Submission

AHC Pre Budget Submission Aust Govt

About the Australian Hydrogen Council

The Australian Hydrogen Council is the peak body for the hydrogen industry, with 64 members from
across the hydrogen value chain.
Our members are at the forefront of Australia’s hydrogen industry, developing the technology, skills
and partnerships necessary to build Australia’s hydrogen economy.

Hydrogen’s role in future energy systems


Hydrogen provides the versatility required by future energy systems in a carbon constrained world.
With its long-term energy storage potential, hydrogen is the perfect complement for variable
renewable electricity and batteries. Hydrogen can also be exported, which means potential new
markets.

The versatility of hydrogen also allows it to connect different sectors of the economy, supporting
Australia’s economic and energy security.

We have an enormous opportunity in this country to create a vibrant hydrogen industry, both for
domestic and export use. Australia has the renewable energy resources, the technical skills, and the
track record with international partners to become a global hydrogen leader.

We are already seeing significant investment from local and international businesses, and the
National Hydrogen Strategy (NHS) and jurisdictional announcements have signalled the value that
the Australian Government and states and territories see in the developing industry. Work for the
NHS estimated potential benefits to Australia could be as high as $26 billion a year in additional GDP
and 16,900 new jobs by 2050.

The opportunity is real, but it will not exist forever. Competing hydrogen producers across the globe
seek a share of the export pie and are scaling up hydrogen production in their respective countries
to supply the Japanese, Korean and Chinese markets as soon as 2025. These competitors include
Brunei, Qatar, UAE and Norway, and in the longer-term, market entrants such as the United States,
Brazil, Chile and New Zealand.

Many of these countries have similar strengths to Australia, including abundant renewable
resources, access to low-cost gas for blue hydrogen production, carbon capture and storage
capabilities, large areas of land for solar installations, and proximity to key hydrogen export markets.

The objectives of the NHS – and in 2020, the ‘H2 under $2’ target set in the Government’s Low
Emissions Technology Statement – are considerable. They require a further significant
demonstration of government commitment to implementation and market development.

This is not a technology matter; it is an economic matter. Hydrogen is competing with incumbent
fuels that are cheaper – they are subsidised by governments and the carbon costs are not valued. It
is also not about leaving market development to the private sector – this would mean we are asking
an industry to create itself at a loss.

Meeting Australia’s stated hydrogen objectives requires strong national leadership to plan,
collaborate and communicate with partners and stakeholders. Government must drive and lead the
creation of the clean hydrogen industry. With the world moving to net zero there is no real
alternative.

This submission proposes some ways for the Australian Government to demonstrate its seriousness
in growing our clean hydrogen industry in line with the NHS and ‘H2 under $2’ target.

Summary of recommendations

Recommendation 1

The Australian Government urgently commences a Hydrogen Market Development Plan that:

  • Explicitly adopts 2030 as the ‘H2 under $2’ target date.
  • Identifies the minimum number and likely size of hydrogen production projects to reach this
    target under different scenarios. This work should inform an export target, which would
    complement the price target.
  • Drives regulatory co-ordination and is informed by a cross-jurisdictional group of regulators.
  • Addresses public perceptions of hydrogen risks and issues, as well as workforces and regions
    that are vulnerable to changes in energy production and use.

Recommendation 2

The Australian Government explicitly funds a division of the DISER or a separate agency (to at least
$5 million a year, and more where further consultant support is required to support major policy
projects in any one year) to:

  • Deliver the NHS on behalf of the Australian and jurisdictional governments.
  • Develop and publish an implementation plan, including allocating work to state and territory
    governments as reasonable and necessary.
  • Allocate federal funding to state and territory governments to deliver as reasonable and
    necessary, or to direct and track other governments’ work to deliver the NHS.
  • Publicly engage with stakeholders, including delivering greater transparency on timeframes and
    decision-making.

Recommendation 3

The Australian Government commits funding of sufficient scale to meet the likely outcome of the
proposed Hydrogen Market Development Plan. The ARENA funding is likely to be insufficient for this
purpose but this will become clearer through the planning process.

Recommendation 4

The Australian Government investigates further opportunities to form arrangements with the states
and territories to support regional hydrogen offtake.

