Submission

AHC Policy Recommendations – Securing Australia’s Hydrogen Future

The world has changed since the release of the National Hydrogen Strategy in November 2019. With
the pandemic and the war in Ukraine we have seen the vulnerability of supply chains and a new
focus on building national capabilities and resilience to shock. These factors have amplified the
arguments for clean energy and for hydrogen, both for countries to make their own and to partner
with others they can trust to supply what they need.


Globally, competition for hydrogen projects is fierce. Significant financial incentives have been
announced by various countries, with each jostling for first mover advantage. The international
funding and policy approaches announced to date demonstrate governments’ recognition that a
profound restructuring of the energy system is required and that this is about maintaining economic
prosperity for their nations.


The standout policy is the US Inflation Reduction Act (IRA), which is part of a suite of new legislation
aimed at increasing US capacity and competitiveness in new and emerging industries. With new
government spending of over US$200 billion a year for the next ten years (across the US policies)
private sector co-investment is inevitable for both large scale infrastructure projects and smaller,
high risk technology commercialisation.


With this legislation, the US government has demonstrated that it seeks to be a market creator,
mobilising significant public and private capital and spurring the development of similar schemes
globally.

What, then, is Australia’s value proposition and competitive offering? And what is the Australian
Government’s role in reducing project and investment risk and in increasing the relative
attractiveness of investment and projects in Australia?


Australia has significant hydrogen export potential, but the potential Australian domestic market is
smaller than that in the US. Our distance from our export base adds additional cost and risk
(technological and financial) to projects. Further, many, if not all, of the things that are part of
Australia’s value proposition – such as abundant solar and wind resource, stable government and laws, and highly skilled workers across a range of skills – are present in the main competitor
jurisdictions.


The challenges and competition for global investment seem unlikely to be met by Australia
attempting to outspend the larger jurisdictions. Without an existing sizeable domestic offtake or
manufacturing base, and with our relatively small economy, the Australian response to the IRA must
be strategic and targeted, and policy needs to consider and support elements of project
development not necessarily reliant on direct cash incentives.

There are several important themes that should underpin future Australian hydrogen policy, as
follows.

  1. Energy policy is industrial policy. Incentives to deliver increased generation and lower power
    costs inevitably increase the pace of manufacturing investment. We can also grow sovereign
    capabilities across a range of sectors, which provides both growth opportunities and a degree of
    economic resilience to external shock.
  2. Cost competitiveness with fossil fuels will not happen without extensive government policy
    and subsidies. Governments must be market creators at this stage of the energy transition. This
    means levelling the playing field with fossils fuels, using an appropriate mix of policy and funding
    levers. This is not only about funding for pilots but also about major infrastructure investment in
    the public interest.
  3. Government must help investors see value. The complexity and uncertainty of the investment
    environment and the overall ecosystem (multiple states, regulatory differences, permitting
    within states) is making investors’ decisions unnecessarily difficult. Government thus has a role
    to direct investors’ attention to the opportunities; to help create value propositions that
    investors recognise. This is also about packaging up opportunities to support regional projects,
    such as port re-developments with onshore or offshore renewable energy zones, pre-approvals
    for nearby industrial zones, and supporting or co-funding additional transmission or pipeline
    infrastructure as required.
    This paper outlines what the Australian Hydrogen Council (AHC) sees as the necessary minimum
    steps to respond to the IRA and other international incentives. This should be read within the
    context of the range of demand initiatives and policy responses that AHC has previously released,
    including our White Paper of September 2021 and submissions on the issues of hydrogen
    certification, electric vehicle policy, the safeguard mechanism and other demand-side policy to
    support the emerging hydrogen industry.

Immediate actions
Ideally there would be a revised strategy and plan to enable the hydrogen sector, within a broader
net zero plan. This is still required, but there isn’t time to develop this through usual government
processes if Australia is to be competitive with other jurisdictions for hydrogen investment dollars,
equipment and a mobile workforce. The market urgently requires a signal to show Australia is
serious.


