Hydrogen – what you need to know

In brief 20 min read

The COAG Energy Council Hydrogen Working Group continues its work on the National Hydrogen Strategy, with the release of its issues papers series. The nine papers are a fascinating look at the breadth, depth and interwoven nature of the issues facing hydrogen. Partners John Greig and Tracey Greenaway look at some of those issues, ahead of submissions closing on 28 July.

Key takeaways

Themes across the issues paper series include:

• the problem that flows from demand (whether for fuel cell electric vehicles (FCEVs), electrolysers or other) not currently having sufficient impact to increase the range and quantity of supply available;
• customers' unfamiliarity with hydrogen, meaning they are wary and slower to embrace it as a new technology (for safety, economic and other reasons);
• customers' motivations being different, with significant numbers not willing to tolerate carbon capture and storage (CCS) in combination with fossil fuel-produced hydrogen other than as a transitional step, and others not at all; and residential appliances perhaps being more ready for hydrogen than industrial and commercial appliances;
• Australia not being able to 'go it alone' in relation to the hydrogen economy. It will be reliant upon significant capital inflows to support the hydrogen economy; and the risk of inconsistent regulation (including as to guarantees of origin) can lead to the inefficient fragmentation of standards, applying to everything from vehicles to residential, industrial and consumer apparatus etc; and
• questions about the suitability of current regulation: whether the national electricity and national gas objectives need to be harmonised, but also recognise and permit hydrogen to earn value for the benefits that it brings to other parts of the economy.

Background

The nine issues papers represent the latest work undertaken by the COAG Energy Council Hydrogen Working Group, after the COAG Energy and Resources Ministers commissioned a comprehensive and ambitious strategy for the development of an Australian hydrogen industry.¹

The papers have been informed by submissions in response to an earlier request for information, as well as visits to countries that have already started to develop hydrogen technologies and markets, and stakeholder roundtables held earlier this year.

While interconnected, each of the papers focuses on a specific topic and asks for feedback on specific questions for each.

Hydrogen at scale

In addition to being a 'relatively new' source of energy, hydrogen has the potential to provide important domestic benefits, including contributing to decarbonising Australia's energy systems, and improving reliability and security. However, Australia and other countries are unlikely to transition their economies to hydrogen unless it is produced at scale, and getting to scale will be a major endeavour.² The working group acknowledges that Australia has risen to similar challenges before, citing the growth of its LNG industry over the past 30 years, to today, when Australia has overtaken Qatar as the world's largest LNG exporter.³

Widespread adoption of hydrogen will only be achievable if it is cost competitive with other fuels. Fossil fuel-based hydrogen production will face particular challenges, given that it will need to be coupled with CCS if clean hydrogen is to be produced. While the papers recognise CCS as an 'established technology', it is also noted that CCS has encountered financial, technical and political barriers to widespread adoption, and that there is currently only one hydrogen project using CCS technology at commercial scale globally, which captures 40% of the carbon dioxide produced by the facility.⁴

Renewable electricity-backed hydrogen production is currently more expensive than fossil fuel-based processes, though it is expected that the cost of renewable energy will continue to fall.⁵ But the costs are not limited to those of the production of hydrogen; there is also its transport, storage and handling, from producers to end users.⁶

The working group's assessment is that Australia will need to actively develop international markets to achieve scale cost efficiencies. That in turn means that the speed at which Australia's hydrogen industry scales up will be highly dependent upon demand stimulus and other countries.⁷

It has already been suggested to the working group that it study the lessons learned from the growth of Australia's LNG industry, but it has also been queried whether the governance of energy markets in Australia is fit for purpose for hydrogen, given that new technologies and markets are increasingly coupling the gas, electricity and transport sectors.⁸

Attracting hydrogen investment

The capital required to support the development of a hydrogen industry is significant, with Australia likely to expect a large proportion of the required capital to come from overseas, meaning that it will need to provide an attractive investment environment in order to compete.⁹

The working group believes that sufficient basic research and development has been completed, such that the support needed to build the hydrogen industry will go through three phrases:

• hydrogen commercialisation;
• hydrogen supply chain development and scale up; and
• hydrogen market establishment and maturation.¹⁰

The working group identifies a key risk in the development of the hydrogen industry, in that it could stall in the 'valley of death' stage of commercialisation, being the point where technologies have been successfully proved as a concept but still require large capital investments to demonstrate their technology and to test various business models for full-scale rollout.¹¹

