AHC positions: the three licences to operate
Economic licence, where the industry needs to get to scale (in some form).
Social licence, which allows for trusted customer and community relationships.
Regulatory licence, where the industry needs stable, meaningful and efficient regulatory settings.
The industry's licences to operate are all connected...
The hydrogen industry has enormous potential to benefit Australia, through new export markets, decarbonising the economy, and supporting energy security.
However, the industry is still developing and still requires significant investment to become commercial. There is not yet an economic licence to operate. There remains material risks that are impeding large scale investment, and there needs to be a means of sharing risk.
The leap from demonstration scale to commercial scale is significant. A key reason for this in Australia is the high cost of electrolysers, which are not yet produced in commercial quantities. Ideally we would aggregate demand across hydrogen uses to improve the business case for electrolyser development, which in turn will improve the economic licence for the industry as a whole for the production of clean hydrogen.
The need for policy and funding support remains high if we are to get the industry to scale and deliver benefit to Australian consumers.
Government can support the hydrogen market (which comprises several, interconnected markets) in two primary ways: direct funding of production via projects (such as via ARENA); and policy to activate the market.
As at 30 September 2019, ARENA had total funds available to commit to new projects of $216.3 million, of which $70 million has been set aside for hydrogen.
The hydrogen industry will require significantly more funding than this to become commercial. This is expected to be a mix of grant funding and long term concessional finance.
Hydrogen industry investment principles
- Until the industry has reached commercial scale, grant funding (such as is provided through ARENA) is essential.
- Grant funding should initially be deployed on a technology neutral basis within the hydrogen sector. This means valuing hydrogen projects that use natural gas (with or without carbon capture and storage) and coal, where they are clearly supporting longer term renewable hydrogen.
- Grant funding is required to unlock future concessional and non-concessional financing. At present, a funding gap exists even with the presence of concessional financing.
- Funding should value the benefits hydrogen provides that other energy carriage sources cannot. It delivers sector-coupling applications and converts to different usable forms. It can provide energy security through long term storage capabilities.
- Further, for a level playing field, the full environmental/lifecycle costs of all hydrogen alternatives should be understood.
- Where there are multiple sources of funding, they should be coordinated and incentivise development at scale.
AHC policy position
- ARENA’s funding should be increased for 2021-2022 by $200 million with its current remit.
- Beyond 2022, ARENA’s function should be extended, with a remit to support non-renewable technologies and projects as long as they can demonstrate a pathway to renewable energy. There should be a minimum of $500 million funding dedicated to hydrogen activities, for a minimum of 5 years.
- It is critical that this policy is set by mid-2020 to provide investment certainty to investors and allow legislation to be in place.
- The remit of the CEFC should also be reviewed in light of changes to ARENA, where all hydrogen technologies at the financing stage can potentially receive support with the right caveats on the path to renewable hydrogen.
Hydrogen market activation policy principles
- Targets should be set to provide investment signals, even if these are only set as ambitions.
- There should be a level playing field with current subsidies for diesel and other energy sources.
- Consider means of having incentives/measures work across sectors.
- Given the uncertainty in predicting the rate of market maturation, it is reasonable to establish a framework of mechanisms mapped to 5-year intervals to provide the market with some degree of investment certainty, and to minimise the peaks and troughs observed in other renewables markets.
- Identify when and for how long mechanisms such as funding, underwriting risk or demand side targets would run for, when taxes, excises or royalties would be introduced, and at what rate.
- Review mechanisms aligned to the intervals in order to create approach responsive to outcomes.
- Any incentives or government policies created to drive scalability should initially be hydrogen technology agnostic, but with a longer-term pathway (potentially an incentive) to zero carbon hydrogen production.
- Government policy and action (policy mechanisms) should seek to ensure that any part-player in the supply chain can make a reasonable investment decision within a secure overall framework.
AHC policy position
There are many potential mechanisms to activate the market for hydrogen. These support either the supply side (to reduce the cost of production and delivery) or the demand side (to reduce the cost of purchase). The mechanisms tend to fall into four main categories:
- tax credits/incentives;
- new market mechanisms to value utility scale dispatchable renewable energy;
- direct funding; and
- new compliance requirements that stimulate demand.