Fortunately, there are low regrets policy actions to take in the immediate term. Hydrogen is already
used as a feedstock for fertiliser to make ammonia, and for critical chemicals production (such as
methanol). Decarbonising these sectors with clean and green hydrogen is clearly going to be necessary. Similarly, the world is looking to Australia to be a future producer of decarbonised fuel for
intercontinental shipping and aviation, which will also grow the ammonia and methanol markets at
the least.
There are also cases being made for hydrogen to replace fossil fuels in the production of alumina
from bauxite, and to produce direct reduced iron for steelmaking. These are challenging industries
to decarbonise given their scale and the cost of long-lived assets, and they need clear government
support given that hydrogen is far from cost-competitive with fossil fuel use in these industries.
We recommend that the Australian Government underwrites demand for these strategically
important and hydrogen-dependent industries. This could be for a ten-year period, provided that
projects are online by 2033. This sort of mechanism is in line with the support packages under the
IRA and in Canada. To mitigate and reduce the costs associated with project development (such as
transmission costs), the Australian and state governments could collaborate to further incentivise
co-location of chemical production within hydrogen hubs, within proximity to other industrial
infrastructure such as ports or to REZs.

Recommendation 1: Underwrite demand through a revenue support mechanism (such as contract
for difference) intended to incentivise domestic production of critical chemicals and metals that are
of strategic and economic importance to Australia, such as iron, alumina, ammonia, urea, methanol
and key derivatives.


Recommendation 2: Increase and expand ARENA funding for trials and demonstrations looking at
decarbonisation of the production processes for carbon intensive, trade exposed industries such as
aluminium and iron ore refineries.


In addition to the significant policy and investment work proposed above, the Australian
Government has a key role in developing the export supply chains such as those proposed between
Australia and Japan, Korea, Germany and the Netherlands.


The size, scale and complexity of the first large scale hydrogen export projects will require bilateral
agreements between governments for bespoke joint support packages. These will need to meet the
specific strategic and economic interests of each party, as well as allocate appropriate levels of risk
across private and public sector partners. The agreements are likely to include significant
expenditure on the required infrastructure, as well as provision of underwriting support for the
trade itself.


Recommendation 3: Develop bespoke joint support packages between Australia and its trading
partners that underwrite trade and support necessary infrastructure.


Beyond the next 12 months
It is time for a revision of the hydrogen strategy. This provides an opportunity to respond to the local
and global changes since 2019, to provide a plan for the transition (or at least clarify hydrogen within
a net zero plan) and to reconsider the best range and combination of long-term economic
mechanisms to develop the industry, including grants, debt and underwriting.

Refreshing Australia’s hydrogen strategy provides an opportunity to shift the focus to job creation,
retention of manufacturing capability, and assisting heavy industry to decarbonise. It can usefully
shape the planning and regulatory environment and help in the development of investable
propositions to attract a range of co-investors. It also provides an opportunity to consider a skills
plan that is responsive to project needs.


This cannot be left to chance, or to the whims, complexities, and uncertainties of a nascent market.
The energy and industry transition will be materials intensive, as well as capital intensive. It will
connect complex systems and require fundamental change, planning and creativity across sector,
departmental and political boundaries. Ideally, a state by state, sector by sector, commodity by
commodity analysis would be undertaken, to assess relative strengthens and identify gaps in order
to inform development of infrastructure and project investment propositions. Net Zero Australia’s
modelling provides a framework for consideration of the size and scale of investment required to
replace existing fossil generation and for potential location of the additional industry investments.
However, this is perhaps a multi-year and staged project. The refresh of the National Hydrogen
Strategy can be completed more quickly if it is focused on alignment with broader energy and
decarbonisation policies and seeks to embed hydrogen value chains within other industry and
manufacturing packages.


Recommendation 4: Develop a revised hydrogen strategy to at the very least address funding
criteria to incentivise the production of hydrogen in areas where Australia has a competitive
advantage, such as in the production of iron. Funding could be matched by the states and territories
for key projects, and perhaps split so that one funding stream defrays capital costs and the other
provides long term underwriting for contracts.


It is also vital to plan for the industry’s development on the ground, and support supply chains. The
need for a hydrogen equipment, technology and services (HETS) sector across Australia (and
particularly the regions) cannot be underestimated.


Support for a HETS sector also does not need to rely on major direct subsidy. Unlike the US IRA
package, which needed to deliberately financially incentivise investors to train apprentices and pay
workers appropriately, Australian governments can target employment and training programs to
ensure workers and apprentices are appropriately reskilled and retooled to engage in emerging
opportunities. Government can also seek to encourage project developers (government and
industry) to reassess procurement models and guidelines to review how decarbonised and locally
sourced services and equipment are prioritised.


Technology providers note the lack of regulatory consistency for the import of new technologies,
such as electrolysers to Australia. Inconsistencies exist not only between Australia and other
countries, but also between Australian states. The Australian Government should consider the
creation of soft common user infrastructure – such as testing and prototyping facilities and shared
office space – that can facilitate growth through reducing barriers to market for emerging
technologies.

