Roll on the throttle: The role of government policies in Australia's race to net-zero

Lowering the cost of electricity: Support for renewables

In announcing the pause on its green hydrogen ambitions, Fortescue specifically called out the high cost of electricity.

The price of renewable energy is expected to contribute approximately A$3.30 of the forecast A$5.86 per kilogram production cost of green hydrogen in 2025.⁴ This compares to about A$2.27-2.77 per kilogram for fossil fuel generated hydrogen.⁵ This difference is the largest contributor to what is often called the “green premium” for green hydrogen.

Current forecasts do not show substantial drops in electricity prices in the short to medium term, given expected demand increases and the costs of transforming to a renewable dominated grid.⁶

Access to cheap renewable energy is therefore critical to the economic viability of green hydrogen production. Electricity costs can be reduced materially for some projects that are able to have co-located dedicated renewable generation. This will not be available for all projects.

Reducing costs for grid connected projects (and “greening” the grid to enable grid generated electricity to meet green hydrogen certification standards more easily) will require continued investment in renewable generation, firming and transmission infrastructure.

Current Australian Government policies are supportive of this. Most important are:

• The Capacity Investment Scheme (CIS) which aims to accelerate the renewables build out by supporting an additional 32 GW of capacity by 2030.⁷
• “Rewiring the Nation”, which has allocated A$20 billion to build out transmission.⁸

Federal policies are supported by a range of state-based policies, particularly the development of renewable zones in New South Wales, Queensland and Victoria.

In the absence of significant downward pressure on renewable electricity prices, there are potentially other mechanisms to reduce the “green premium”, such as carbon taxes (both domestically and through carbon border adjustment mechanisms as was recently introduced by the European Union). Government subsidies are also likely to be helpful as discussed below.

Supporting viable use cases

What is the best use?

Establishing the best use case for green hydrogen is a question that is yet to be clearly answered in the Australian context.

Hopes that hydrogen will be “the next LNG” seem unlikely to be realised in the foreseeable future given the prohibitive economic and technology constraints on transporting hydrogen. For example, a recent study found the costs of exporting green hydrogen from Australia to South Korea, which are currently A$30 per kilogram, will only fall to A$18 per kilogram by 2050.⁹

Transporting hydrogen by converting it to ammonia (which can then be cracked back into hydrogen) is generally seen as the short-term solution to transporting the hydrogen molecule given the existing export transport infrastructure however, we have also seen investment into alternative hydrogen carriers such as LOHC (Liquid organic hydrogen carriers), e-methane (currently being investigated in Australia by a consortium of Japanese energy companies) and MOFs (metal-organic framework). A balance of costs, new infrastructure and technology risk needs to be considered in the context of transportation (particularly to northern Asia where the greatest demand is anticipated).

In the shorter term, it is expected that most use cases will be domestic and will likely require the use of the hydrogen at or close to its point of production, to avoid the issue (and costs) of transportation.

The most likely short-term use cases are therefore likely to be industrial use cases connected with commodities currently produced in Australia such as ammonia and iron. This is the clear intent of the Future Made in Australia government policy as discussed below.

Future made in Australia

The Future Made in Australia program establishes a A$22 billion framework for Australian Government support for the growth of the green hydrogen sector as one of five priority industries.¹⁰

The 2024 Federal Budget announced:¹¹

• A$6.7 billion over the next decade for a new production tax incentive of A$2 per kilogram of green hydrogen starting from financial year 2027-28.
• A$2 billion for a new round of the Hydrogen Headstart program under which successful projects receive a production credit based on a nominated dollar value per kilogram of renewable hydrogen (or a derivative), which represents the funding gap and support required between the cost of production and the market price.
• A$32.2 million to fast track the initial phase of its Guarantee of Origin scheme which supports the hydrogen sector by providing a methodology for transparency of emissions in the production process.

However, the Future Made in Australia program is yet to legislated. It is currently before Parliament and subject to an inquiry by the Senate Economics Legislation Committee.¹²  On 11 September 2024, the second reading was moved in the Senate.

While there is likely a pathway for the legislation to be passed through Parliament, whether the subsidies would survive a change in government following the federal election due in May 2025 is less certain.

Demand side subsidies

Japan

A key milestone achieved since our previous article has been the passing of the Hydrogen Society Promotion Act by the Japanese Parliament on 17 May 2024, which establishes Japan’s supply side support mechanism. See our June 2024 paper described the scheme here.

The core of this is a United Kingdom style contracts for difference (CfD) scheme. Under the CfD scheme suppliers will be paid a difference payment covering the additional cost of low carbon fuels as compared to an index representing the landed cost of conventional fuels in Japan.

Importantly, the CfD subsidies will potentially be accessible by both domestic and foreign low carbon fuel producers including Australia. Interestingly, in the context of transportation, the Japanese government has provided its subsidies by reference to the carbon intensity of the transport medium and specifically references hydrogen, ammonia, e-fuels and e-methane as the anticipated carrier mediums to get hydrogen to Japan.

The Japanese Government has also recently confirmed that there will be no restrictions on international clean hydrogen developers “doubling up” on subsidies between Australian and Japan.

Korea

Similarly, South Korea has announced the world’s first clean hydrogen auction. The 15-year auction scheme enables prospective hydrogen and hydrogen derivative developers and producers to bid for government contracts to support their projects (subject to the projects commencing operation by 2028).¹³

Both the Japanese and Korean schemes potentially allow developers to “stack” subsidies by taking advantage of schemes in multiple jurisdictions. The ability to do so is likely to be critical to early mover project economics.

Hydrogen Olympics

Australia, the United States, the United Kingdom, the European Union and Japan have all announced policies to support the growth of green and low carbon hydrogen industries.

A comparative table of the regimes is set out at the end of this article. There are several key commonalities and differences between the schemes, particularly:

• A focus on catalysing the industry - there is generally a horizon of 10 to 15 years or dollar caps on the regimes.
• The United States and United Kingdom supports both extend to hydrogen types beyond green hydrogen (compared to the Australian schemes which are limited to green hydrogen).
• The use of a mixture of grants, CfDs and production tax incentives to bridge the cost gap between low carbon hydrogen and emissions intensive hydrogen.

Feedback from potential investors in the Australian hydrogen sector is that the wider scope of potentially subsidised projects beyond those producing green hydrogen (as well as the sheer scale of the incentives) is potentially driving capital to the United States in particular.

Where to next?

Some of the enthusiasm for hydrogen as the critical agent of the energy transformation has been drained as the economic and technology challenges have become clear. Despite this a number of smaller scale trial projects are moving to Final Investment Decision (FID).

There is a clear opportunity to build on Australia’s comparative advantages in both renewable generation and as a commodity producer, to use green hydrogen to build sustainable export industries in commodities such as ammonia and green iron that are otherwise difficult to abate.

It is clear that this will require very significant government support; analogous to the support received in the early years of development of the LNG industry. The Future Made in Australia initiatives are a start and broadly reflect the design of subsidies in other jurisdictions, although the scope of eligible projects is narrower than in some jurisdictions, particularly the United States.

While these initiatives are material in the Australian budgetary context, in a global investment environment where investors are actively comparing jurisdictions and their relative subsidies, it is unclear whether they are sufficient to attract the capital required to develop projects at the necessary scale. We expect that subsidy stacking is likely to be required for early mover projects. The introduction of schemes in other jurisdictions such as Japan which specifically allow this is an important development.

In the drive to net zero by 2050 policy very much matters.

Comparative table: Global hydrogen subsidies