While identifying a range of Australian Government initiatives to support clean technologies (Australian Renewable Energy Agency, Clean Energy Finance Corporation, Clean Energy Innovation Fund, Emissions Reduction Fund and the Climate Solutions Fund), the working group notes that, while they can provide support to commercialise hydrogen production and use, they have mostly been designed to support clean energy development, and so may not fully support all aspects of hydrogen industry commercialisation.¹²

The working group believes that government investment is likely to be required in a variety of forms, both direct and indirect, and both on the supply side (eg making clean hydrogen an eligible technology under the renewable energy target, or creating specific and new targets for clean hydrogen) and demand side (eg government purchasing, such as supporting fleet purchases; and providing offtake agreement guarantees, including being a customer of last resort).¹³

A matter for debate is the extent to which government funding strategies should target both domestic and export-focused measures. While recognising that a purely domestic industry is unlikely to attract the scale needed to capture the full benefits of an 'at large' hydrogen industry, some submissions suggested developing domestic supply chains potentially ahead of them being economically competitive, as it would assist in demonstrating to export markets Australia's hydrogen capabilities.¹⁴

As the hydrogen industry becomes cost competitive and matures, support from government will likely shift to being mostly indirect ongoing market support.¹⁵

Developing a hydrogen export industry

East Asia is identified as being the likely key destination for Australian hydrogen exports: most notably, Japan and South Korea, with Singapore and Taiwan also emerging as potential markets. This is due in part to Japan and South Korea being highly dependent on imported energy, and being focused on clean hydrogen-based fuels as part of transitioning from fossil fuels while ensuring energy security and diversity. With Australia already being a valued energy provider and partner to the region, its relative geographic proximity, and abundance of renewable energy assets and experience developing resource and energy projects, the working group believes that it is well placed to be a major hydrogen supplier to the region.¹⁶

Important will be country-to-country agreements, with bilateral memoranda of understanding and trade agreements signalling confidence to the industry, to help encourage negotiation of specific commercial offtake and financing arrangements for at-scale projects.¹⁷

The working group believes that setting export targets would signal Australia's export ambition to the international market and to investors. It suggests a possible aspirational target of aiming to secure 50% of Japan and Korea's supply by 2030.¹⁸

The working group noted that many submissions suggested that governments should consider the example of the support given by the WA Government in underwriting, in 1979, the first LNG project as an offtaker, providing the bridge for investors to undertake the project.¹⁹

Another role for government is to take steps to influence – or even lead – the development of global hydrogen regulation standards, trade rules and access. Even within Australia, regulations need to be harmonised between jurisdictions, and between international standards, to ensure consistent practice.²⁰

Guarantees of origin

In this context, a guarantee of origin is a reference not to where hydrogen is produced but, rather, how it is produced. It is a standardised process of tracing and certifying the provenance of hydrogen and the associated environmental impacts (eg greenhouse gas emissions, water use or both).²¹

A guarantee of origin could allow purchasers of hydrogen to demonstrate their commitment to climate change mitigation, whether to customers, to their investors or to governments. It can also be used to comply with regulatory measures designed to reduce emissions.²²

Studies undertaken by the University of Queensland reveal customers do care about how their hydrogen is made, and do differentiate between hydrogen made from renewable energy and hydrogen made from fossil fuels.²³

In addition, potential export markets have already signalled that the emissions associated with hydrogen production are important to them. Japan's strategy notes that imports will need to be 'carbon free' from 2030, whereas Korea's strategy indicates the major overseas production of hydrogen should come from water electrolysis and be 'CO2‑free' between 2030 and 2040.²⁴

There is currently only one guarantee of origin program for hydrogen, being Europe's CertifHy Scheme, the IP for which is privately owned, though the scheme itself was developed by industry with government funding.²⁵

Australia's Carbon Neutral Certification Program is not designed with hydrogen in mind, and the working group notes that while it is used by some Australian companies and overseas markets, it is not recognised by other governments as a guarantee of carbon neutrality.²⁶

As such, the working group believes that a new scheme is needed but that further work is required to determine scope and governance.²⁷

The working group's initial view is that a guarantee of origin should cover emissions only (and not other impacts, such as water) and seeks guidance as to whether there should be a threshold for eligibility (with hydrogen whose emissions are above the threshold not being eligible for certification). The working group notes as well that the approach of destination markets for hydrogen may also influence decisions made in Australia, and bilateral or multi‑lateral arrangements may be required to ensure Australian guarantees of origin are recognised in destination markets. Otherwise, destination market regulation could act as a barrier to trade in relation to Australian hydrogen.²⁸