Recommendation 5: A revised hydrogen strategy should explicitly value and support the
development and commercialisation of new technologies and industries, to ensure a pipeline of
technologies and researchers in Australia. Alignment should be sought with other support for
Australian innovation such as that provided through the Commercialisation Action Plan and National
Reconstruction Fund, as well as include dedicated funding for attraction of cleantech scale ups
looking to expand to Australia, particularly from the Asia Pacific region.


Common testing and prototyping infrastructure should also be enabled, to allow product testing and
optimisation to occur alongside regulatory reform.


Finally, the nascent nature of the hydrogen industry requires deals over at least the next five years
to have bespoke construction of financial and non-financial support packages. A range of funding
support packages and programs have already been announced by Australian governments, aimed at
supporting renewable energy projects, potential hydrogen projects, and targeted industry and skills
development. There is currently no mechanism for a streamlined approach to applying for programs,
coordinated regulatory approvals or applications for funding that can combine grant and loan
applications.


Recommendation 6: The Australian Government should consider establishing a case manager
approach within government to assist project developers and funders to tie all potential sources of
support together, as well as assist in the coordination of planning and approvals.

Appendix A: The Inflation Reduction Act

The US signed the Inflation Reduction Act (IRA) into law in August 2022.6 The IRA directs federal
funding towards the reduction of carbon emissions, as well as includes measures aimed at reducing
healthcare costs and increasing taxpayer compliance. The IRA seeks to incentivise investments into
domestic, US based manufacturing capacity and commercialisation of clean technologies such as
carbon capture, hydrogen production and procurement of critical supplies to drive the energy
transition.


The IRA is part of a suite of new legislation aimed at increasing US capacity and competitiveness in
new and emerging industries:

  • The Bipartisan Infrastructure Law (BIL)7 passed in November 2021 provides significant public
    investment in transportation networks, broadband and public works projects, including
    US$70 billion in clean energy technology and demonstration projects.
  • The CHIPS and Science Act8 passed in August 2022 focuses on investment in superconductor
    manufacturing capacity as well as funding R&D in a suite of technologies such as quantum
    computing, AI, nanotechnology, and clean energy.

Together, these laws – IRA, BIL and CHIPS – introduce over US$2 trillion in new US government
spending over the next ten years – US$200 billion per year. The US policies explicitly encourage
private sector co-investment in both large scale infrastructure projects and smaller, high risk
technology commercialisation, appealing to investor risk appetites across the spectrum – from
venture capital to private equity, banking and institutional investors.


Components of the IRA
The IRA sets a target of cutting an additional 1 billion tonnes of emissions by 2030, in order to
progress towards the 50 to 52 percent emissions reduction target by 2030, and 100 percent carbon
pollution free electricity by 2035 targets set by President Biden in 2021.


The clean energy provisions of the Act focus on the reduction in carbon as opposed to the
technology used – with regard to hydrogen production, the IRA makes no differentiation between
hydrogen produced from electrolysis using renewable sources or from nuclear, or fossil fuel + CCS
derived hydrogen.


The IRA allocates US$5.8 billion to the Office of Clean Energy Demonstration (OCED) to create a
program (available until September 2026) to invest in projects aimed at reducing emissions in hard
to abate sectors and industries (steel, cement, iron, chemicals etc) and includes provisions for the
retrofitting of existing facilities.


The IRA also allocates $11.7 billion for the Department of Energy Loans Program Office (LPO) to
support issuance of new loans. It also increases the existing loan program authority by $100 billion
and appropriates $5 billion for a new loan program – the Energy Infrastructure Reinvestment
Program – for up to $250 billion in loans to both new clean energy projects and the retrofitting of
existing infrastructure. The LPO is intended to provide access to debt and loan guarantees to innovative, potentially high-impact energy technologies that are not deemed bankable by existing
lenders.


The IRA incentivises projects to seek dedicated power sources and allows project developers to
combine the investment tax credits (ITC) and production tax credits (PTC) for solar and wind
generation projects with the ITC and PTC for hydrogen production. In addition, the IRA also
includes an option for direct payment of the tax credit for which the project would be eligible, in
place of a tax credit.


Under Section 45V,12 the base tax credit amount that can be claimed is set to US$0.60 per kilogram
of clean hydrogen, increasing to $3 per kilogram when the lifecycle emissions are between zero and
0.45 kilograms of CO2 equivalent per kilogram of hydrogen, alongside employment, wages and
apprenticeship requirements. In order to benefit from the full suite of rebates, employment, wages
and apprenticeships/training must be part of the project planning.


