equity finance from Clean Energy Finance Corporation (“CEFC ”), a sister agency of ARENA, which manages the A$300 million Advancing Hydrogen Fund.
Darren Miller, the CEO of ARENA, has stated publicly that
We’re excited to have chosen three projects we believe will help kickstart renewable hydrogen production in Australia at a large scale. Our hydrogen industry in Australia is in its infancy, so the lessons learned from these three projects - and the entire funding round - will be important in driving our future hydrogen economy."
The ARENA funding rounds are designed to help spur commercial production of hydrogen under the Federal Government’s H2 under A$2 strategy, which aims to make hydrogen cost competitive with other fuel sources such as gas by bringing the cost of hydrogen to below A$2 per kg. Since 2016, ARENA has committed over A$57 million to hydrogen projects including A$22.1 million towards 16 R&D projects, as well as to feasibility studies into large scale projects and smaller scale demonstrations.
A number of companies which were unsuccessful in this ARENA funding round are now reportedly reviewing their options. In particular:
Gas pipeline company, APA Group, and partner Woodside Petroleum Limited (“Woodside ”) announced that they have dropped their proposed renewable hydrogen project in WA after being unsuccessful in obtaining ARENA funding. APA and Woodside had sought funds for a proposed project in WA’s Central West, powered by APA’s Badgingarra wind and solar farm.
Woodside, which has a large LNG export business and has stated publicly that it wants to capture a foothold in the emerging hydrogen market in Asia, was unsuccessful in the ARENA funding round for its Tasmanian project but has announced that it will still pursue that project on a slower schedule. The company is of the view there is strong support among community and government stakeholders for a phased approach that starts with a Tasmanian market. Woodside and partner Countrywide Renewable Energy will now review the concept and schedule of their Tasmanian project (which is planned for the same industrial park as separate projects planned by Fortescue Future Industries Pty Ltd (“FFI ”) and Origin Energy). FFI is the wholly-owned “green” energy vehicle of Fortescue Metals Group (“FMG ”).
BHP has said it will continue to study the potential to trial the use of an electrolyser alongside renewable power at its Kwinana nickel refinery in WA despite failing to secure ARENA funding for its project.
Macquarie Group has made no comment on the plans for its hydrogen project with Anglo American at the Dawson coal mine in Queensland, after its bid for ARENA funds was also unsuccessful.
Australia’s clean hydrogen hubs initiatives
In April this year, Prime Minister Scott Morrison pledged A$275.5 million to accelerate the development of four additional clean hydrogen hubs in regional Australia and implement a clean hydrogen certification scheme.
This was supported in the 2021-22 Budget by a commitment of A$61.8 million over 4 years for the development of these additional clean hydrogen hubs. This builds on A$70.2 million provided in the 2020-21 Budget to support the development of a technology-neutral regional hydrogen export hub. These new measures are for “clean” hydrogen which the 2019 Hydrogen Strategy defines as being “produced using renewable energy (green hydrogen) or using fossil fuels with substantial carbon capture and storage (CCS) (blue hydrogen)”.
Where are the hydrogen hubs in Australia?
The number of announced regional hydrogen hubs in Australia is currently 7 and are located in:
Latrobe Valley (Victoria);
Darwin (Northern Territory);
Pilbara (Western Australia);
Gladstone (Queensland);
Hunter Valley (New South Wales);
Bell Bay (Tasmania); and
Eyre Peninsula (South Australia).
What is the purpose of the hydrogen hubs?
The objective of these hubs is to crystallise billions of dollars of investment pledged by major ASX-listed companies, private investors and international energy investors. Australia is pinning its hopes on the hydrogen hubs - backed by some of the nation’s biggest renewable investors - as part of a technology-led solution to reach net zero emissions, without yet providing a timeline for reaching that goal.
Hydrogen gas blending initiatives in Australia
As the momentum and commitment to reach net zero emissions accelerates, companies that distribute gas to households in Australia face significant challenges. On one view, the only option is to adapt or face a slowly dwindling business as new gas connections are halted and the gas companies are left with only existing customers. Some experts are of the view that it is up to the gas industry to demonstrate that supplying renewable gas through the network is viable in the face of an increasing push towards electrification to meet emissions targets. Prompt action is required given the early stage of “green” hydrogen development compared to the mature electricity industry, where electrical appliances can already be bought to replace the functions of gas in the home.
AGIG aims to have a 100% “green” hydrogen product available for new housing subdivisions by 2025, as part of a push into renewable gas to avoid losing out to electrification in the rush to net zero emissions.
AGIG owns distributors Multinet and Australian Gas Networks and is Australia’s biggest natural gas distributor. It is reportedly targeting all of its gas network to be on at least a 10% renewable gas blend by 2030, to pave the way towards its new stretch target of net zero emissions by 2040 (being scope 1, 2 and 3 emissions including the product that the company delivers as well as its own emissions from its operations). By 2040, the company plans to transition from natural gas to renewables gases - mostly hydrogen but also biomethane. Developing options to supply customers with hydrogen and biomethane is seen by AGIG as essential as both a way forward to align with its own corporate net zero targets and also those of governments and stakeholders.
