Depending on who you listen to, the global hydrogen1 industry is either poised for take-off in 2024, or about to come face to face with the reality that the cost of its production and transportation will prevent it becoming the hoped-for super-agent.

These contrasting forecasts demonstrate that, while there have been literally hundreds of projects announced globally and significant development and research and development costs incurred, few projects have reached final investment decision (FID).  It also reflects the reality that there remain material project development challenges to creating viable projects that can produce hydrogen and its derivatives at scale.  These include still developing regulatory and fiscal frameworks that are a pre-condition to the development of the industry.

These global dynamics are all evident in the Australian context with over 100 hydrogen and hydrogen derivative projects in the pre-FID stage. 

Despite the uncertainties, there is significant optimism about the potential of the hydrogen industry. Is this optimism justified? 

We have identified 6 key themes (in addition to the general decarbonisation global thematic) that will decide the future success of the industry in Australia:

  1. Japan and Korea demand
  2. Energy security
  3. Australia’s competitive advantage
  4. Government support
  5. Cost and resourcing pressures
  6. Technological innovation.

 

1. Japan & Korea demand

It is likely the Australian industry over the longer term will be largely driven by Japan and Korea and their twin needs for energy security and decarbonisation.  Australia currently provides approximately 30% of Japan’s energy, mostly through coal and LNG. It also provides approximately 50% of Korea’s coal and 25% of its LNG.

Both countries are actively seeking to decarbonise their economies and, given their reliance on imports, this means creating alternative energy supply chains to replace existing coal and gas.  

Hydrogen and related compounds (especially green ammonia in the short to medium term) are expected to be the principal way this is achieved. To this end, in its Hydrogen strategy, Japan has set clear targets of the consumption of 20 million tons per year of hydrogen (although not necessarily green hydrogen) by 2050 and for hydrogen and ammonia to make up 1% of the country’s primary energy mix by 2030. Korea has also set hydrogen targets and has created a legal framework to support the industry. 

Consistent with this focus, Japanese and Korean companies have been at the forefront of developing project opportunities in Australia. Mitsubishi, ENEOS, Osaka Gas, Kansai Electric and Marubeni (among others) have publicly announced their involvement in multiple hydrogen projects. Similarly, Korean Electric Power Corporation is the proponent of a 750 MW Green hydrogen project at the Port of Newcastle which was one of the projects which was taken through to the next round in the Hydrogen Headstart program.  Indeed, the proposed use cases for virtually all of the six Hydrogen Headstart first round winners involve export to Japan and/or Korea.

Other recent steps demonstrating this transition include Tokyo Gas’s sell down of its Australian equity interests in 4 LNG projects (although it will remain a buyer of LNG) and its announcement of an e-methane joint venture with Santos.  E-methane is a particular focus of a number of Japanese companies (Osaka Gas has also announced a tie up with Santos) as it has the same properties and chemistry as natural gas and can use existing gas pipelines, LNG facilities (including liquefaction, ships, tanks and receival terminals) and gas distribution networks.

 

2. Regional energy security

Energy security, and the need to secure supply chains, is not just about economics and decarbonisation but is more and more a part of domestic and regional defence strategies.  Both Japan and Korea are seeking to become more integrated with Australian and United States regional defence frameworks (for example their recently stated interest in becoming members of the AUKUS partnership).  There is a clear alignment of this strategy with the strategy of securing an energy supply chain for Australian produced hydrogen and related products.

While security may ultimately not trump economics in determining whether specific projects are developed, the security overlay is likely to reinforce the determination of Japan and Korea to strengthen their energy supply chains by supporting a viable hydrogen industry with demand side support and encouragement for local companies to invest in Australia.    

 

3. Australia’s competitive advantage

Australia has a number of potential competitive advantages in the production of hydrogen and related products.  For example, Australia has the land space to situate the enormous renewable projects needed to produce green hydrogen and the existing infrastructure, expertise and workforce created by the LNG industry. For those projects which are intended for export there is a relatively short transportation time to key Asian markets compared to potential competitor supplier countries. 