And the working group calls for submissions on who should make and administer the rules for a guarantee of origin industry: government, or developed and maintained by government in consultation with the industry but with industry or a third party administering the scheme.²⁹

Understanding community concerns for safety and the environment

The working group notes that, while there is a growing interest globally in hydrogen technologies, knowledge of hydrogen in Australia is generally low.³⁰

The working group reports that, through early consultations, it heard that Australians' acceptance of large-scale hydrogen production depends on impacts on carbon emissions, carbon capture and sequestration, safety, water consumption and land use.³¹

The impacts of these are not straightforward. With hydrogen being seen as beneficial in reducing carbon, a study by the ANU Energy Change Institute noted that additional fossil fuel-based electricity will be required to meet the hydrogen demand between 2025 and 2040, if the rate of renewable capacity installation remains constant at 2018 levels.³²

Alternatively, producing hydrogen from fossil fuels, currently said to be the most cost-competitive method, requires CCS if the hydrogen is to be considered clean. However, a study conducted by the University of Queensland indicates that the public has mixed reactions about producing hydrogen from fossil fuels with CCS, as compared with producing hydrogen from renewables. While 75% of respondents indicated support for hydrogen produced by renewables, and a further 38% accepted hydrogen produced with fossil fuels with CCS as an intermediate step, only 25% were prepared to tolerate production using CCS indefinitely.³³

Also production of hydrogen using renewable energy and electrolysis requires both significant areas of land for renewable energy generation and large amounts of water. Indeed, community concerns (ranging from environmental protection to uncertain livelihood) can arise, especially where hydrogen production is seen to be competing for water and land resources with existing industries and employers, such as farming and agriculture.³⁴

And in relation to land access, with Aboriginal and Torres Strait Islander people now owning and/or controlling interests in some 40% of the Australian land mass, engaging and collaborating with Indigenous communities to realise the shared benefits of hydrogen economy are regarded by the working group as a vital part of gaining local community acceptance for the hydrogen industry.³⁵

In relation to safety, the working group noted that research undertaken by the University of Queensland shows that communities are mostly concerned with the volatility and flammable nature of hydrogen gas. Noting that all conventional fuels have some degree of risk associated with their use, the working group believes that education and community outreach to inform people about the different properties of hydrogen and the relative risks compared with more familiar fuels will be needed.³⁶

Hydrogen in the gas network

The working group understands that there is considerable interest within the gas sector to consider use of hydrogen in Australia's gas network, with the paper addressing the various components of those networks.³⁷

However, hydrogen's physical properties mean that it does not behave as natural gas does when in natural gas infrastructure. Injecting hydrogen into high-tensile steel used in high-pressure transmission pipelines can cause hydrogen embrittlement (where hydrogen being absorbed into the metal makes the pipe brittle and prone to failure). As such, the working group is not considering use of hydrogen in Australia's gas transmission networks at this time.³⁸

The position in relation to gas distribution networks is different. There have been moves towards blending small amounts of hydrogen with natural gas in distribution networks. At relatively low concentrations (10‑20% in volume), hydrogen embrittlement is less prevalent and may not require major investment or modification to infrastructure.³⁹

While early trials indicate that existing Australian gas distribution networks should be able to accept the blending of some hydrogen, the Australian Gas Infrastructure Group submitted that the progressive replacement of existing cast iron distribution pipelines with high-density polyethylene pipe is already well underway across Australia. The replacement program is being undertaken primarily for safety and operational reasons.⁴⁰

In contrast, consumer piping used to deliver gas from the outlet of the gas billing meter to consumers (whether homes or industrial sites) is made from a variety of metals. Further work is needed to confirm that all Australian consumer piping materials are 'hydrogen ready'.⁴¹

As to metering, unless the blending of natural gas and hydrogen is consistent across a particular distribution network, individual meters would need to be calibrated for the relevant calorific value, to ensure that the metering provided an accurate way of estimating the volume of gas passing through the network.⁴²

As to existing residential gas appliances, many are already tested to operate under limited conditions with hydrogen at levels of 13%. The working group noted that work by the Energy Pipeline CRC has found that a blend of around 5% has no effects but that minor modifications to appliances may be required with blends of up to 30%.⁴³

