Bridging the commercial gap: Australia’s 2024 National Hydrogen Strategy

The National Hydrogen Strategy 2024 (the Strategy), developed by the Federal Government, aims to position Australia as a global leader in hydrogen production and export.¹ The Strategy supports Australia’s transition to net zero and seeks to capitalise on the significant economic opportunity renewable hydrogen presents globally.²

Our previous Bulletin sets out a summary of the Strategy’s key objectives in supporting Australian hydrogen production, including:

1. Establishing a globally cost-competitive hydrogen industry.
2. Identifying and supporting the most prospective hydrogen demand sectors.
3. Ensuring communities are aware of, and realise the benefits of, hydrogen.
4. Establishing trade at scale and leveraging purposeful partnerships.³

This article explores in more detail whether the Strategy successfully addresses one of the fundamental barriers to establishing Australia’s hydrogen industry: the commercial gap between production costs and the sale price of green hydrogen (or its derivative products).

Challenges in developing the renewable hydrogen industry

The hydrogen market is still in its early stages, not just in Australia but internationally, with many countries still developing their hydrogen strategies.⁴ Due to its infancy, there is no established ecosystem to support the production, storage, distribution and use of hydrogen.⁵ There is no accepted market practice for determining the price of green hydrogen, which presents challenges for hydrogen project proponents and offtakers alike.⁶

In order to obtain financing, it will be crucial that a hydrogen project has a bankable offtake arrangement in place.⁷ However, even with the continual rising of gas prices, the cost of producing green hydrogen is higher than prospective offtakers are willing to pay.⁸ The cost of production is approximately $5-6 per kilogram, and it is estimated that it needs to fall below $2 for hydrogen to be commercially viable and competitive with fossil fuels.⁹ This creates a ‘chicken-and-egg’ situation where the development of the hydrogen industry is dependent on bankable offtake agreements, but it is difficult to negotiate those agreements without a stable market to trade hydrogen.¹⁰ In saying this, the cost of production is expected to fall as technology matures and economies of scale are achieved.¹¹ However, this will be contingent on the establishment of a comprehensive regulatory framework and the securing of long-term investments.¹²

Key initiatives under the Strategy

 The Strategy sets out hydrogen production and export targets, supported by all the initiatives, incentives and policies project proponents may be able to access. We outline some of the key initiatives under the Strategy below.

Hydrogen Production Tax Incentive

Announced under the 2024-25 Federal Budget and introduced into Parliament on 25 November 2024 through the Future Made in Australia (Production Tax Credits and Other Measures) Bill, the Hydrogen Production Tax Incentive (HPTI) offers a short-term and uncapped tax offset system to eligible hydrogen producers, with support over the 10 year period being estimated at AU$6.7 billion.¹³ The offset is set at $2 per kilogram of eligible hydrogen produced and is designed to reduce the cost of production.¹⁴ The HPTI is available for hydrogen produced between 2027-28 and 2039-40, with support provided to projects that reach final investment decision by 2030.¹⁵ Each facility can access the HPTI for a maximum of 10 years from the start of production.¹⁶ To ensure broader benefits, recipients must comply with the Community Benefit Principles, aimed at sharing economic opportunities with local workers, industries and communities.¹⁷ To learn more about the background to the HPTI, please read our previous article Hydrogen on the Horizon: Unpacking Australia’s New Hydrogen Production Tax Incentive.

Hydrogen Headstart

The $2 billion Hydrogen Headstart program also offers revenue support to large-scale renewable hydrogen projects over a maximum 10-year period.¹⁸ This program targets early-mover projects, aiming to assist them in achieving final investment decisions and bridge the commercial gap.¹⁹ In December 2023, six projects, representing a total electrolyser capacity of 3.5GW, were shortlisted and invited to submit a full application for the next stage of the program.²⁰

Renewable energy cost-reduction initiatives

The cost of renewable energy is a significant component of the cost of producing renewable hydrogen, representing around 70 per cent of total production costs.²¹  The $20 billion Re-wiring the Nation initiative supports the expansion and modernisation of electricity grids to facilitate the integration of renewable energy.²² The Capacity Investment Scheme also aims to drive down the cost of renewable energy through competitive tender bids for renewable energy generation and storage products.²³ These initiatives will be crucial in driving production costs down.

