New Energy Insights: Bulletin – NSW Hydrogen Hub Initiative
This article is part of our New Energy Insights series from our Energy, Infrastructure and…
This article is part of our New Energy Insights series from our Energy, Infrastructure and Resources team. Stay tuned for regular updates and commentary on topical issues across the sector.
Renewable energy is cheap. It is the cheapest form of new generation. With the ever-increasing global buzz surrounding hydrogen as a new renewable energy fuel source and numerous funding pathways developing across Australian States and Territories, the key question for Australia is how to develop a sustainable green hydrogen (GH2) industry at home. This is fundamentally a question of demand - what are the ways of generating enough demand in GH2 such that supply, and hence the price competitiveness, in theory, takes care of itself. With an eye on the importance of developing the demand side of the GH2 industry, the NSW Government through the Department of Planning, Industry and Environment (DPIE) released its NSW Hydrogen Strategy in October this year (Strategy). The Strategy aims to incentivise the production of GH2 while also providing conditions that will enable the private sector and market forces to drive large scale investment. Initiatives set out in the Strategy include funding GH2/gas blending projects; supporting the heavy vehicle industry to develop GH2 refuelling networks and GH2 fuelled vehicles; and committing to converting 20% of the NSW Government heavy vehicle fleet to GH2 by 2030.
Price and scale
For GH2 to become a legitimate alternative clean energy fuel, it requires a price point that is as competitive if not more competitive compared to its dirtier counterparts. The target often quoted is to reach a price point of $2 per kilo. The NSW Government has targeted a price point of below $2.80 per kilo in their Strategy. However, this modelling does not consider forecast reductions in the price of renewable energy. While this conservative assumption may be considered prudent, it ignores a highly probable outcome, but also leads to the conclusion that GH2 production at less than the magical $2 per kilo is not achievable in the medium term. It also does not allow the analysis of the sensitivity of GH2 production cost to reductions in electricity cost. For these reasons and more, the price modelling should be made public.
To achieve production cost reductions, significant production economies of scale are required. Traditionally, the problem with producing large amounts of hydrogen was the resulting generation of large volumes of CO2. Fortunately, advances in electrolysis technology and the falling cost of renewable energy are enabling the mass production of GH2 globally. Australia has a wealth of experience in renewable energy production. With an abundance of solar and wind power, these existing forms can be coupled with electrolysers to produce GH2 efficiently. While this industry is still in its nascent years (arguably where solar PV was a decade ago), as more and more projects get off the ground and scale ramps up, costs should in turn come down.
A major input, and therefore, cost of GH2 production is electricity. Therefore, crucial to driving down production costs are cheap electrons and utilising electrolysers as much as possible (at high-capacity factors) at a large scale. This will likely favour project sites that have both wind and solar generation potentially firmed by energy storage. This is likely to be the fundamental project anatomy of GH2 projects and is the design being used by some of the largest GH2 projects including Infinite Blue Energy’s Arrowsmith project.
The NSW Government has acknowledged the need for cheaper electricity to drive down the production costs of GH2. A key policy in their Strategy is to provide electricity network costs concessions of approximately 90% to hydrogen producers for network use of system charges where electrolysers are placed in parts of the network with excess generation capacity. The concession is available only for the first 750MW, therefore it will be the first in, best dressed projects benefiting from this concession. Exemptions from other chargers will also be available under the Electricity Infrastructure Roadmap, Climate Change Fund, Energy Security Safeguard and GreenPower programs. To provide investor certainty, these concessions will be available for at least 12 years. Legislation is currently passing through NSW Parliament to facilitate these concessions by amending how the National Electricity Retail Law and National Energy Rules are applied to the NSW network.
Domestic and export demand
The basic principles of economics dictate that without demand, supply essentially becomes redundant – supply can only front run demand for so long. Therefore, for GH2 production to upscale, hydrogen projects first and foremost need long term domestic or export markets.
Taking green ammonia – produced using GH2 - as an example, the main markets are currently in fertilisers and explosives. However, we are starting to see the use of ammonia as a fuel. If produced from renewable energy, this is a clean fuel. While this market does not exist at the moment in Australia, Japanese co-firing of ammonia as a demonstration project is a leading example of how large amounts of potentially green ammonia can be burned using existing infrastructure. If this is successful in Japan, this sets the road map for Australia, both as domestic use and export opportunity.
Green ammonia is also gaining traction as the preferred future fuel of the shipping industry. Currently, the shipping industry contributes 2.9% of the global CO2 emissions through its use of fossil fuels. In recognition of this, the Australian and Singapore Governments in June 2021 announced ahead of the agreement for the deployment of low emissions fuels and technologies (including green ammonia) in maritime and port operations. Both countries have committed up to $10 million over five years to fund industry-led pilot and demonstration projects. The potential demand for green ammonia (and GH2 as a production input) is immense. It is estimated that by 2050 global fuel demand for green ammonia will be 900 million tonnes per year.1
Hydrogen also has a wide range of applications across several industries. For example, the train, trucking, and aviation industries look set to be radically altered by hydrogen technologies in the coming years. Hydrogen-fuelled trains have been implemented in Germany with hugely positive results and in the last year, China, Japan and South Korea have pledged to put almost 8 million hydrogen fuel cell cars on the road.
