Federal Government to underwrite 1 GW of green hydrogen projects

Consultation periods end next month 10 min read

In Australia's hydrogen industry is progressing, but not fast enough, we reported the Federal Government's Budget announcement that it had committed $2 billion to the 'Hydrogen Headstart' program, and flagged that it and each of the state and territory governments had agreed to conduct a review of the National Hydrogen Strategy. On 7 July 2023, the Department of Climate Change, Energy, the Environment and Water released a consultation paper on the Hydrogen Headstart program, which aims to support at least 1 gigawatt of green hydrogen projects, with the expression of interest phase to commence in late 2023 or early 2024. The Government also released a consultation paper on the review of the National Hydrogen Strategy.

In this Insight, we provide an overview of these consultation papers and the key takeaways for the hydrogen industry.

Key takeaways

• The principal intention of the Hydrogen Headstart program is to put Australia on the path to having up to one gigawatt of electrolyser capacity by 2030, which will be achieved through supporting at least two large-scale hydrogen projects.
• Projects will be selected via a competitive process, focused on cost and deliverability. This involves an expression of interest (strict eligibility criteria apply) and, by invitation only, a full application. Each expression of interest and application will be assessed based on merit criteria.
• Successful applicants will receive a 'hydrogen production credit' for each kilogram of renewable hydrogen (or an equivalent metric) produced over a period of up to 10 years. The credit is designed to bridge the gap between offtake prices and the project proponent's cost of production (which may include 'a justifiable return' on capital).
• The 'National Hydrogen Strategy Review' consultation paper was released on the same day as the Hydrogen Headstart consultation paper. This paper contains six themes (based on further activating the industry, and on attracting investment, infrastructure needs and creating an export industry) and associated questions. Responses to these questions will assist with formulating the revised National Hydrogen Strategy. The consultation period for this paper ends on 18 August 2023. Details for providing submissions can be found here.

Hydrogen Headstart

Background

On 9 May 2023, the Federal Government announced in the Budget that it had committed $2 billion to the new 'Hydrogen Headstart' program (Hydrogen Headstart). On 7 July 2023, the Department of Climate Change, Energy, the Environment and Water (the DCCEEW) released the 'Hydrogen Headstart: Consultation Paper'.

The DCCEEW and the Australian Renewable Energy Agency (ARENA) are collaborating on the design of Hydrogen Headstart, which will be implemented using a competitive application process whereby proposed project developers can seek financial support to bridge the gap between offtake prices and costs of production.

The consultation paper states that the key intention of Hydrogen Headstart is to put Australia on the path to having up to one gigawatt of electrolyser capacity by 2030, to be achieved through supporting at least two large-scale hydrogen projects.

Timeline

The consultation period for the Hydrogen Headstart consultation paper ends on 3 August 2023. Details for providing submissions can be found here.

Feedback from the consultation process will be used to develop 'guidelines' that will outline the final specifications of Hydrogen Headstart, before the application process commences in Q4 2023 or Q1 2024. It is expected that the stage 1 application process will remain open for approximately eight weeks.

Key terms of the Hydrogen Headstart payments

Application process

The application process involves two stages:

• an expression of interest; and
• by invitation only, a 'full application'.

To submit an expression of interest, a project must satisfy the eligibility requirements, which are summarised below. The expressions of interest will be assessed based on the merit criteria, also summarised below, each of which is given equal significance in the assessment process.

If a project is 'assessed as being of high merit', a project proponent may be invited to submit a 'full application'.

Ultimately, the projects that are ranked the highest based on the merit criteria will be recommended for funding. Although the consultation paper does not specify who ultimately decides which projects will receive a HPC, we expect the broader process will be managed by the DCCEEW and ARENA, and the ultimate decision-maker will be the Minister for Climate Change and Energy.

We note that the paper states the use of bid bonds is under consideration. A support recipient would be required to provide a non-refundable bond (based on a realistic pre-estimate of the costs of seeking a replacement project), and this would be forfeited where the project does not meet financial close or key development milestones by certain dates. Whether unsuccessful shortlisted applicants should be eligible for some level of bid cost recovery is also being considered.