Guarantee of Origin Scheme

On 28 November 2024, the Federal Government enacted the Future Made in Australia (Guarantee of Origin) Bill 2024 and supporting legislation, establishing the voluntary Guarantee of Origin Scheme (GO Scheme). The GO Scheme will certify low-emission products and renewable electricity, including green hydrogen, through digital certificates.²⁴ The GO Scheme enhances transparency and competitiveness, supports initiatives like the Capacity Investment Scheme, and will help determine eligibility for the HPTI.²⁵ The GO Scheme is expected to launch in 2025.²⁶  To learn more about the GO Scheme, please read our previous article Pressing GO! on Clean Energy Certification: Understanding the Future Made in Australia (Guarantee of Origin) Bill 2024.

Bridging the commercial gap: Is it enough?

As discussed previously in our article on the announcement of the HPTI, while the HPTI aims to build scale to reduce production costs over time, some argue that a 10-year support window may not be sufficient for producers.²⁷ Instead, this short window may increase ‘pressure on supply chains through competition for workers, equipment and services, in turn driving inflation of project delivery costs’.²⁸

Furthermore, the practical accessibility of the Hydrogen Headstart program is up for question. An eligibility requirement for the program is for the facility to include a 50 MW minimum electrolysis single-site deployment.²⁹ The reality is that this will only benefit a short list of hydrogen producers, leaving many smaller producers without support from the program.

The focus of the Strategy and the Government incentives on scaling up large-scale hydrogen production projects is a step in the right direction, but further support could be provided to assist small-scale production to build industry. Smaller projects can be instrumental in supporting the development of the domestic hydrogen industry, as well as educating the community and developing a skilled workforce.

While the HPTI and Hydrogen Headstart program are vital to help bridge the commercial gap by focusing on reducing the cost of production, it is likely that additional support and funding sources will be required, and the Government may need to bring forward demand-side policies to meet these needs.³⁰

In order to provide demand-side support it has been suggested that the adoption of a contract for difference (CfD) style scheme would incentivise production.³¹ CfDs offer a practical solution to financing emerging technologies by establishing a stable and predictable long-term revenue profile.³² The success of CfDs has been proven in other renewable technologies, for example, in Europe, where 33-50 per cent of new capacity from offshore wind projects has been financed through CfDs over the past 15 years.³³

The Strategy lays essential groundwork to position Australia as a global hydrogen leader and to support the transition to net zero. Key initiatives like the HPTI and Hydrogen Headstart program address production cost barriers, but whether they sufficiently bridge the commercial gap and provide the necessary support to accelerate the development of a hydrogen industry in Australia remains uncertain. Ultimately, Australia’s commitment to overcoming these challenges will be crucial to positioning itself as a global hydrogen leader and driving a sustainable, renewable future.

The Hamilton Locke team advises across the energy project life cycle – from project development, grid connection, financing, and construction, including the buying and selling of development and operating projects. For more information, please contact Matt Baumgurtel.

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¹Department of Climate Change, Energy, the Environment and Water (DCCEEW), National Hydrogen Strategy 2024 (Government Strategy, 13 September 2024) 7 <https://www.dcceew.gov.au/sites/default/files/documents/national-hydrogen-strategy-2024.pdf> (‘The Strategy’).

²Ibid 37.

³Ibid 7.