In addition to the PTCs for clean hydrogen, the IRA creates a 30 percent credit for energy storage
technology constructed before 1 January 2025. Clarity around eligibility for this scheme is
forthcoming, though it is widely expected to also cover hydrogen related storage. The existing
renewable energy ITCs for facilities constructed before 1 Jan 2025 remain and include rebates for
solar and wind generation and fuel cell manufacture. If the energy storage project is constructed
before 1 January 2025, it will attract a 30 percent credit and in addition, a 10 percent bonus if the
project is located in an existing designated energy hub.


The IRA also amends the existing section 45Q to provide additional tax credits for the construction
of carbon capture facilities. Any carbon capture, direct air capture or carbon utilisation project that
begins construction before 1 January 2033 will be eligible for the tax credit. Electricity plants that
use carbon capture to reduce emissions by at least 75 percent are also eligible for the 45Q tax credit.
As with the hydrogen production tax credits, the maximum credits are achieved only if worker or
trainee wages and conditions are met.


The potential to access a US$3 tax credit or direct payment for each kilogram of low-carbon
hydrogen produced over a ten year period is revolutionary for the emerging hydrogen sector, with
some analysts claiming that green hydrogen costs may reduce to as low as US$0.73 per kilogram in
the US Northwest, making green hydrogen cheaper than traditional, unabated hydrogen
production at US$3.73/kg. Sourced at this price, green hydrogen could increase the cost
competitiveness of green steel and spur demand in other hard to decarbonise sectors such as
cement and glass manufacture.

Appendix B: Responses from other jurisdictions

Deloitte recently released a report titled Hydrogen: Making it Happen which looks at the range of
conditions required for the large-scale production and deployment of clean hydrogen.
Deloitte outlines a range of conditions for consideration:

  • Natural Demand (demand emerging without regulatory support in specific sectors) –
    aggregation of off-takers.
  • Regulation – joined-up regulations across supply and demand.
  • Assets, infrastructure, and supply – Faster asset cycles, coupled with infrastructure reuse
    where possible, complemented by large-scale investment in renewable capacity, grids, and
    infrastructure.
  • Collaboration –new commercial and business models to address systemic challenges and
    inertia.

The table below is a summary of the policy and regulatory levers deployed across a range of
jurisdictions.

Canada

  • In November 2022, the Canadian government announced several initiatives, including three
    refundable investment tax credits – one for carbon capture, utilisation and storage, one for clean technologies and one for clean hydrogen – in response to the measures announced in the IRA.
  • In particular, CA$15 billion was allocated to the Canadian Growth Fund (CGF), an
    independently managed investment fund focused new energy and cleantech investments.
    Initially established as a subsidiary of the Canada Development Investment Corporation
    (CDEV), the fund is expected to spin out as an independent entity in the first half of 2023.
  • According to policy documents, in addition to standard equity or debt financing, the fund
    will offer CfD or other price assurance contracts, as well as underwrite offtake where
    demand from prospective buyers is still developing.

India
US$2 billion in subsidies to develop green hydrogen production capacity of 5 million tonnes a year by
2030, as well as a suite of measures to drive demand:

  • The state-run Shipping Corp of India will retrofit at least two ships to run on green
    hydrogen-based fuels by 2027.
  • All the state-run oil and gas companies that charter 40 vessels for fuel transport will also
    have to hire at least one ship powered by green hydrogen each year from 2027 to 2030.
  • Green ammonia bunkers and refuelling facilities will be set up at least at one port by 2025
    and at all major ports by 2035.
  • India aims to end imports of ammonia-based fertiliser by 2034 to 2035, replacing them with
    local production.
  • The government will also invite bids to set up two domestic green hydrogen-based urea and
    diammonium phosphate plants.
  • The policy also requires new steel plants to be capable of operating on green hydrogen.