Hydrogen can also be used, like natural gas, to heat homes. The delivery of hydrogen for this use would most likely be via new or existing gas networks. Hydrogen can also be blended with natural gas for heating and cooking. In fact, NSW has included a stretch target of 10% gas network blending with GH2 by 2030 in their Strategy and provided that gas blending projects will be able to apply for funding support under the relevant hydrogen hub initiatives. NSW has also indicated that it will review relevant legislation to determine the maximum gas blending limit while also providing support to research and industry organisations investigating safety, standards, injection requirements and the economics of GH2 blending in the gas network.
The more end uses for GH2 - covering multiple applications and capable of downstream conversion to other energy carriers and products - the more the demand side of the GH2 market will grow, providing flexibility as to the ways to achieve decarbonisation. This will also help generate larger economies of scale and faster deployment, leading to a virtuous cycle of increasing demand encouraging increased supply, improving efficiencies and economies of scale which reduce production costs, lower prices, and further encourage demand. Lower prices also open additional markets where green hydrogen can replace existing inputs, e.g. replacing coal in steel production,
So the key to kick starting demand, and this is where governments can and should lead the way – are governments making policy choices that look beyond the immediate economic outcome. Such policies can either:
Both incentivising GH2 production and disincentivising substitutes supports demand for GH2. The enormous success of policies designed to encourage renewable energy and therefore reduce its cost of production (such that those subsidies are no longer required) provides a clear example of how substantial short term government intervention can enable an industry to evolve from collage, to mainstream, to dominate a market in a very short period.
Given the enormous global push for GH2 arising from macro themes such as ESG, economic recovery post pandemic, and a renewed global will to address climate change post COP26, the market is convinced of the case for GH2. Therefore, behaviour and attitudes do not need to shift – and hence disincentives are not required. Incentives will be much more effective on a dollar-for-dollar basis. This is primarily because of the ‘green halo effect’ - people will pay more because it is green. Price parity is not required, merely price comparability/compatibility.
Government intervention - supply vs demand
As with the growth of any new industry, the government will have a major say in whether demand for GH2 keeps pace with supply in Australia. Through the National Hydrogen Strategy, Australia aims to grow its domestic hydrogen industry and position itself as a major player in the global economy by 2030.
However, to do this, a targeted policy is required to incentivize both demand and supply for GH2. While all States and Territories have some form of funding schemes in place to incentivize the supply side of the GH2 market (click here for more information), NSW is the only state or territory that has provided a clear plan to generate both supply and demand for GH2. Government support of the demand side of the GH2 market is integral to driving large scale investment which will drive the costs of production down below $2.80 per kilo and beyond.
The NSW Government has already committed $380 million of funding in the Net Zero Industry and Innovation Program to support existing, high-emitting facilities to significantly reduce their emissions. For many of these hard to abate facilities, GH2 is the likely decarbonisation pathway, and the $380 million will be used to support these facilities overcome the technical and commercial barriers to adopting GH2.
Another welcome initiative to drive the demand side for GH2 is the commitment by the NSW Government to have 20% of their heavy vehicle fleet fuelled by GH2 by 2030. The Strategy provides that by 2030 this initiative alone will create demand for 10,000 tonnes of GH2 per annum or around 70MW of electrolyser capacity. This is coupled with a commitment to support refuelling operators invest in GH2 refuelling stations which will support not only the NSW Government’s heavy vehicle fleet but also encourage fleet operators to convert to GH2 fuel. The Strategy estimates that by 2050, the heavy-duty truck sector in NSW will grow to around 500,000 tonnes of GH2 per annum or 2.6 GW of electrolyser capacity. Primed to capitalise on the growth of the GH2 vehicle sector are companies like H2X, Australia’s first hydrogen vehicle manufacturer who can supply to, and expand with, the growing sector.
Don’t forget demand
One issue that has become clear in the frenzy to fund GH2 throughout Australia’s States and Territories is the general lack of a coherent plan to ensure there is demand for GH2 as well as supply. The NSW hydrogen Strategy is a step in the right direction and provides the foundations of a plan to stimulate GH2 demand. However, the credentials of this Strategy can only be adequately assessed once the modelling the DPIE relied upon to prepare the Strategy is released. This will not only increase consumer and business confidence in the Strategy, but it will provide other States and Territories with useful information as they develop further GH2 government programs. In the meantime, other States and Territories should follow NSW’s lead and adopt GH2 strategies that prioritise developing the demand side of GH2 as well as the supply side.
As we have seen previously with the RET, its successful deployment has resulted in the addition of 33,000GWh of new renewable generation. Similar schemes focusing on the generation of GH2 can have a real impact on a fledgling hydrogen sector in Australia.
A new industry in hydrogen will not only contribute to a cleaner environment but will strengthen industrial competitiveness globally and create jobs and economic growth at home. It should also stabilize Australia’s electricity grid which in turn could lower electricity costs for consumers. The benefits of seizing the GH2 opportunity are therefore clear. Rather than just pie in the sky ideals, the time for the promotion and implementation of GH2 as a leading renewable energy source is now.
The Hamilton Locke team advises across the project life cycle – from project development, grid connection, financing, construction, including the buying and selling of development and operating projects.
Matt Baumgurtel leads the New Energy sector team at Hamilton Locke which specialises in renewable energy, energy storage and hydrogen projects and transactions as part of the firm’s Energy, Infrastructure and Resources practice.
David O’Carroll is a lawyer in the Hamilton Locke Energy Infrastructure and Resources team and specialises in renewable energy projects including, wind, solar and hydrogen projects.
Andrew Smith is a lawyer in the Hamilton Locke Energy Infrastructure and Resources team and specialises in renewable energy projects including, wind, solar and hydrogen projects.