While Australia has the potential to be a global leader in the emerging hydrogen market, some headwinds remain. The ‘State of Hydrogen’ report cited our considerable hydrogen project pipeline, which makes up close to 40% of all announced global investments. It also revealed other positive aspects, including support for hydrogen hubs, doubling of chemical feedstock (e.g. green ammonia) projects, and increased project scale, noting that the majority of these projects are in the early stages of feasibility and development.
Australia’s hydrogen market is categorised as progressing - but not fast enough. Only one project, Engie’s Yuri Ammonia Project, has reached a final investment decision (FID). The challenging environment is attributed to a number of factors:
- Demand side risk arising from slower than expected progress in domestic demand, particularly for heavy transport, steel and iron making and industrial applications
- Persistent high costs associated with green hydrogen production
- Supply chain constraints, including electrolysers and solar PVs
- Uncertainty regarding regulation and the standards of new equipment, such as electrolysers
- Relatively small scale government investment and increasing global competition. Australia’s initial investment commitment was approximately $1.3 billion, which is dwarfed by US’ Inflation Reduction Act (US$369 billion) as discussed below, and Canada’s Clean Hydrogen Investment Tax Credit (US$12.6 billion)
- Lack of government targets including production or uptake targets, compared to other jurisdictions such as the EU, which has committed to produce 10 million tonnes and import 10 million tonnes of renewable hydrogen in the EU by 2030.
The state of the Australian market will be assessed again at the end of 2023. The Australian government has also committed to revise its 2019 ‘National Hydrogen Strategy’.
Australia’s ‘Hydrogen Headstart’ to support the commercialisation of large-scale projects
In recognition of the prevailing market challenges (as noted above) and in an attempt to not fall behind in the global ‘subsidy race’, the federal government announced in its May 2023 Budget a $2 billion hydrogen ‘Headstart’ program (the Program). It is consistent with the US and EU which have committed substantial hydrogen funding through their respective initiatives in the Inflation Reduction Act (IRA) and the Green Deal Industrial Plan, to underwrite the market.
Subject to industry consultation, the Program will commence in 2026-27. It aims to fund a small number of large-scale flagship projects to potentially deliver up to a gigawatt of electrolyser capacity by 2030. Whilst specific details are yet to be worked out, the Program intends to close the commercial gap between the cost of green hydrogen production and the market price. Through a competitive process, the government will provide project proponents with ‘production credits’ over a ten-year period.
The Headstart Program pales in comparison with the US’ IRA which, through its US$369 billion of incentives, features production tax credits (PTCs) of up to US$3 per kg of hydrogen. The IRA is expected to significantly improve the cost competitiveness of green hydrogen in the US.
There is value in getting emissions accounting and hydrogen certification right
To claim the full benefit of PTCs under the IRA, producers must demonstrate that their total lifecycle carbon intensity is below the 0.45kg CO2-e/kg H2 threshold. Producers need to ensure they have the capacity, processes, and systems to account, track and report on their carbon emissions.
Whilst the finer details of the Headstart Program are yet to be determined, to qualify, project proponents need to verify the carbon intensity of their product in accordance with requirements under Australia’s emerging Guarantee of Origin (GO) scheme. The GO scheme, which is undergoing industry trials, is anticipated to commence in 2024 and will include a ‘product GO’ and a ‘renewable electricity GO’ (REGO).
Understanding the mechanics of the ‘product GO’ and its interaction with the REGO, will be particularly important for green hydrogen producers to ensure they can achieve certification. As well as supporting their government funding case, certification will enhance the marketability of their products and help mitigate demand risk (including international trade).
Compliance with the product GO scheme, albeit voluntary, is likely to present hydrogen producers with a number of challenges:
- A ‘well-to-user’ emissions boundary that differs from existing emissions accounting frameworks like the NGER scheme in requiring producers to account for their scope 3 emissions, including supply of raw materials and transport and storage of hydrogen to the point of consumption or export
- Consistency with international frameworks, namely the International Partnership on Hydrogen and Fuel Cells in the Economy (IPHE), which is developing universal emissions accounting methodologies for hydrogen production
- Market based scope 2 emissions reporting, including the use of LGCs/REGOs and associated requirements (e.g., temporal correlation and vintage thresholds)
- Interaction with existing schemes such as NGER, Climate Active and Safeguard Mechanism.
Hydrogen producers need to prepare now to avoid future risks, including ‘greenwashing’
Ultimately, the GO scheme provides an opportunity for hydrogen producers to certify and differentiate the ‘low carbon intensity’ credentials of their product(s). Under GO they would be well positioned to both benefit from government initiatives and address investor and customer requirements/preferences.
There is also increasing market scrutiny, as seen by regulators in Australia (i.e. ASIC) of claims about ‘green’ products. Hydrogen producers need to be confident about the integrity of any product declarations to avoid ‘greenwashing’ risks.
As outlined above, the GO certification process is likely to present challenges for producers. To ensure they are ideally positioned for compliance, hydrogen producers are advised to seek ‘pre-certification’ in order to assess the:
implications of a wider emissions boundary
complexities of the IPHE carbon accounting methodologies such as emissions 'allocation' (i.e. where co-products are on-sold)
data requirements including scope 3 for reporting
requirements for market-based reporting
use of LGCs/REGOs
robustness of systems and processes for tracking and reporting under the scheme.
For hydrogen exporters, keeping abreast of international developments will also be critical for understanding emerging requirements in their target markets (e.g. EU’s Renewable Energy Directive) with respect to certification, which may be stricter in nature and not fully aligned with the Australian GO.