We will be talking with governments about these in the coming weeks.
Like any new large-scale industry, the emerging hydrogen industry requires a trusted and positive relationship with consumers and with communities living near infrastructure. For the industry this is a matter of obtaining and maintaining a social licence, and of working with policymakers to ensure policy and regulatory regimes are properly targeted to avoid harm.
While hydrogen has been produced and transported in large quantities as a chemical and industrial gas in Australia for many decades, public understanding of, and exposure to, hydrogen is still relatively low. The large-scale development of hydrogen through newer production pathways such as electrolysis also brings a new requirement to engage communities about any concerns regarding land, water and safety.
Hydrogen social licence principles
- Information provision is a priority. Industry and government should work together to develop material to create and support a social licence for hydrogen.
- Any work needs to consider a range of audiences across hydrogen uses, and work with all relevant stakeholders, including consumers and their representatives, communities, research institutions, technical and communications experts, and communities.
- Key areas of interest are likely to include safety, cost and environmental effects, as well as lessons learned from relevant other sectors and international experiences.
AHC policy position
The AHC looks forward to working with governments, consumers and communities on the best means of engaging with communities and on the information required for consumers and all stakeholders. The National Hydrogen Strategy and its supporting reports provide guidance about matters to address with this work.
Regulation is an important foundation for the industry to support social and economic licence. It codifies expectations of minimum standards to:
- Allow for a baseline for community and stakeholder trust in operations.
- Help create a stable investment environment.
Regulation is complex in the case of the emerging hydrogen industry. This is because we have (or might have) relevant regulatory regimes across different:
- sectors (such as electricity, gas and water);
- jurisdictions (national, states, territories and international);
- issues (such as safety, environmental protection and training); and
- parts of the various value chains (such as producing and transporting for different uses).
Regulation also takes time to develop, particularly in complex systems. While it may appear that we have that time in some cases, investment decisions about long-lived assets are being made now. This is also an innovative space – technologies are still developing.
Hydrogen regulatory principles
- There should be a level playing field for the treatment of hydrogen compared with other regulated sectors.
- For this industry there is a particular need for regulatory clarity and efficiency to:
- Account for the ability for hydrogen to connect different regulated sectors.
- Give confidence to all parties, including the community and current and future investors in infrastructure.
- Domestically we need integrated governance, where the relevant regulatory regimes across different sectors, jurisdictions, issues and parts of the various value chains are suitably consistent.
- We need initiatives such as the South Australian Hydrogen Regulatory Working Group, which includes the Metropolitan Fire Service and all other workplace safety, environmental, planning and technical regulation authorities.
- We should develop standardised curricula for trade and tertiary training of staff, to ensure portability of the workforce between projects and consistent quality and safety standards across Australia.
- For energy, hydrogen allows for new choices between markets, such as choices between building gas or electricity infrastructure in the long-term interests of consumers.
- Policy should move towards a single energy market, as hydrogen allows for coupling/co-optimisation.
- There is potential for an overarching National Energy Objective, rather than there being separate gas and electricity objectives.
- For export, Australia should adopt relevant international standards and codes of practice unless there is a specific regional difference that applies.
- A hydrogen guarantee of origin with associated certification are critically important for the development of a credible, valuable and differentiated hydrogen market.
- An opportunity exists to develop a benchmark approach for global adoption.
- A scheme should be designed with sufficient granularity to scope 1 and scope 2 emissions, consistent with IPCC guidelines, and that the resultant hydrogen produced should be mutually recognised against other schemes (such as CertifHy) to ensure international consistency.
- Work should occur to streamline land access and project approvals requirements.
- Innovation can be supported through concepts like the Australian Energy Market Commission’s regulatory ‘sandboxes’, which allow waivers from rules, or changes to rules to allow proponents to test projects.
AHC policy position
- Building on the foundation laid by the National Hydrogen Strategy, work to understand what’s required must start now, with:
- Regulatory mapping
- Coordinated workplan with clear accountability and timing
- Gap analysis
- Targeted activity to fill gaps
- Hydrogen guarantee of origin and associated certification work should commence immediately.