Eligibility requirements

The eligibility requirements are:

• the project must be a new project based on electrolysis / renewable hydrogen production (we note it is stated that existing energy generation may be utilised, which means existing renewable energy projects planning a hydrogen electrolysis 'add-on' project will be eligible);
• the electricity for hydrogen production must be:
  • behind the meter renewable electricity (ie electricity generation on a project proponent's property), if any large-scale generation certificates that are created from that generation are surrendered;
  • from the electricity grid, if large-scale generation certificates created within one year of the hydrogen production or other certificates under the proposed Guarantee of Origin Scheme are surrendered, which must correspond to 100% of the electricity use; or
  • from a renewable generation power purchase agreement, if any large-scale generation certificates are retired;
• the project must comply with the Guarantee of Origin Scheme;
• the project must deploy at least 50 megawatts of electrolysis;
• the project must be a single site development in Australia;
• the project must have a valid commercial case for the end use of hydrogen or a hydrogen derivative product, such as ammonia; and
• an expression of interest must include a commercialisation pathway or cost reduction pathway analysis (ie an analysis describing the options to ensure the project operates commercially).

Merit criteria

The merit criteria have five elements, each of which is a category of specifications and supporting information that must be submitted with an expression of interest and a full application.

1. Alignment to Competitive Round Objectives: This includes the funding request for a project, the justification for the requested funding, the cost competitiveness and efficiency of a project with reference to the implied cost per kilogram of hydrogen (or hydrogen derivative) delivered over the contract term (excluding any concessional funding), and the potential of the project to lead to further decarbonisation.
2. Capability and Capacity: This includes the demonstrated level of experience and expertise of the project proponent (including its consortium, if relevant, and its major equipment suppliers, and engineering, procurement and construction contractors), and the quality and completeness of project documentation and agreements.
3. Scope, Methodology, Deliverability and Risk: This includes the quality and completeness of the project plan (including the level of project definition and the end use of hydrogen or the offtake agreements), the project timeline, use of local supply chains / job creation, community engagement and support, the extent to which key risks have been identified and mitigated in project agreements, and the financial model and the extent to which the project proponent accepts the terms of the 'Funding Agreement' template (which is yet to be developed).
4. Financial Capability: This includes the level of conditionality of the project's funding commitments, offtaker creditworthiness / offtake conditionality, risk of cost overruns, and the project proponent's financial capacity to deliver a hydrogen project (including its capacity to manage cost overruns).
5. Knowledge Sharing: This includes the extent to which the project proponent accepts the terms of the 'Knowledge Sharing Plan' (which is yet to be developed), and the extent to which additional valuable knowledge may be generated and shared from the project.

National Hydrogen Strategy Review

Background: National Hydrogen Strategy

In November 2019, the Council of Australian Governments Energy Council released 'Australia's National Hydrogen Strategy' (the National Hydrogen Strategy). The National Hydrogen Strategy provides a framework for leveraging Australia's natural resources, experience of resource development and reputation among its trading partners as a trusted supplier of natural resources to develop an Australian hydrogen industry.¹

Each of the state and territory governments agreed to conduct a review of the National Hydrogen Strategy, which accounted for global developments relating to hydrogen since the release of the National Hydrogen Strategy and the impact of regulatory regime changes in other countries, to support their domestic hydrogen industry ambitions.² On 7 July 2023, the DCCEEW released the 'National Hydrogen Strategy Review' consultation paper. The paper acknowledges that, due to international hydrogen developments, Australia must consider updated or additional nationally coordinated government actions to reach its hydrogen potential.

The consultation paper proposes that the Federal Government's strategic objectives in its revised strategy should be:

• Australia on the path to be a global hydrogen leader by 2030;
• enabling domestic decarbonisation through the development of the hydrogen industry; and
• ensuring economic benefit for all Australians through the development of the hydrogen industry.

Overview of the consultation paper

The consultation paper contains six themes:

1. How can Australia enable decarbonisation through the development of a clean hydrogen industry?
2. How could Australia further activate its hydrogen and related industries?
3. How can we ensure our hydrogen industry attracts the necessary investment?
4. How can we ensure our hydrogen industry develops in a way that benefits all Australians?
5. How should we develop the necessary infrastructure needed to support the development of our hydrogen industry?
6. How can we enable a hydrogen export industry (including the export of goods manufactured with hydrogen)?

The consultation paper includes 34 questions related to these themes. Responses to them will assist with formulating the review of the National Hydrogen Strategy. They may be made using the DCCEEW 'consultation hub' website, before 18 August 2023.

Next steps

If you have questions about, or require assistance with, what is discussed in this Insight, please contact any of the people below.