Recommendation 5

The Australian Government encourages private investment in hydrogen through the tax system,
such as:

  • Treating any grant funding from ARENA as assessable over the life of the project rather than in
    the year the grant funding is received.
  • Providing tax credits/incentives for investing in export hydrogen production and distribution
    where any Research, Development or Demonstration (RD&D) is undertaken.3
  • Reducing tax write-off periods for hydrogen infrastructure (perhaps 1-3 years).
    4
  • Increasing the effective rate of tax offsets (from the current rate of 8.5% to 20%) and
    expenditure thresholds (beyond the A$100 million cap to A$500 million).
  • Legislating for the immediate tax deductibility for all salary and wage costs for the construction
    of hydrogen production and distribution projects. These are a significant expense and requiring
    them to be capitalised for tax purposes acts as a disincentive to employment and infrastructure
    development.
  • Treating front-end engineering design costs for hydrogen projects as immediately deductible
    under Division 40-730 of the Income Tax Assessment Act, 1997, rather than being capitalised.

Adapting the excise regime over time to apply a levy to fuel consumed in Australia based on its
carbon content. Initially (say over a 5-year period), credits for businesses could be phased out to
allow for a transition to new energy technologies.

Recommendation 6

The Australian Government considers a new direct compensation measure to replace diesel
standalone power systems.

Recommendation 7

The Australian Government sets a natural gas blending target of 10% and instructs the Australian
Energy Market Commission to investigate possible rule changes to allow for and value hydrogen
blending into natural gas networks.

Recommendation 8

The Australian Government implements vehicles emissions standards:

  • Light vehicle CO2 emissions standard suitable for the Australian new vehicle market.
  • CO2 emissions standard for new heavy vehicles (buses, trucks) to bring vehicles to Australia. For
    example, the EU target is for new heavy-duty vehicle CO2 emissions (average) to reduce by 15%
    in 2025 and by 30% in 2030, both relative to a 2019 baseline.
  • Euro 6 noxious emissions standards for light and heavy vehicles.

Recommendation 9

The Australian Government sets a 50% zero emissions vehicle target for fleets of cars, buses and
ancillary vehicles for 2030. This would include privately operated public transport fleets and
government owned logistics providers.

Summary of recommendations

The 57 actions in the NHS have been endorsed by the Australian Government and each state and territory. The challenge remains to flesh out the detail of the NHS and take action to implement the actions.

Collectively, in Australia, we do have huge enthusiasm and appetite to test the waters, but we do not yet have the means to harness this to get to scale, such as through targets that provide bankable support for investors, so we can get major projects deployed.

It becomes even more important to get this deployment when we consider the long-term risk of having an economy tightly coupled to fossil fuels in a decarbonising world. We need to diversify how we produce, use and export energy, and hydrogen allows us to do this.

In the view of the Australian Hydrogen Council, the next step in developing a world-scale hydrogen industry in Australia, building on the National Hydrogen Strategy and Low Emissions Technology Statement, is to develop a comprehensive and actionable Hydrogen Market Development Plan. The plan should go to 2030 at the least.

While no long-term plan can predict exactly what will need to be built, and where and when it should be built, it is possible to use market information and credible inputs to develop plausible scenarios. Those scenarios can inform the early decisions which have to be made to get the investment ball rolling.

There are three key elements for planning purposes.

1.      Planning for ‘H2 under 2’

First, we need to flesh out the stretch target of $2 Australian per kilogram of hydrogen produced, as
set out in the Low Emissions Technology Statement. This target is not associated with a date at this
stage.
The Australian Hydrogen Council encourages the Australian Government to adopt 2030 as the ‘H2
under $2’ target date.
We suggest 2030 because the National Hydrogen Strategy states an objective where Australia is a
top three exporter to Asian markets by that time. Japan has also indicated that it is seeking hydrogen
at a production price of $2 Australian a kilo post-2030, and Korea has proposed around $1.70 to $2 a
kilo by 2030 as well.
The Hydrogen Market Development Plan should ideally identify the minimum number and likely size
of hydrogen production projects to reach the ‘H2 under $2’ target by 2030, under different
scenarios. This work should inform an export target, which would complement the price target.
This helps establish basic expectations about what is required to meet our objectives, which in turn
help shape government and industry planning and investment in the detail.
We need to do this soon though, because very large projects take years to plan and build – in fact,
most of the time that we have to 2030.

