In September 2022, Matt Baumgurtel, Partner and New Energy Lead at Hamilton Locke, moderated the discussion on “Financing ‘Bankable’ Hydrogen: Invigorating hydrogen finance, investment and funding: Determining bankability, risks and rewards” at the inaugural Hydrogen Connect Summit in Brisbane, hosted by H2Q.
Joining Matt on the panel were Dr Cameron Kelly, General Counsel, Australian Renewable Energy Agency (ARENA); Rupert Maloney, Head of Hydrogen, Clean Energy Finance Corporation; and Sam Reynolds, Managing Director, Octopus Australia.
This article is based on the panel’s discussion that day.
Hydrogen Export: An Australian Opportunity
This article explores the opportunities and obstacles facing scalable hydrogen investment in Australia, looking at how Australia can make hydrogen a commercially viable alternative to conventional fossil fuels, particularly in the eyes of the investors essential to industry success.
Australia has the ability to produce more renewable energy than it will ever need. With 80% to 90% of global energy transported by molecules rather than through power lines, Australia is well positioned to become one of the world’s chief exporters of hydrogen. According to the Clean Energy Council, Australia’s hydrogen market could be worth upwards of $10 billion a year by 2040. However, unlocking that growth requires significant private capital investment.
Australia is at the doorstep of land constrained countries such as Indonesia, South Korea, Japan and Singapore. While economically robust, these countries will continue to rely heavily on energy imports to power their economies into the next century – Japan alone will need to continue to import over 90% of its energy via ocean transport. Australia possesses the production capacity and geographical proximity to meet regional trading partner’s renewable energy demand – in fact some of these countries are closer to Darwin than Darwin is to Melbourne. With the proper investment in production and transportation infrastructure, Australia could become central to renewable energy production in the Pacific region.
Further, Australia’s political stability is a key asset. Regional neighbours are looking for stable trading partners – partners that lack the political volatility of contemporary energy superpowers in Asia and the Middle East. Australia’s relatively stable political system presents an inviting alternative to the routine political upheaval that so often impacts energy exports in Eastern Europe and the Middle East.
Roadblocks to Australia’s Hydrogen Future
Despite these domestic advantages, there are significant obstacles for hydrogen production in Australia. Currently, green hydrogen production has two main cost drivers: the development and construction cost of electrolysers and the cost of raw materials. That translates to green hydrogen costing about $50/MWh. This figure needs to drop by another two-thirds to make green hydrogen commercially viable.
Further, it is difficult to project the needs of hydrogen projects into the future. Water is a chief concern. It is difficult to determine how projects will maintain a sustainable water source for the period of a project – drought, competition from agriculture and general growth in demand all undermine the long-term stability of these projects.
In addition, there are issues with grid capacity. Over the next ten years, Australia will lose 70% of its coal industry. It is not possible to simply replace a coal powered station with one hydrogen plant – three to four times the amount of renewable energy is required to generate the same level of electricity.
Further, these projects cannot be built in proximity to the urban centres that require electricity because the land is too expensive. Nor does building these renewable projects in rural regions solve the problem – the existing grid infrastructure to transport the energy to the urban areas where it is most required is not up to scratch. As a result, the grid infrastructure must be built and/or transformed – a process that would take at least a decade. This waiting period keeps significant capital on the side-lines until the creation of a fit for purpose transmission system.
In some respects, this process is already underway – the Federal Government has set aside $20 billion for transmission upgrades. However, there is going to be a lag effect that will keep energy prices high as Australia works to scale capacity in an existing system which is currently not fit for purpose.
Government to Unlock Potential
Currently, there is a wall of capital that wants to get into hydrogen financing. To let that capital in, hydrogen must become mainstream – it must be attractive to major sources of capital like superannuation pension funds and global insurance companies. 15 years ago, the UK, Europe and the US promoted solar subsidies to draw conventional investment institutions to the novel technology. As the technology scaled, the cost of manufacturing came down and the industry began to grow organically. Australia is 7-8 years behind where it needs to be. If Australia wants to be a global leader in hydrogen, it needs government intervention to kick start the industry.
This becomes clear when looking at the actions taken abroad. In the US, the recent inflation reduction bill provides a $3 tradable tax credit for every kilo of hydrogen produced. This places hydrogen almost at price parity with fossil fuels and will create a viable hydrogen industry overnight when the credit takes effect on 1 January 2023.
The UK Government has introduced a scheme to incorporate 10GWs of hydrogen energy into its domestic grid by 2030. This utilises a reverse auction mechanism through which the Government will subsidise the gap between the price that the producer needs to sell at and the price that the buyer is willing to pay. This is a great way to stabilise contract prices and ensure hydrogen can compete commercially with traditional fuels.
However, Australia is not completely without initiative. The HyGATE project between Australia and Germany is a first of its kind program intended to incentivise cooperation between the Australian and German Governments, specifically in relation to accelerating early-stage green hydrogen projects. While in the early stages of funding, the project is being backed by a €50 million grant from the German Government.
Should Australia continue to invest in projects of a similar nature, while at the same time borrowing from the initiative and examples of our international counterparts, it has the potential to become a world leading international energy exporter. Not only can hydrogen fuel Australia – Australia can fuel the future of hydrogen.
For more information, please contact Matt Baumgurtel – Partner and New Energy sector lead at Hamilton Locke.
David O’Carroll is a Senior Associate in the Hamilton Locke New Energy team.
Alexander Bird is a Graduate Lawyer in the Hamilton Locke New Energy team.