⁴Tom Monaghan, ‘Australia’s Green Hydrogen Ambitions: Soldiering On Despite Adversity’, Australian Energy Council (Article, 17 October 2024) <https://www.energycouncil.com.au/analysis/australia-s-green-hydrogen-ambitions-soldiering-on-despite-adversity/>

⁵Australian Hydrogen Council, ‘Closing the financial gap for hydrogen in Australia’ (LinkedIn, 13 October 2023) <https://www.linkedin.com/pulse/closing-financial-gap-hydrogen-australia-kj9zc/>.

⁶Green Hydrogen Organisation, ‘Key considerations for green hydrogen offtake agreements’ (Briefing Paper, 1 May 2024) 36 <https://gh2.org/sites/default/files/2024-05/GH2_Considerations%20for%20Hydrogen%20Offtake%20Agreements_2024.pdf>.

⁷PwC, ‘Getting H2 right: Success factors for Australia’s hydrogen export industry’ (Report, 2022) <https://www.pwc.com.au/important-problems/integrated-infrastructure/PwCAU-Getting-H2-Right.pdf>.

⁸Australian Hydrogen Council (n 5).

⁹Monaghan (n 4).

¹⁰Green Hydrogen Organisation (n 6) 6.

¹¹University of Western Australia, ‘Australia’s Green Hydrogen Vision: Shaping a New Market’, (Article, 28 November 2024) <https://www.uwa.edu.au/news/article/2024/november/australia-green-hydrogen-vision-shaping-a-new-market>.

¹²Ibid.

¹³Matt Baumgurtel et al., ‘Hydrogen on the Horizon: Unpacking Australia’s New Hydrogen Production Tax Incentive’, Hamilton Locke (Article, 24 July 2024) <https://hamiltonlocke.com.au/hydrogen-on-the-horizon-unpacking-australias-new-hydrogen-production-tax-incentive/>.

¹⁴The Strategy (n 1) 9.

¹⁵Ibid (n 1) 47.

¹⁶Ibid (n 1) 47.

¹⁷Marni Riley and Lily Clements-Markham, ‘New Energy Bulletin: Future Made in Australia (Production Tax Credits and Other Measures) Bill introduced to Parliament’, Hamilton Locke (Article, 28 November 2024) <https://hamiltonlocke.com.au/new-energy-bulletin-future-made-in-australia-production-tax-credits-and-other-measures-bill-introduced-to-parliament/>.

¹⁸The Strategy (n 1) 47.

¹⁹Ibid (n 1) 46.

²⁰DCCEEW, ‘Hydrogen Headstart applicants are potential world leaders’ (Article, 21 December 2023) <https://www.dcceew.gov.au/about/news/hydrogen-headstart-applicants-are-potential-world-leaders>.

²¹The Strategy (n 1) 46.

²²Ibid.

²³Ibid 14.

²⁴DCCEEW, ‘New Guarantee of Origin Scheme to support low-emission industries’ (Media Release, 12 September 2024) <https://www.dcceew.gov.au/about/news/new-guarantee-origin-scheme-support-low-emission-industries>.

²⁵The Hon Chris Bowen MP and the Hon Josh Wilson MP, ‘Pressing GO on a future made in Australia’ (Media Release, 28 November 2024) <https://minister.dcceew.gov.au/bowen/media-releases/pressing-go-future-made-australia>.

²⁶Ibid.

²⁷Baumgurtel (n 13).

²⁸Ibid.

²⁹Australian Renewable Energy Agency, Hydrogen Headstart Guidelines (Guidelines, October 2023) 5 <https://arena.gov.au/assets/2023/10/Hydrogen-Headstart-Guidelines.pdf>.

³⁰Baumgurtel (n 13).

³¹Australian Hydrogen Council (n 5).

³²Agnieszka Ason and Julio Dal Poz, ‘Contracts for Difference: The Instrument of Choice for the Energy Transition (Research Paper ET34, Oxford Institute for Energy Studies, April 2024) 2 <https://www.oxfordenergy.org/wpcms/wp-content/uploads/2024/04/ET34-Contracts-for-Difference.pdf>.

³³Ibid.