While home appliances can run on a 10% hydrogen blend without adjustments, AGIG’s 100% “green” hydrogen product will require hydrogen appliances that are not available currently in Australia but are on the market in Britain and Europe. The company intends to bring hydrogen cooktops, ovens, boilers and space heaters in from Europe by the year-end to use in demonstration homes and is in talks with manufacturers with the aim of locally produced appliances being available by 2025.
As well as adjustments to home appliances once the blend exceeds 10%, Australia’s National Hydrogen Strategy identified that further research and reforms are needed before widespread hydrogen blending in gas distributions networks can occur. One issue that has been identified is the extent to which the existing regulatory framework applies to blended gas - the implications of this for blending activities are uncertain. Due to the embrittlement or degrading effect of hydrogen on steel pipelines that were originally designed for natural gas transportation, the extent of blending will be limited until there is further evidence that safety issues can be addressed.
The challenges of building a sustainable hydrogen industry in Australia
The development of a sustainable hydrogen export industry in Australia faces a number of challenges.
The first challenge is to build a domestic market for hydrogen. There are a number of factors which suggest that this is achievable including:
the need for large gas distributors to find an alternative to gas to supply to customers - gas blending is being trialled now with large distributors such as AGIG seeing this as a necessary path for gas distributors to remain relevant and viable. The attractiveness of gas blending is that there is a day one customer and application for the hydrogen produced. The challenge is that once the amount of hydrogen blended into the gas exceeds 10%, modified or new appliances will be required by consumers and impacts on pipeline integrity and safety will need to be better understood;
the interest in development of “green” and “blue” ammonia manufacturing capacity which can be used in a number of applications including in fertiliser production. Hydrogen projects which involve an in-built source of demand, such as fertiliser maker Yara’s “green” ammonia project in WA, Strike Energy’s “Project Haber” in WA and FMG’s plans for “green” ammonia to be used in its mining fleet and its other industrial processes, arguably have a higher prospect of success;
the innovative use of hydrogen as a part of a renewable energy and storage grid in remote locations such as the units being developed by Ampol and Endua; and
the willingness of major listed ASX companies (such as FMG, Origin Energy, Woodside and BHP) to investigate and commit funds to hydrogen projects (and associated infrastructure) even in the absence of access to government grant funding. This commitment is a reflection of the potential which these companies see in hydrogen delivering their own carbon reduction or net zero emissions goals.
Assuming that a domestic market for hydrogen is created, the challenge remains to build a viable export industry. Once again there are some factors which suggest this can be achieved including:
the interest of overseas utilities in the use of “green” ammonia in the manufacture of fertiliser who see this as a way of both reducing their carbon footprint and having a ready market in their home economies; and
the innovative use of hydrogen in the steel manufacturing industry in Australia as a way of lessening the carbon footprint of such industries. The success of AGIG’s landmark project in Adelaide which will result in “green” hydrogen replacing fossil fuel-based hydrogen at the Whyalla steel works and FFI’s successful “green” iron production trials in WA will be an important indicator of what can be achieved. These are a first for Australia in terms of clean fuel being used in heavy industrial applications and will be important “road tests” as to whether the replacement of fossil fuel with hydrogen can be done in a cost-effective manner.
However, Australia is in a global race and other countries are also committed to becoming global players in the hydrogen industry. Unless the cost of hydrogen production can reach a level of A$2 per kg (the target set by the Federal Government), an export industry will not be competitive globally.
In addition, the scale of capital required to build a viable hydrogen export industry in Australia is significant - billions of dollars of investment will be required. The availability of ARENA grant funding and CEFC debt and equity funding will be important in the early stages but ultimately these projects which receive ARENA and CEFC funding will need to be economically viable and be able to attract private sector finance. The selectiveness of the Federal Government’s approach to grant funding whereby grant funding will not be available to all applicants (as reflected in the latest round of ARENA funding) is likely to have the result that not all hydrogen projects proceed. The appetite of governments to continue to provide such funding and commence other government decarbonisation incentives to the developing hydrogen industry is also likely to be tested.
Ultimately, it may fall to the major ASX-listed companies and global developers to invest significantly in the hydrogen industry for a successful export industry to be developed. Whilst there is a powerful driver now for companies to move to a net-zero emissions position, there are different pathways to achieving that outcome and development of hydrogen production facilities and individual hydrogen use cases will be costed against other low emissions alternatives to determine their viability.
It is difficult to see private sector finance being available in the short-term in the absence of a defined and accessible market(s) for hydrogen and committed offtake arrangements to support debt repayment. Private sector finance will also want to see that there exists a clear supply chain pathway from the hydrogen production facility to the end user - for exports, this will include access to transport infrastructure and port facilities and appropriate shipping arrangements. This may mean that companies need to fund such developments themselves (e.g. by raising equity) and look to introduce private sector debt once economic viability has been established.
It will be interesting to watch the green hydrogen industry in Australia as it develops and compare the country’s progress to that of other countries seeking to be global players.