As to industrial appliances, being generally more complex, they are usually independently certified and, as a consequence, may require recertification.⁴⁴

Due to all these moving parts, the working group noted that an important early step would be to determine a safe upper limit for the initial blending of hydrogen in the gas distribution networks, recognising that it may be different in different networks.⁴⁵ Obtaining consistency of approach, thereby minimising adjustments, recertification etc, will be important, given that University of Queensland research has revealed that cost would be a keen issue for consumers, with a report stating less than half of the survey sample would be willing to pay more for hydrogen technologies even if there were clear environmental benefits.⁴⁶

Hydrogen to support electricity systems

The working group believes that hydrogen can support electricity systems in three main ways:

• hydrogen can be stored and used to generate electricity when needed, though noting that, to date, there is no explicit market mechanism in the National Electricity Market to value storage;
• electrolysis producing hydrogen can rapidly respond to variations in generation output, meaning that by ramping hydrogen production up or down, the electricity otherwise used can be used to smooth out a generation profile, consuming excess renewable energy when it is available and deferring to other loads when generation output is low. If the hydrogen production facilities are situated close to renewable generation, this may also provide an offtake for otherwise curtailed energy; and
• because electrolysis-producing hydrogen can be rapidly ramped up and down, it can provide frequency control and other ancillary services for electricity networks. Whether hydrogen production will support electricity networks in this way depends on whether energy markets and incentives allow or disallow those benefits to be exploited.⁴⁷

The working group, however, does recognise that there are risks associated with hydrogen production. Significant uncoordinated on‑grid hydrogen production could exacerbate existing constraints and cause other difficulties for electricity networks and consumers. For this reason, optimal asset placement and planning will be crucial.⁴⁸

The working group believes that market frameworks and signals will determine whether, and the extent to which, hydrogen production and use, including associated renewable energy growth, will drive electricity system benefits or cause challenges.⁴⁹

Some commentators are of the view that there is a need to better harmonise the National Electricity and Gas Objectives, Laws and Rules, given that hydrogen could play a role in both markets. Each are currently separately optimised in the long-term interests of consumers, though it was also recognised there may be challenges to such integration, as the gas and electricity markets are quite different in operation.⁵⁰

Separately, the working group believes that pilot plant and demonstrations are needed to better understand the characteristics of hydrogen protection systems and the potential interactions with electricity systems.⁵¹

The working group noted that a number of stakeholders had raised the need for government to establish enabling market frameworks that reflect how hydrogen interacts with different sectors and allows hydrogen production to be appropriately compensated for the value it can provide to electricity systems.⁵²

Hydrogen for transport

With transport being Australia's second-largest source of greenhouse gas emissions and Australia importing 90% of liquid fuels used, the working group sees hydrogen as being one of a range of options for reducing fuel consumption to improve air quality, reduce carbon emissions and strengthen energy security.⁵³

Those options include FCEVs, battery electric vehicles (BEVs) and hybrids (internal combustion engine (ICE) or FCEV hybrids).⁵⁴

Using hydrogen as one of the new technologies to fuel transport would help diversify energy sources and reduce reliance on current liquid fuels, with the bonus that replacing the consumption of imported liquid fuels with domestic energy production may improve Australia's terms of trade.⁵⁵

The working group also believes that FCEVs can be refuelled with a similar consumer experience to incumbent ICE vehicles and have strengths where alternatives like BEVs are weakest: range, weight and refuelling times. Also, because fuel cells have much higher-energy densities than lithium‑ion batteries, they may be more readily scaled to bigger vehicles, heavier loads and longer distances.⁵⁶

Analysis by the US National Renewable Energy Laboratory indicates that total cost of ownership for FCEV forklifts is less than BEV equivalents due to refuelling time benefits, given that reducing downtime is a major factor when making purchasing decisions about forklifts, buses, mining trucks and commercial freight, and the like.⁵⁷

The working group noted that the challenges being faced included:

• a lack of supply of FCEVs at a time when manufacturers say that the main constraint is not demand but supply, as new production lines are developed to produce these vehicles;
• achieving price parity between FCEVs and ICEs, with some stakeholders proposing tax rebates as one way to reduce capital costs associated with modernising Australia's heavy vehicle fleet;
• relatively little hydrogen refuelling infrastructure, with the few current refuelling stations not readily accessible to the public. Like vehicle supply itself, early consultation suggests that there is currently not much of a case for investing in FCEV refuelling, owing to a lack of present demand and uncertain future returns;
• uncertainty as to fuel price. The working group notes that the likely retail price for Australian hydrogen fuels is unknown, with data scarce. In contrast, energy costs for BEVs are likely to remain significantly lower but FCEVs could be more competitive based on other attributes (such as range, weight, refuelling time) as the cost gap with electricity narrows;
• technology and operational risk. The working group noted that purchasers will also be wary of financial risk associated with new technology, needing to consider not only the initial purchase but future maintenance, operational and depreciation costs.⁵⁸

The working group identifies urban buses, passenger ferries, long-haul freight, light vehicles, remote mine site vehicles and non‑road vehicles as prospective early use cases for FCEVs.⁵⁹

As to safety, the working group notes that the use of hydrogen as a fuel for on‑road vehicles is already possible through existing transport regulation, as is the movement and refuelling of hydrogen-powered vehicles. That includes requirements that hydrogen and battery electric vehicles display an identifying label, so that first responders can safely identify and take necessary precautions when responding to an emergency situation. But new skills will be required, and scaled up in relation to maintaining and servicing FCEVs. During a transitional period, the working group suggests that there might be a period of sharing of limited skills: eg hydrogen mechanics could be shared between government bus fleet operators and private vehicle owners. ⁶⁰

Hydrogen for industrial users

This paper focuses on the opportunities for hydrogen as a chemical feedstock and as a source of industrial heat, particularly in the context of hydrogen presenting an opportunity for Australian industry to utilise hydrogen to reduce emissions, especially in those sectors (cement and steel) that have proven harder to abate.⁶¹

The working group notes that many industries require hydrogen as a feedstock to industrial processes where its use is due to its chemical characteristics, rather than its ability to provide energy. Those industries include ammonia production, chemical manufacture, glass manufacture, metals processing and food manufacture.

There is also the prospect of hydrogen being used in low carbon industrial processes, such as using it in place of coking coal in steel making. This is notwithstanding that the working group believes that its relative technological immaturity will mean the use of hydrogen in steel making is unlikely to occur before 2030.⁶²

The working group notes that the most common method of production of hydrogen for use as a chemical feedstock is steam methane reforming of natural gas, during which carbon dioxide is emitted. Industrial users could transition to clean hydrogen by moving to the production of hydrogen from water via electrolysis using renewable energy. The impetus for that transition will in part be driven by the price of natural gas against reductions in the cost of hydrogen via electrolysis.⁶³ Some commentators have indicated that the hydrogen via electrolysis technology is well understood but, given electrolysers are not yet mass produced, their cost remains comparatively high, with manufacturers indicating that demand has not yet driven cost reduction through economies of scale.⁶⁴

The working group notes that the largest users of heat in Australia are the energy (including petroleum refining, gas processing and solid fuel manufacturing) and manufacturing (steel, non‑ferrous metals, chemicals, food processing, ceramics, cement and pulp and paper) industries.⁶⁵

Hydrogen presents an opportunity to reduce carbon emissions for those industrial users currently using natural gas, diesel, LPG and coal. A significant issue today, however, is that hydrogen is considerably more expensive and energy intensive than existing heat sources.⁶⁶

In addition, the working group noted:

• the transition to using hydrogen for heat generation would require a substantial volume of hydrogen, raising questions about production, transportation and storage of hydrogen;⁶⁷
• given the variety of processes and apparatus involved, it is likely that the conversion of commercial and industrial appliances would be site specific and ad hoc, leading to potentially longer lead times and expense (as compared with residential/consumer appliances)⁶⁸;
• the use of hydrogen for industrial heating can give rise to increased NOx production, which is known to adversely affect the ozone layer, contribute to the greenhouse effect and be adverse to human health. Different designs or emissions control may be required to stay within permitted NOx emissions levels.⁶⁹
• increased safety concerns flowing from the industrial use of hydrogen. While the working group believes that existing users of hydrogen are well aware of the hazards and are likely to have the capacity and knowledge to transition to clean hydrogen without risk, there will be a need for education and experience for new users, first responders and the like. The working group does, however, note there have been considerable international efforts on hydrogen safety, and believes that those efforts can be built upon to establish best practice and regulation in Australia.⁷⁰

Next steps

Anyone who is interested in the hydrogen economy, including its impact on other sectors (including electricity, gas and transport) is well advised to study the issues paper series. Please contact any of the people below if you would like to discuss it further.