However, there is likely to be significant competition from the United States, Europe and the Middle East for both investment in the industry and customers.  Deloitte has estimated that if Australia does not respond to the United States’ Inflation Reduction Act (IRA), Australia could export 65% less hydrogen per annum by 2050, with scaled production delayed until after 2030.

A key issue is that Australia is unlikely to be able to match the scale of the subsidies that the United States and the Gulf states may potentially offer.  The challenge for Australia is to quickly develop an industry to attract capital and retain its expertise and existing energy customer base.   

 

4. Government support

In its initial stages the industry will need very significant government support on both the supply and demand sides and in the creation of regulatory and fiscal frameworks to underpin and support the industry.  In the short term, the level of demand side support that is to be offered by destination countries is clearly a critical piece.  To this end, a much-awaited support package is expected be passed by the Japanese Parliament in the third quarter of 2024 which should provide a clearer pathway for project viability.

It should also be remembered that, many Australian hydrogen projects will have non-export use cases, particularly in decarbonisation industries such as steel, iron and aviation. Critical to this will be IRA style industry policy demand side supports that can be offered through programs such as the proposed Future Made in Australia program (which will specifically target green hydrogen in the context of green manufacturing) as well as the relatively modest (compared to the IRA) supply side programs such as the Hydrogen Headstart program.

To this end the recent Federal Budget included a number of significant funding announcements including:

  • AUD$22.7 billion over the next decade on the Future Made in Australia package
  • AUD$6.7 billion over the next decade for a new production tax incentive of AUD 2 per kg starting from 2027-28
  • AUD$2 billion for a new round of the Hydrogen Headstart program to give long-term certainty for the large-scale renewable hydrogen industry, and
  • AUD$32.2 million to fast track the initial phase of the Guarantee of Origin scheme.

Regulatory incentives (which might include such things as mandatory requirements on sustainable aviation fuel) used in other markets are likely to also have a critical role to play in creating the demand that will underpin projects.

 

5. Cost and resourcing pressures 

Creating green hydrogen requires the development of renewable projects on a scale which is multiples of currently existing projects. The cost of development of renewables makes up to two thirds of green hydrogen’s production cost.  Accordingly in order to successfully develop mega projects in the timeframes required by investors and decarbonisation targets it will be critical that Australia solves the development choke points that are significantly delaying the energy transition, particularly creating a more efficient and predictable approvals regime.  It will also require management of the inflation, equipment supply and workforce issues that are likely to continue to create cost and resourcing pressures on all projects.   

 

6. Technological innovation

Many aspects of the hydrogen value chain are novel and will require new technology to enhance efficiency, reduce production costs and optimise transportation methods, particularly for the transport of H2 across large distances.  This seems challenging in the foreseeable future and is leading to many projects focussing on ammonia as the preferred carrier for export use cases. 

Other areas requiring technological advancement include reducing the cost of electrolysers, improving ammonia synthesis processes, and developing safe and cost-effective storage solutions. 

These 6 overarching themes demonstrate the mix of opportunity and challenges that characterise the current state of the hydrogen industry. There is no doubt the next 12 to 24 months are critical, as many of the uncertainties should start to be resolved and it should become clearer which of the 100 plus projects currently in concept or development have truly viable business cases. 

What is also obvious is that governments and project proponents recognise that the stakes are high – to decarbonise, to achieve energy security and to create a sustainable basis for industry – and are applying significant amounts of attention, research, and capital to develop an industry with the potential to be truly world changing.   

Norton Rose Fulbright is at the forefront of the development of hydrogen projects globally.  In the Asia Pacific, our integrated regional team has extensive expertise in advising on the structures, risk profiles and regulatory regimes that are critical to the success of new energy projects.

Please get in touch if you would like to learn more. 

 


Notes

1 [1] It should be noted that references to ‘hydrogen’ are intended to include not just H2 but the various hydrogen compounds and derivatives such as ammonia, e-fuels and MCH.



Personnes-ressources

Partner
Partner
Partner
Partner
Partner and Head Of Office

Publications récentes

Abonnez-vous et restez à l’affût des nouvelles juridiques, informations et événements les plus récents...