Hydrogen on the Horizon: Unpacking Australia’s New Hydrogen Production Tax Incentive

The Australian Government announced the Hydrogen Production Tax Incentive (HPTI) under the 2024-25 Budget as part of the Future Made in Australia package. The Future Made in Australia package aims to build a stronger, diversified and resilient economy,¹ securing Australia’s place in the evolving global landscape.² Underscoring this strategy is the Government’s desire to speed up the transition to renewable energy and reach Australia’s goal of net zero greenhouse gas emissions by 2050.³

The HPTI proposes to offer a short-term and uncapped tax offset system to accelerate the production of renewable hydrogen in Australia, with an estimated support of AU$6.7 billion over 10 years.⁴

The consultation period for the HPTI has now closed and Treasury will incorporate feedback from submissions in their advice to the Government on the final design and arrangements of the measure.

The Incentive

• The HPTI will be delivered through Australia’s tax system as a refundable tax offset to eligible producers of renewable hydrogen.
• The proposed offset is $2 per kilogram of eligible hydrogen produced, provided in the form of either a cash refund or a reduced income tax liability.
• The offsets will be available for hydrogen produced from eligible facilities (existing or new) for up to 10 years between 1 July 2027 and 30 June 2040.
• The offsets are uncapped for the 10-year period.
• The HPTI will be co-administered by the Australian Taxation Office (ATO) and the Department of Climate Change, Energy, the Environment and Water (DCCEEW) through the Guarantee of Origin (GO) scheme. The GO Scheme is an internationally aligned assurance scheme designed to track and verify emissions associated with hydrogen and other products made in Australia.⁵
• The HPTI will include eligibility criteria that align with the Community Benefits Principles under the Future Made in Australia Act, focusing on investment in local communities (including First Nations communities), domestic industry and supply chains, skills, and the promotion of diverse workforces, secure jobs and tax transparency.

What you need to know

Tax Offsets 101: How do tax offsets actually work?

Tax offsets are provided for a variety of reasons, including to incentivise individuals and businesses to engage in activities that boost the economy, to provide financial assistance and to help support emerging industries.

Tax offsets reduce the amount of tax owed by a taxpayer (as compared to tax deductions, which seek to reduce the amount of income that is subject to tax). Tax offsets can either be refundable or non-refundable. In the case of the HPTI, the relevant tax offset is proposed to be a refundable tax offset, which means that a taxpayer can receive a cash refund if the tax offsets delivered through the HPTI exceed the taxpayer’s tax liability. In contrast, for a non-refundable tax offset, if a taxpayer’s offsets exceed their tax liability, the taxpayer’s tax liability would simply be reduced to nil and no cash refund would be available (although it may be possible to carry forward the offset to a future income year).

As with all tax offsets, it will be important for hydrogen producers to understand the eligibility criteria of the HPTI (and any documentation or substantiation requirements) to ensure that the HPTI is being claimed appropriately, and that a producer does not inadvertently miss out on the availability of a tax offset.

Eligibility for the HPTI

To be eligible for the HPTI, the key proposed criteria that must be satisfied include:

1. the hydrogen producer must be a corporation that is subject to Australian income tax throughout the relevant income year (it must not be a corporation that is fully exempt from paying Australian income tax);
2. the facilities must be located in Australia;
3. the Final Investment Decision (FID) for each eligible facility must be complete on or before 30 June 2030 (or production must commence by 30 June 2030);
4. renewable hydrogen must be from an existing or new facility where the facility meets the eligibility requirements on or before 30 June 2030;
5. each facility must be located on a single site;
6. projects must be registered with the Clean Energy Regulator under the GO Scheme;
7. each kilogram of renewable hydrogen must be produced with an emissions intensity less than or equal to 0.6kg of carbon dioxide for the aggregate lifecycle production process, including gathering, extraction, processing and delivery (‘well-to-gate’);⁶
8. the facility must include a minimum capacity equivalent to a 10-megawatt electrolyser; and
9. the hydrogen producer must comply with any transparency and disclosure reporting requirements that are established as part of the HPTI.

