National Hydrogen Strategy Issues Papers

As large users of electricity, large scale hydrogen production will need a source of energy. The question of whether to connect to the grid or construct/contract their own project specific generation should always be a commercial decision for the investors and management behind any project.
The current electricity framework imposes connection and usage costs on the demand side. This means that an economically efficient decision will be made by any consumer of electricity, including the cost imposed on the transmission network.
Hydrogen generation will also benefit from the introduction of the recent work that the Australian Energy Market Commission has been undertaking into demand side management. Large plant of this nature can have a role to play in stabilising the network and should be given access to markets for ancillary services.
However, the question overlooks the single most important contribution hydrogen can make to the electricity market – generation.
The ability to use hydrogen to produce on demand CO2e free electricity is one of its strongest advantages. Hydrogen can be produced at anytime thereby utilising renewable energy sources at times of low demand by other electricity consumers and the hydrogen can then be utilised to generate electricity at times of high demand or network instability. In effect hydrogen can fulfil the current role of Natural Gas on the generation side of the market as the marginal generator at times of high market prices.
One method the hydrogen can be used for power generation and electricity grid stability is to convert the hydrogen to renewable methane via methanation. The renewable methane can be stored in existing gas transmission infrastructure without the need for augmentation. It can also be used for power generation using existing gas fired power stations. Renewable methane stored in gas infrastructure provides a readymade green energy bank. The energy bank can then be used for grid stabilisation services. Renewable methane can support the electricity industry without having to change current gas legislation. There are currently well established services such as gas storage which are used to supply additional gas fired power into the market to support the electricity market.
It is the ability of hydrogen or renewable methane to be produced in one location and utilised for generation in a separate location that give its advantages over batteries and pumped hydro as a form of energy storage. Its advantage is its portability.

The main reform that can be recommended, outside reflecting the cost of CO2e, is demand side management that would permit hydrogen production facilities to operate in a market during higher price periods. This will result in lower prices being paid in the wholesale market for all electricity resulting in reductions in bills to consumers.
However, as per above if the hydrogen is converted to renewable methane this can be used similar to traditional gas fired generation which to be dispatched at high demand periods to reduce electricity prices.

The main failure of the current market framework in energy markets is the failure for the production of electricity to price in external economic costs. While CO2e is one of the known pollutants of the production of electricity from fossil fuels, it is not the only form of pollution produced in the generation of electricity. All these factors should be factored into the price received for the sale of MWh of electricity or ancillary services.
Such a framework would benefit hydrogen, and society more generally, leading to an optimal economic outcome within the wholesale electricity market by producing the right incentives.

One of the major issues for the future of the Australian economy in a hydrogen future is, if not approached carefully, it can result in significant additional infrastructure cost to industry in Australia.
There is one hydrogen technology that is preferable to others in its ability to seamlessly integrate into the Australian economy with a minimum of additional cost to infrastructure for consumers and minimal changes to the National Electricity Market is to convert hydrogen into – Renewable Methane.
There are benefits from this approach:
• transportation of renewable methane is safer that hydrogen as it can utilise the existing transportation infrastructure for natural gas
• it can be utilised in the existing equipment for most customers; and
• existing gas market mechanisms can be used
However, currently this approach is attracting less attention and government support than some aspects of both electricity and hydrogen technologies. This is despite the ability of renewable methane to avoid 10s of billions of dollars of additional expenditure that would be necessary to utilise hydrogen in its pure form or in another transportation form such as ammonia.
This would also be true for hydrogen as an export commodity both for producers and consumers.
Because renewable methane can utilise the existing transportation and generation infrastructure utilised by natural gas, it can support the National Electricity Market and the Wholesale Electricity Market (WA) within minimal changes to the infrastructure and market mechanisms in place.
It is highly recommended that the Government focus its resources on the minimal impact hydrogen approach that is renewable methane as it will naturally produce the sector coupling that is a reality in the current electricity market.

When considering the role of hydrogen in support of the electricity market the Government needs to be mindful that for hydrogen, unlike batteries or pumped hydro, the collection of the energy and the release of the energy does not have to be undertaken by the same project. It is this aspect that gives hydrogen its export potential.
The advantage of utilising hydrogen in support of the electricity market is that the Government can use existing funding structures such as ARENA to fund projects in relation to generation utilising hydrogen.
However, if the Government is looking for a route that will strongly encourage the development of a hydrogen industry in Australia that can support the electricity market it would be to act as the intermediary between:
1. the production of hydrogen, and
2. using hydrogen for generation.
This could be done through the Government conducting two separate auctions (for 1 and 2 above) with the Government as the counter party to the successful project.
The auction for the production of hydrogen will focus on price and scalability with the winner being the producer whose technology can be efficiently scaled up but wins the auction at the lowest bid.
In using hydrogen for generation auction, the Government will offer the hydrogen secured under the auction for the production for hydrogen for sale under a contract.
The successful project would be the one that can bid the highest price to buy the hydrogen. The bidders would need to take into account they will be responsible for the transportation of the hydrogen and will receive revenue the sale of electricity and ancillary services.
Success in the production of hydrogen auction should not preclude anybody from being a participant in the using hydrogen for generation auction. This recognises the cheapest way to transport hydrogen may commence at its production.
Recognising that in developmental stages the price the Government receives for the hydrogen is likely to be below the price it is paying for it. This start-up role is one that only a government can perform to aid the development of this market.
This approach does not increase the costs for consumers of electricity in Australia but reveals how close to commercial reality hydrogen is as a support for the electricity market. It also provides the opportunity to learn lessons in the commercialisation of these technologies that could result in hydrogen participating in the electricity market in the future.