Over 40 countries have a hydrogen strategy or policies outlining ambitious demand forecasts, focussing use on several sectors. As a result of these plans, the global potential for green hydrogen is forecast to grow exponentially between current levels and 2050 to ¬80 Mtpa at a compound annual growth rate (CAGR) of 11% . The major drivers of demand are expected to be in line with the largest emitting sectors transportation, industrial use and agriculture.
For the most part, targets are driven by aspirations to reduce sector emissions or build a hydrogen economy within each country, however, in the absence of meaningful policy to drive demand, it will be challenging to meet these goals in the timeframes outlined.
History has shown that kick starting new industries within the energy sector has generally been through government led policy. In recent times within Australia, the growth in renewable energy from the mid-2000s came as a result of the Mandatory Renewable Energy Target which was first revised in 2009 to 20% by 2020 of all energy from renewables and later in 2015 to a target of 33TWh. Renewable generators were granted large scale renewable energy certificates (LRECs) for each megawatt hour of energy produced and freely traded these certificates to energy retailers with an obligation to purchase, thus creating the market which spurned investment in the sector. This combination of ‘carrot’, and to a lesser extent, ‘stick’ policy through a short lived carbon tax from 2012 to 2014, lead to a growth in renewable capacity of 3GWs in 2012 to 15GW in 2021, at a compound annual growth rate of 19%.
In the absence of similar and complimentary policy to stimulate demand, it will be challenging for the hydrogen economy to follow the lead of renewables and meaningfully contribute to emissions reduction. Global policy will take, to a certain degree, international cooperation as net importers such as Japan, Europe, South Korea and other parts of South East Asia will be reliant on net exporters such as Australia, Middle East, Africa and South America to bring supply online to meet demand.
This article will examine the most progressive policy initiatives in support of Hydrogen from around the globe the in the areas of demand stimulus, electricity concessions, taxation and financing and how explore how Australia might adopt elements of each to expand its hydrogen industry.
There has been few examples of direct Government demand stimulus, however perhaps the most progressive to date is Germany’s H2 Global auction program. This is a Government funded initiative designed to procure global supply of green hydrogen and derivative products such as ammonia through long term contracts to be sold in Germany. €900m of funds will be made available by government to bridge the spread between the domestic sales price and the procurement cost required to provide green hydrogen producers with an appropriate return. Supply is expected to commence from 2024 and will help encourage investment in the sector.
The German Government also revised its National Climate Law in 2021 handing down sector specific emissions reductions targets.
Within Australia, the Western Australian Government recently put to consultation a Hydrogen blending target as the first step in encouraging demand in line with its Hydrogen Strategy. Similar policy will be required within other states targeting hydrogen production to encourage domestic demand to help underwrite plant capacity and meaningfully contribute to Australia’s own emissions reduction targets.
In recognition of the fact that electricity costs represent, in most cases, 50% or greater of the total cost of production, the Indian Ministry of Power has outlined a policy providing a 25 year concession on inter regional network charges for green electrons contracted by hydrogen producers. This provides a significant advantage for the cost of supply which is likely to encourage investment in the sector by allowing producers to access the most cost-effective renewable supply on the network.
The European Union recently revised the Renewable Energy Directive, removing the requirement for green hydrogen producers to evidence hourly renewable energy supply, extending the averaging period. This effectively provides greater advantages in sourcing the most cost-effective renewable energy under power purchase agreements.
The recent US Inflation Reduction Act has enhanced and extended investment tax credits for renewable generators for a period of 10 years, which in addition to the $3/kg production tax credit (referenced below) is likely to drive down the cost of green hydrogen production further with renewable electricity made more cost effective.
Within Australia, the New South Wales Government has foreshadowed a concession on network use of system charges for electrolyser capacity installed before 2030 for a period of 12 years. This is a great stride forward in reducing the cost of electricity and the overall cost of hydrogen production, however, similar policy will be needed in all states. To emphasize the point, of the green electrolyser capacity currently in development within Australian, 97% (80GWs) resides outside of NSW.
The United States have committed $8.0bn to fund hydrogen production hubs under the recent Inflation Reduction Act legislation, while the member states of Europe have funding programs exceeding €20bn in total. In South Korea $37bn has been committed to fund international supply chains through Government owned utility KOGAS, while the Indian Government has announced a funding program of $15bn.
Collectively these investments support electrolyser capacity of 58GW (production of 4.9Mtpa) assuming a unit capex rate of $3.0m/MW, electrolyser utilisation of 50% and project gearing of 70%.
Comparatively speaking, while Australia has taken great strides to support the industry, to date direct federal funding has been limited to a $70m funding round from ARENA and $300m from the Clean Energy Corporation. On the same basis applied to global funding, this amounts to capacity of 0.18 GW and 0.01Mtpa. Furthermore, accessing the Federal Government’s AAA high investment grade credit rating would provide a source of competitive in relation to other net exporting regions, lowering the cost of production through a reduced cost of capital for projects.
In October 2022 the US Govt announced the Inflation Reduction Act which provided significant benefits in the form of refundable production tax credits of up to US$3/kg for facilities with lifetime emissions of less than 0.45gCO2e/kg of H2 for the first five years post operations. This is in addition to enhanced investment tax credits for renewable electricity which could potentially be coupled with hydrogen production to lower production costs further. The resulting reduction in production price is likely to bridge the gap between the cost of blue and green hydrogen, similar to the intent behind Germany’s H2 Global auction
Outside of specific tax concessions, several net exporters maintain highly competitive tax regimes featuring sub 30% headline corporate tax rates and a patent box allowing for further concessions of corporate tax for qualifying intellectual property developed and manufactured in those countries. By way of example the US Federal Tax rate is 21% while Saudi Arabia is 20%. In the UK the patent box regime applies to all qualifying IP at a reduced rate of 10% on eligible profits.
While Australia recently passed patent box legislation, the concessional rate of 17% ranks as the highest of the 20+ countries with a scheme, and application is limited to the medical and biomedical sectors. As a result, potential patents developed in relation to hydrogen are unlikely to be encouraged or filed within Australia. Hysata, an Australian company developing electrolyser technology to improve efficiency from 75% to 95%, would likely benefit from an expansion of the patent box within Australia and perhaps encourage large scale commercial manufacturing. As global supply chains come under increasing pressure this problem is likely to continue in the energy sector as existing supply chains look to satisfy their domestic energy transitions.
While undoubtedly the market potential for Hydrogen is clear, in the absence of coordinated and progressive policy within Australia and net importing regions, it is entirely possible that demand may fall short of expectations, and in the event that global demand is established, supply may lack the adequate investment incentives to proceed. Furthermore, there is an economic opportunity for Australia to take “first mover” advantage in the race to meet global demand, however without the right policy settings, there is a risk it will lag other net exporters, leaving the economy dependent on industries with a declining long-term outlook.