In addition, the Government is contemplating whether to include requirements for projects to match hydrogen production with electricity from the same grid.⁷

Is it enough?

The HPTI aims to bring forward project development, make renewable hydrogen available sooner and build scale to reduce production costs over time⁸. Global competitors are also working towards this goal, with the US Department of Energy supporting research and development aiming to bring the cost of hydrogen production to US$1/kg by 2030.⁹

Despite healthy competition, the Treasury holds that Australia is well placed to produce green hydrogen at internationally competitive prices, and with its proximity to key markets, there is potential for Australia to become an exporter of renewable hydrogen.¹⁰

Some commentators however have their doubts. The Institute of Energy Economics and Financial Analysis asserts that exporting hydrogen is prohibitively expensive, and Australia should instead focus on using any locally produced hydrogen domestically as a fuel for powering vehicles and a replacement for natural gas in gas networks.¹¹

Incentives such as HPTI and the Hydrogen Headstart are vital to help bridge the gap and get major projects over the line for the 2030s and 2040s.¹² While the $2/kg tax offset offered by the HPTI is significant, it is likely that further support and other funding sources will be required in order to bridge the commercial gap for early movers, and the Government may need to bring forward demand-side policies to meet these needs. Additionally, there is a possibility that the 10-year support window may not be enough for producers. There is a risk that this relatively short period may instead lead to increased pressure on supply chains through competition for workers, equipment and services, in turn driving inflation of project delivery costs.

We look forward to perusing the responses from the industry and subsequent development of the HPTI as it emerges from the consultation process. Watch this space for further updates on the HPTI from the Hamilton Locke New Energy and Tax teams.

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 or Seema Sandhu.

¹The Hon Anthony Albanese MP & the Hon Dr Jim Chalmers MP, ‘A Future Made in Australia Bill will build a stronger, cleaner economy,’ Prime Minister of Australia (Media Release, 3 July 2024) <https://www.pm.gov.au/media/future-made-australia-bill-will-build-stronger-cleaner-economy>.

²Australian Government, ‘A Future Made in Australia’ (online) <https://budget.gov.au/content/factsheets/download/factsheet-fmia.pdf>.

³Australian Government, ‘Investing in a Future Made in Australia’ (online) <https://budget.gov.au/content/03-future-made.htm#m2>.

⁴Australian Government ‘Powering Australia”, (online, 24 May 2024) <https://www.dcceew.gov.au/energy/strategies-and-frameworks/powering-australia>.

⁵Clean Energy Regulator, ‘Guarantee of Origin’ (online, 8 April 2024) <https://cer.gov.au/schemes/guarantee-origin#:~:text=The%20Guarantee%20of%20Origin%20(GO,renewable%20electricity%20made%20in%20Australia.>.

⁶The Treasury, ‘Hydrogen production tax incentive’ (online, 28 June 2024) <https://treasury.gov.au/sites/default/files/2024-06/c2024-541265-cp.pdf>.

⁷Ibid.

⁸Ibid.

⁹Office of Energy Efficiency & Renewable Energy, ‘Hydrogen Production Pathways’ (online) https://www.energy.gov/eere/fuelcells/hydrogen-production-pathways.

¹⁰The Treasury 2024, (n6)

¹¹Basirat, S & Nicholas, S, ‘Hydrogen holds great potential for Australia’s onshore green iron production,’ Institute for Energy Economics and Financial Analysis (online, 4 July 2024) <https://ieefa.org/resources/hydrogen-holds-great-potential-australias-onshore-green-iron-production>;

¹²Dr. Fiona Simon, CEO, Australian Hydrogen Council, as reported in Energy Source & Distribution, ‘Hydrogen heads meet in nation’s capital to discuss priorities’ (online, 2 July 2024) <https://esdnews.com.au/hydrogen-heads-meet-in-nations-capital/>.