The hydrogen sector in Australia – the cart or the horse; which one goes first?
2020 has brought mixed outcomes to Australia’s resources and energy sectors. Sadly to date, there have not been many winners. However, the emerging hydrogen industry appears to have bucked that trend with a number of key funding developments having been announced in recent weeks revealing the Commonwealth Government’s determination to see this industry developed.
How did we get here?
In early 2019 we saw the first murmurings of those hydrogen ambitions with a number of initiatives announced by different governments around Australia. See our previous alert here for more details and the early beginnings of the Australian hydrogen experience.
State and Commonwealth interest in establishing and developing a hydrogen sector has been spurred on by the release of the long awaited National Hydrogen Strategy prepared by Dr. Alan Finkel in November 2019, and the more recent Technology Investment Roadmap Discussion Paper released in May 2020. These documents discuss the pathways for the development of the Australian hydrogen industry, by effectively removing market barriers, efficiently building supply and demand, and accelerating Australia’s global cost-competitiveness.
The main priorities of the Commonwealth Government, as identified by the strategy, are focused on regulatory reform, investigating and connecting with foreign markets, infrastructure developments and private and public sector cooperation. These are all fundamental aspects of Australia developing a viable hydrogen production and export industry. Still, putting all of this together, it is clear that there is a long road ahead for Australia’s budding hydrogen sector, and significant public and private investment is necessary for there to be any momentum.
Leading up to the release of the National Hydrogen Strategy, a number of States had already announced support for hydrogen projects, including:
- Queensland – In its 2019 budget, the Queensland State Government announced the allocation of $15 million over the next four years for a Hydrogen Industry Development Fund (HIDF). The HIDF forms part of the Government’s ‘Queensland Hydrogen Industry Strategy 2019 – 2024’ and is intended to provide financial assistance to those proposed projects considered eligible, including prioritising investment in plant and equipment and feasibility studies for projects.
- Western Australia – In July 2019, the Western Australian State Government launched the Western Australian Renewable Hydrogen Strategy. Similar to other states, the strategy aims at developing domestic production capabilities and applications of renewable hydrogen in order to become a major exporter. As part of the strategy, the Western Australia State Government has established a $10 million Renewable Hydrogen Fund over four financial years. $9 million of the fund will be available for grant funding to support development of feasibility studies or capital works and promote private sector funding. The other $1 million will be devoted to resourcing, regulatory analysis, and other Government work. $1.678 million of the fund has already been allocated to seven applicants to undertake feasibility studies.
- New South Wales – In January 2020, the Commonwealth and New South Wales (NSW) Governments entered into a Memorandum of Understanding (MOU) setting out the actions and outputs between both Governments in relation to solving NSW’s emerging reliable electricity generation problems. As part of the MOU, the NSW’s State Government outlined its Energy and Emissions Initiatives which included a Hydrogen Technology Program to support the commercialisation of hydrogen technologies in NSW. While the exact details in respect of the Hydrogen Technology Program have not yet been released, this program will add to the current NSW programs, including the $75 million Emerging Energy Program and the Regional Community Program, both of which have already provided funding to potential hydrogen projects.
- Victoria – The Victorian Hydrogen Investment Program looks to develop a hydrogen sector across three streams, including market testing to determine the current extent of interest and opportunity in hydrogen, policy development through the Victorian Hydrogen Industry Development Discussion Paper and the Victorian Government’s investment program that intends to provide funding to leverage hydrogen research, trials, pilots and demonstrations.
There have been only a limited number of projects publically announced as having qualified under these programs, with the majority of those projects announced being initial project concepts and feasibility studies. We expect to see further announcements in relation to the findings of these concepts and studies in the coming months.
At a Commonwealth level and in advance of the National Hydrogen Strategy, the Australian Renewable Energy Agency (ARENA) also announced a change to its investment priorities which were revised to include ‘accelerating hydrogen by helping drive innovation and hydrogen supply chains’ as part of developing technological pathway to emissions reductions.