2.      Scoping an appropriate regulatory framework

The second key element of our proposed Hydrogen Market Development Plan is regulation, where
relevant regulations include hydrogen certification, safety regulations for a range of purposes,
environmental regulations, consumer protections and local government approvals.
Customers, communities, investors and trading partners will be looking for some degree of
regulatory certainty and consistency.
Major hydrogen projects also need a degree of regulatory certainty to start planning for multi-year
construction. If we expect very large projects are required to get to ‘H2 under $2’ by 2030 – and we
do – there will be a need for regulatory clarity within the next 18 months or so.
None of this is impossible, and there are existing regulatory regimes that can be used.
However, the task is still complex and is made more complex by one of the great benefits of
hydrogen, which is its versatility. Connecting different sectors of the economy is a good thing for
energy diversity and economic resilience to shock. But it also has the effect of connecting separate
regulatory regimes, which vary further over different layers of government and multiple
jurisdictions.
The Australian Hydrogen Council is asking for regulatory coordination across the jurisdictions. This
should involve a cross-jurisdictional group of regulators, to inform and help deliver the regulatory
aspect of the Hydrogen Market Development Plan.
As with the Hydrogen Market Development Plan itself, this work should be led by the Australian
Government, with a focus on how to make it easier to do business in the emerging hydrogen
industry. This includes the needs of international companies who want to invest in Australia.
This work also needs to start now. Regulatory change is rarely straightforward or fast, and we need
to know what changes are required as soon as possible.

3.      Engaging with communities and consumers about change

Third, the proposed Hydrogen Market Development Plan should also have a way to scope and
deliver engagement with communities and consumers about change.
The hydrogen industry, as envisaged in the NHS, will have unprecedented scale.
Sizeable land areas will be developed as wind and solar farms and transmission lines. Hydrogen
pipelines will be required (some of which may be converted gas pipelines) as well as water pipelines
to supply electrolysers. Industrial and port facilities will also need to be developed to process and
export hydrogen.
This will in turn require Australian communities to accept new infrastructure in their midst, prepare
for new opportunities arising from job creation/transition, and to feel comfortable introducing new
fuels and technologies in their homes.
We can see that there is a need for respectful and constructive engagement with consumers and
communities about the road ahead. This is clearly a role for industry, and the Australian Hydrogen
Council is developing principles and commitments to this effect.

There is also a much larger task here for governments to sponsor a public discussion about
hydrogen. This could start with looking at public perceptions of hydrogen risks and issues, and
research into workforces and regions that are vulnerable to changes in energy production and use.
In our view, the Hydrogen Market Development Plan must address community engagement and
regional adjustment, and to consider these as priorities from the outset.

Recommendation 1

The Australian Government urgently commences a Hydrogen Market Development Plan that:

  • Explicitly adopts 2030 as the ‘H2 under $2’ target date.
  • Identifies the minimum number and likely size of hydrogen production projects to reach this
    target under different scenarios. This work should inform an export target, which would
    complement the price target.
  • Drives regulatory co-ordination and is informed by a cross-jurisdictional group of regulators.
  • Addresses public perceptions of hydrogen risks and issues, as well as workforces and regions
    that are vulnerable to changes in energy production and use.

Resourcing and coordination

There is significant work required to coordinate and implement the actions under the NHS, and we
have some concern that this workload has not been reflected in departmental resourcing and
processes to date.
There needs to be a strong advocate for the NHS through government, where the body has been
appropriately authorised and resourced to deliver the NHS with some urgency.
We would expect funding to deliver the NHS would be in the region of at least five million dollars a
year.

Recommendation 2

The Australian Government explicitly funds a division of the DISER or a separate agency (to at least
$5 million a year, and more where further consultant support is required to support major policy
projects in any one year) to:

  • Deliver the NHS on behalf of the Australian and jurisdictional governments.
  • Develop and publish an implementation plan, including allocating work to state and territory
    governments as reasonable and necessary.
  • Allocate federal funding to state and territory governments to deliver as reasonable and
    necessary, or to direct and track other governments’ work to deliver the NHS.
  • Publicly engage with stakeholders, including delivering greater transparency on timeframes and
    decision-making.