Japan

  • New policy announcement, Green Transformation GX, intended as a successor to the Green
    Innovation Fund (GIF). METI funding under the GIF (matched with industry contributions)
    for the establishment of hydrogen supply chains (approximately US$70 billion) has yet to be
    announced, through is expected in early 2023.
  • Of key interest is the issuing of green bonds to fund massive industrial and energy
    generation projects. Voluntary carbon trading has also been proposed, though industry has
    expressed a high level of concern of decreasing Japanese industrial competitiveness. With
    the passing of the IRA this issue will need to be reassessed.
  • Suite of subsidies and policies released as part of Repower EU, EU210 billion committed in 2022. The REPowerEU plan’s ambition is to produce 10 million tonnes and import 10 million tonnes of renewable hydrogen in the EU by 2030.
  • Options development and analysis focused on:
    o Speed of deployment
    o Minimising the continued use of fossil fuels
    o Cost efficiency (in order to achieve the higher order aim of energy independence
    and CO2 reduction)
    o Future proofing to the extent possible, in order to decrease financial asset risk.
  • The Green Deal Industrial Plan, announced in January 2023,24 contains no new funding and
    will focus initially on speeding up regulatory approval for clean tech industrial projects.
  • The Green Deal Industrial Plan25 announced in February 2023, outlines a decade of funding
    and reform based on four pillars:
    o a predictable and simplified regulatory environment;
    o faster access to sufficient funding;
    o skills; and
    o open trade for resilient supply chains.
  • The EU proposes to put forward a Net-Zero Industry Act to underpin industrial
    manufacturing of key technologies in the EU, with a simplified regulatory framework for
    products that are key to meeting climate goals, such as batteries, windmills, heat pumps,
    electrolysers, carbon capture and storage technologies.
  • The Net-Zero Act proposes to create simple operational criteria for identifying net-zero
    supply chain projects of strategic interest, the intention being to promote strategic projects,
    including multi-country projects, with accelerated permitting procedures.
  • The EU is also investigating the establishment of regulatory sandboxes to allow for rapid
    experimentation and disruptive innovation to test new technologies, with the intention of
    simplifying the process of authorisation/certification for bringing products to market.
  • Under NextGenerationEU, the 27 national recovery and resilience plans funded by the
    Recovery and Resilience Facility (RRF) make available EUR 250 billion for green measures,
    including investments supporting the decarbonisation of industry. Horizon Europe allocates
    an additional EUR 40 billion to Green Deal research and innovation, also in partnership with industry. The Cohesion Fund makes around EUR 100 billion available for green transition, including the Just Transition Fund. The Commission will further facilitate the swift mobilisation of Cohesion investments in support of the Net-Zero Industrial Plan, including by speeding up the design and reimbursements of energy efficiency and renewable projects through standard reimbursement schemes.
  • Reform of EU grant giving is proposed (in particular the Temporary Crisis and Transition
    Framework, TCTF), including the possibility of granting higher aid to match the aid received
    for similar projects by competitors located outside of the EU while ensuring the
    proportionality of such aid.
  • The InvestEU Fund, through the European Investment Bank, the European Investment
    Fund, the European Bank for Reconstruction and Development and 14 other implementing
    partners, supports public and private investments in net-zero tech and industrial innovation,
    mobilising upwards of EUR 372 billion of financing.
  • The Innovation Fund allocates an additional EUR40 billion and in June 2023, plans to have
    an EUR800 million auction for renewable hydrogen. Winners of this auction will receive a
    fixed premium for each kg of renewable hydrogen produced over a period of 10 years. This
    pilot auction will be followed by further auctions or other forms of support for hydrogen
    production and use that contribute towards the REPowerEU hydrogen targets, thereby
    covering the EU domestic part of the Hydrogen Bank.

China

  • Largest hydrogen producer in the world, one third of the global output – 33 million tonnes in 2020. Two thirds of production is derived from coal with only 1% from renewable energy.
  • Major producer of clean technologies, including solar panels, electrolysers and fuel cells, as
    well as electric vehicles.
  • Mid and Long Term Hydrogen Industrial Development Plan was issued in March 2022. It sets
    a target of 100,000 – 200,000 tonnes of renewable hydrogen per year by 2025, primarily to
    replace grey hydrogen in ammonia and methanol production and in refineries.
  • Proposes supportive electricity prices for green hydrogen production in the four key
    hydrogen clusters.
  • The policy also incentivises innovation and industrial development – fuel cells, fuel cell
    vehicles, electrolysers and materials for hydrogen storage.
  • Support for investors is thought to be in the form of preferential loans, subsidies, industrial
    funds, green bonds, and financial incentives via the carbon trading market.

Click here to download the submission PDF.

QLD regulatory framework review

You can download the full PDF version here. 1st March 2024Kahil LloydExecutive Director, Hydrogen and Future FuelsDepartment of Energy and ClimateQueensland GovernmentLevel 9, 1 William

Read More »

2024 Draft ISP consultation

You can download this submission as a PDF here. 16th February 2024 Eli PackGroup Manager, System PlanningAustralian Energy Market Operator Dear Eli, Re: Draft 2024

Read More »