An example of ARENA’s hydrogen funded activity is the Dyno Nobel Project. ARENA has provided nearly $1 million in funding to ammonium producer Dyno Nobel to investigate commercialisation of green hydrogen production with an on-site solar generation project in central Queensland. In its findings, this study determined that the integration of hydrogen production facilities with on-site solar is key to producing cost competitive renewable hydrogen (that is, through directly linking a hydrogen producing electrolyser with on-site solar generation, hydrogen can be produced at approximately half the cost of producing it by way of an electrolyser connected to the grid). The next stage of this study is now considering the construction of a large-scale on-site solar farm to be connected with a hydrogen electrolyser.
New funding announcements
While the above commitments are positive initial steps, some key threshold questions remain including the true extent of funding required to commercialise the industry and move beyond concept phase into development (not to mention production), but also domestic and overseas offtaker demand.
Mid COVID-19 pandemic however, two new and more significant funding initiatives have been announced revealing some short term answers regarding the Commonwealth Government’s next steps and strategy in this journey. In early April 2020, ARENA announced the establishment of a new Renewable Hydrogen Deployment Fund, which was then followed up by the Commonwealth Government’s announcement in May 2020 confirming a change to the Clean Energy Finance Corporation’s (CEFC) investment mandate, directing the CEFC to make up to $300m available for a new Advancing Hydrogen Fund. This is significant as it is a similar strategy adopted by the Commonwealth Government to kick-start the earlier innovative energy transition projects back in 2014 and 2015.
In recent years, ARENA has provided more than $92 million in grant funding and the CEFC has been responsible for more than $10 billion in debt and equity financing, to many of the most innovative and ground-breaking Australian energy and technology projects. Many of these projects have provided significant industry momentum to instil confidence and cost certainty for the various technologies created, resulting in other industry participants accepting these technologies as good industry practice. The current use of solar generation and battery storage on mine sites is a clear example of where investment in new technologies can lead to better industry practices and environmental outcomes.
Further details of these new funds follow.
ARENA’s Renewable Hydrogen Deployment Fund
ARENA has announced a funding round of up to $70 million to fast track the development of renewable hydrogen in Australia. ARENA intends to provide grant funding for ideally at least two projects that can demonstrate the production of hydrogen via electrolysis with expressions of interest to be submitted by late May 2020. ARENA is focusing on electrolyser technology backed by renewable energy (whether through PPA, onsite generation of RECs). Projects must comply with, amongst other things, the following parameters in order to be considered eligible:
- a valid commercial case for the production and use of hydrogen; and
- a credible commercialisation pathway (cost reduction pathway) for hydrogen production.
This criteria requires applicants to directly address offtaker demand. This is difficult however in the current Australian market with more feasible initiatives required to boost what is currently a limited domestic demand or by supporting a commercially viable pathway for export internationally for which there is no existing supply chain.
Included amongst the other criteria is the requirement for any proposal to address issues with water availability, which has become an increasingly sensitive project issue. We expect the emerging hydrogen industry to come under increasing scrutiny as it increases in size, and any proposals will need to offer strong long-term solutions and balance increasing community and industry sensitivities when it comes to our scarce water resources.
CEFC – Advancing Hydrogen Fund
This announcement represents a change in the investment mandate of the CEFC. Established as an Australian government-owned green bank to facilitate increased flows of finance into the clean energy sector, it must now make up to $300 million in funds available for a new Advancing Hydrogen Fund as part of the National Hydrogen Strategy.
Unlike the ARENA Renewable Hydrogen Deployment Fund, the CEFC does not give grants, rather it invests both debt and equity into projects that provide a positive return for taxpayers. As a priority, the CEFC will seek to invest in projects included in the ARENA Renewable Hydrogen Deployment Funding Round (as discussed above). CEFC anticipates investing in projects requiring $10 million or more in debt or equity financing, although smaller-scale projects from $10,000 to $5 million may be eligible for debt financing.
The CEFC has noted that eligible projects include those that:
- advance hydrogen production;
- develop export and domestic hydrogen supply chains, including hydrogen export industry infrastructure;
- establish hydrogen hubs; and
- assist in building domestic demand for hydrogen.