Supporting hydrogen infrastructure and driving demand

Until the industry has reached commercial scale, grant funding is essential.
We welcome the recent announcement that ARENA would receive guaranteed baseline funding of
$1.43 billion over 10 years, and we observe that hydrogen remains a clear ARENA priority.
However, we note that hydrogen still competes with subsidised fossil fuels, and that hydrogen
commitments from other governments have been particularly strong.
For example, the German hydrogen strategy includes an investment of 9 billion euros, and France
recently announced 7 billion euros to be spent by 2030 to develop green hydrogen.
France and Germany do have larger GDPs than Australia – which implies each country can provide
greater investment in hydrogen. Nonetheless, their contributions indicate the magnitude of
government support required to meaningfully activate the hydrogen industry. And we have a larger
export prize to strive for.
This matter connects with Recommendation 1, which is the plan to set the target and likely
pathways to 2030. This should also demonstrate the scale of funding required.
To provide some context: the Hydrogen Council’s 2020 Path to hydrogen competitiveness report
(supported by McKinsey analysis) estimates that US$70bn (A$100bn) of investment in hydrogen is
required across the globe by 2030 to meaningfully activate the global hydrogen economy:

Reaching the scale required will call for funding an economic gap until a break-even point is reached –
an investment to offset the initially higher costs of hydrogen as a fuel and of hydrogen equipment
compared to alternatives. Instead of being perceived as costs, this should be seen as an investment to
shift the energy system and industry to low-carbon technology.
BNEF analysis goes further, estimating that US$150 billion (A$214 billion) will be needed globally
until 2030 to bridge the cost gap between hydrogen and the cheapest fossil fuels, not just the
cheapest low-carbon alternative.
Public investments and policies to fill the gap can then unlock several times their value from the
private sector. Assuming all else is equal, figures from ARENA and CEFC suggest that government
funding in hydrogen might be expected to unlock at least three times as much private investment.
A real opportunity exists to build on the success of the renewables revolution in Australia and
channel funding towards developing a hydrogen industry.

We also note that private sector financing can also be incentivised through governments acting as
offtakers to hydrogen projects. While these arrangements usually sit with the states and territories,
the Australian Government can play an important role. The NSW Energy Package MOU from January
2020 is an excellent example, where the two governments are funding over $2 billion in energy and
emissions reduction initiatives to help NSW meet its target of net zero emissions by 2050.
Further, while changing tax laws cannot close the hydrogen investment gap, the tax system can play
a role. The existing tax laws are largely in place and could be tailored relatively easily to capture
hydrogen projects of national significance.

Recommendation 3

The Australian Government commits funding of sufficient scale to meet the likely outcome of the
proposed Hydrogen Market Development Plan. The ARENA funding is likely to be insufficient for this
purpose but this will become clearer through the planning process.

Recommendation 4

The Australian Government investigates further opportunities to form arrangements with the states
and territories to support regional hydrogen offtake.

Recommendation 5

The Australian Government encourages private investment in hydrogen through the tax system,
such as:

  • Treating any grant funding from ARENA as assessable over the life of the project rather than in
    the year the grant funding is received.
  • Providing tax credits/incentives for investing in export hydrogen production and distribution
    where any Research, Development or Demonstration (RD&D) is undertaken.8
  • Reducing tax write-off periods for hydrogen infrastructure (perhaps 1-3 years).
    9
  • Increasing the effective rate of tax offsets (from the current rate of 8.5% to 20%) and
    expenditure thresholds (beyond the A$100 million cap to A$500 million).
  • Legislating for the immediate tax deductibility for all salary and wage costs for the construction
    of hydrogen production and distribution projects. These are a significant expense and requiring
    them to be capitalised for tax purposes acts as a disincentive to employment and infrastructure
    development.
  • Treating front-end engineering design costs for hydrogen projects as immediately deductible
    under Division 40-730 of the Income Tax Assessment Act, 1997, rather than being capitalised.
  • Adapting the excise regime over time to apply a levy to fuel consumed in Australia based on its
    carbon content. Initially (say over a 5-year period), credits for businesses could be phased out to
    allow for a transition to new energy technologies.

Replacing diesel in remote applications

Diesel is currently used extensively in mining and agriculture, and to power remote communities.
Developing hydrogen remote area power systems (RAPS) can reduce Australia’s reliance on
imported diesel and support decarbonisation in these sectors and communities. The development of
hydrogen remote applications would also generate jobs in the design, construction and operation of
hydrogen systems and provide a much-needed training ground to develop local knowledge and
experience in the industry.
From a cost comparison perspective, hydrogen can replace diesel as a fuel right now. However, the
issue remains how to replace existing infrastructure (including vehicles, which we return to below)
and how to produce the hydrogen at scale in a pre-commercial environment.
Hydrogen is also competing against a heavily subsidised fossil fuels industry. A 2019 International
Monetary Fund paper calculated Australia’s post-tax fossil fuel subsidies in 2015 as US$19 billion
(A$28 billion), or US$1,198 per capita (A$1745).10 Post-tax subsidies were defined as the differences
between “actual consumer fuel prices and how much consumers would pay if prices fully reflected
supply costs plus the taxes needed to reflect environmental costs and revenue requirements”.
This supported further by the work of the Organisation for Economic Co-operation and Development
(OECD). It has been found that 70% of energy-related CO2 emissions from advanced and emerging
economies are entirely untaxed.
This indicates there is scope for policy reform to make a meaningful impact. Recommendation 6 can be seen as complementary to Recommendation 5 above.

Recommendation 6

The Australian Government considers a new direct compensation measure to replace diesel
standalone power systems.

Replacing natural gas

Besides the obvious benefits of decarbonising Australia’s gas use, the use of hydrogen in the natural
gas networks can provide important domestic offtake support to the emerging hydrogen export
industry. This can also occur without significant additional investment in infrastructure.
However, explicit government policy support is required, as the gas networks cannot effectively
make rate cases to their regulator without policy endorsement for expenditure. The most valuable
support at this stage is for the Australian Government to set targets for hydrogen blending into the
gas distribution networks. This is a ‘pen ready’ market stimulus opportunity.
Also, the current national regulatory framework does not account for hydrogen, which has created
uncertainty for gas networks seeking to pursue hydrogen blending.

Recommendation 7

The Australian Government sets a natural gas blending target of 10% and instructs the Australian
Energy Market Commission to investigate possible rule changes to allow for and value hydrogen
blending into natural gas networks.

Transport applications

Decarbonisation of Australia’s transport sector is becoming increasingly urgent. Transport is
Australia’s second largest emitter, making up 19% of current greenhouse emissions.
Decarbonising transport will only occur with a mix of batteries and hydrogen fuel cells. While both
can be used for light vehicles, hydrogen has particular value in the heavy transport sector. As noted
in the NHS, hydrogen fuel carries significantly more energy than the equivalent weight of batteries.
This is particularly useful for buses, trucks and ships that carry heavy loads and can travel long
distances. Even with improvements battery efficiency the heavy transport sector remains very hard
to decarbonise without clean molecules like hydrogen.
As with gas blending opportunities, transport also provides significant hydrogen offtake potential.
Transport uses are more piecemeal than gas blending but have the advantage of having a public
profile and can also replace diesel now.
Hydrogen can also bring new design and manufacturing opportunities to Australia in fuel cell
technologies, to be used in the automotive, mining, aviation and marine industries.
Governments can provide the right signals by setting targets and reducing unnecessary barriers to
uptake for vehicles. They can help create the demand that will draw through private investment in
vehicles and infrastructure. This will give certainty to manufacturers and investors in the early
stages.

Recommendation 8

The Australian Government implements vehicles emissions standards:

  • Light vehicle CO2 emissions standard suitable for the Australian new vehicle market.
  • CO2 emissions standard for new heavy vehicles (buses, trucks) to bring vehicles to Australia. For
    example, the EU target is for new heavy-duty vehicle CO2 emissions (average) to reduce by 15%
    in 2025 and by 30% in 2030, both relative to a 2019 baseline.
  • Euro 6 noxious emissions standards for light and heavy vehicles.

Recommendation 9

The Australian Government sets a 50% zero emissions vehicle target for fleets of cars, buses and
ancillary vehicles for 2030. This would include privately operated public transport fleets and
government owned logistics providers.

Conclusion

Considering the current economic conditions and the opportunity that hydrogen presents, the
2021/22 budget presents an excellent opportunity for the Australian Government to implement the
recommendations outlined in this submission in order to reap the benefits of a local hydrogen
industry.
The Australian Hydrogen Council would welcome the opportunity to provide further detail about any
of the recommendations made in this submission via CEO Dr Fiona Simon who can be contacted by
email on [email protected] or telephone 0474 028 740.

Click here to download the submission PDF.

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