The criteria required in order to provide financial assistance under the Advancing Hydrogen Fund and the Renewable Hydrogen Development Fund make it clear that the Commonwealth Government is looking for strong commercial cases from investors prior to advancing any taxpayer money. However, requiring a reliable or at least somewhat identifiable offtakers for green hydrogen projects raises some key issues.
Firstly, as identified by the National Hydrogen Strategy and Technology Investment Roadmap Discussion Paper, economies of scale are going to be essential in driving down production costs for green hydrogen (H2 under $2 being the identified goal that is $2 cost of production per kilogram). However, it is unlikely that the current Australian domestic market for hydrogen would be able to support such a scaling up. The domestic transport, manufacturing and energy sectors (the sectors most likely to adopt green hydrogen into their operations) have not yet transitioned or even begun to transition on a scale large enough to a support a growing hydrogen sector.
Secondly, it is a clear objective for the Australian Government to create a green hydrogen export industry to countries such as Japan and South Korea on a similar scale to the Australian LNG sector. However, large-scale transportation of hydrogen is still too expensive to be feasible in the near future.
Both issues highlight the Australia hydrogen dilemma – you cannot commercialise until you have a market, and you cannot have a market until you have large-scale commercial hydrogen production.
To attract real momentum and private investment, the need for large-scale government investment in the hydrogen sector is clear. The steps taken by both Commonwealth and State Governments to support the development of a hydrogen industry are a promising sign, with the timing of the announcements and scale of funding allocated mid-COVID pandemic highlighting the importance and urgency that the Commonwealth Government’s is placing on the realisation of this national opportunity. While grants are helpful, further public investment and government led initiatives, particularly to increase domestic demand, are going to be required before applicants will be in a position to demonstrate the commercial viability of their project and provide answers for others to learn from, let alone attract the private investment which is required in order for the industry to stand by itself.
Although involving differing technologies, it is worth remembering that Australia has already managed to build momentum and attract widespread private (including significant international) investment which caused rapid expansion of the large scale solar and wind sector. In recent times, and notwithstanding that renewable energy is fast becoming the cheapest source of power, that investment has slowed and it is difficult to see many new large scale solar and wind generation projects constructed or connected without ready cost effective solutions to the significant grid instability issues which have been experienced. What is very possible though is that we will see new large scale solar and wind generation projects developed behind the meter, that is, not for generation to the grid, but for co-location with and by providing cost effective generation in support of other more stable energy production technology like hydrogen projects.
Using large scale solar and wind generation in this way to support other primary generation technologies avoids the need to deal with the extreme difficulties currently being experienced by project developers regarding offtaker shortages and grid connection issues. It will also be necessary in order to meet the requirements of Australia’s future hydrogen export trading partners (Japan and South Korea) that any hydrogen, be green hydrogen, and therefore meeting zero net emissions aspirations (and not brown hydrogen, which is produced utilising fossil fuels). As hydrogen feasibility studies progress, there may be opportunities for some existing large scale solar and wind projects (depending on proximity to other infrastructure) to attract hydrogen developers to co-locate and secure offtake which would also provide greater cost input certainty to the hydrogen developers. With the long-standing economic impacts of COVID-19 on the Australian economy to remain, capitalising on our natural advantages and the interest of our international trading partners creates a unique opportunity for Australia with the need for revenue as urgent as ever. For now though, there are a number of market challenges for first mover hydrogen developers to overcome and we expect there will be more funding announcements to follow. Having witnessed Australia’s experience in attracting the scale of private investment which has supported the rapid development of our renewable energy sector, the global market for private funding readily exists and will continue to flow and be motivated as global commitment to achieving zero net emissions continues to gain traction. Expect to see further Australian funding announcements however greater public direction may be required to transition existing industries to look to hydrogen sources in the short term and support those first projects.
To submit a proposal or seek more information regarding any of the grants mentioned or legal issues identified please contact us.
This publication covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. It is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.