National Hydrogen Strategy Issues Papers

For large-scale export to be competitive in Australia, the industry will eventually need to be in the multi GW electrolyser scale, requiring significant ramp up of market and technology innovations over the next decade. It is likely that significant cost and efficiency improvements will occur in areas including electrolysers, shipping and handling, and destination market transport logistics.

First scale export developments will be sized in accordance with offtake contracts that can be achieved whilst supply chains and the domestic market are developing. To achieve reasonable cost efficiencies, projects upwards of 100 MW will be required if feasible with the available infrastructure and technology. Early developments at much larger scale will fail to take advantage as technology and equipment manufacture comes down the cost curve.

Initial domestic market opportunities are more likely to be regionally focussed minimising distribution costs, and may make more sense at small scale (10 MW to 50 MW) depending on offtake opportunities.

In order to achieve start-up cost efficiencies, electrolyser development will need to be grid connected to achieve reasonable load capacity factors in context of capital cost and achieving reasonable Long Run Marginal Cost targets. Locations will need to be optimised around capitalising on transmission network capacity and transport infrastructure including end use distribution points for domestic use. A coordinated national and state strategic approach to developing hydrogen production zones considering transmission, port infrastructure, sustainable water supplies and access to renewable energy will assist in supporting Australia to become competitive.

Hydro Tasmania believes the availability of these key inputs demonstrates the benefits of instigating hydrogen production in Tasmania. Existing and future clean energy production backed by hydro in Tasmania can provide a competitive advantage with high capacity factors providing for a strategic and cost effective demonstration location. Tasmania’s transmission capacity and existing infrastructure (e.g. port access) also makes it attractive for the requirements of initial development of the domestic industry.

With export opportunities from Japan’s renewable hydrogen targets by 2030, Australia requires significant production to be commencing by 2025 to enable large-scale production by 2030. Tasmania is already well positioned to host significant developments and in context of becoming an even larger player in the National Electricity Market (NEM) through the Battery of the Nation initiative, is poised to realise substantially more potential. With growing clean energy opportunities including pumped-hydropower, Tasmania would provide a resource-rich base for demonstrations and commercial realisation of clean hydrogen production. To ensure ease of transition, standards and zoning should be adjusted appropriately within the next two years, which will also address community perception of safety.

Facilitating deployment and pre-commercial demonstration of technologies will allow the Australian Government to drive down domestic production costs, similar to the Government’s role in other industry development. The establishment of a sustainable export industry will be based on domestic production and eventually consumption, requiring high consumer acceptance of safety in hydrogen production and use across multiple value chains, including the potential for developing a green ammonia industry.

Early stage demonstration projects with potential to be commercial in the near term should be supported by Government with capital funding to ensure they are sustainable as the market is expanding. Advances in production, storage and transport to accompany significant decreases in renewable energy costs will contribute to the development of a successful export strategy. Technology demonstration will be most effective where it can increase a self-sustaining industry. Support measures around scaling hydrogen production for end use by fuel cell should be a priority (as opposed to direct burning such as diesel fuel replacement).

Hydro Tasmania has experience of working with the Australian Renewable Energy Agency (ARENA) to demonstrate and progress renewable energy in Australia. We believe there is value in exploring similar demonstration and deployment models for the hydrogen industry. Similarly, organisations such as the Clean Energy Finance Corporation (CEFC) could be called upon for their investment analysis and project support.

The use of hydrogen for transport is one area that is likely to become competitive in the near term and will facilitate closer sector coupling between the electricity and gas sectors also. The development of hydrogen transport in Australia will initially rely on global advancement in production of competitively priced fuel cell vehicles (in particular heavy transport, buses and heavy machinery). It is important to avoid fuel excise imposed on hydrogen for diesel replacement until the industry is established and clearly competitive in its own right. Effective vehicle emissions standards in Australia consistent with other countries should be a priority.

Beyond small-scale demonstration, blending hydrogen into domestic gas distribution networks is unlikely to be cost competitive in its own right without price incentives. Production cost of green hydrogen is likely to be significantly in excess of natural globally for the foreseeable future. For a transition to hydrogen in direct burning applications such as natural gas replacement, a significant international carbon price is likely required alongside relevant safety regulations to meet community expectations.

Australia’s renewable energy industry is growing rapidly, with falling costs and increasing opportunities in wind, solar and pumped hydro. The prospects of a clean hydrogen economy will be enhanced if production, consumption and export can be developed in parallel. Coordinated national strategy and government-to-government dialogue, recognising key development zones and production timeframes are critical to the expansion of the domestic market. This has economic opportunities for utilising Australia’s renewable energy resource advantages and redevelop Australia’s ‘brand’ as an international competitor in exports and manufacturing.

The Tasmanian Government is actively contributing to the development of the national hydrogen strategy, and Hydro Tasmania agrees that it presents significant opportunities for Tasmania to lead the emerging market for low and zero emission hydrogen production. With existing port and electricity infrastructure to facilitate hydrogen export, Hydro Tasmania will consider future opportunities for partnership with local industry, hydrogen producers and long-term customer opportunities.

As previously mentioned, collaboration between government, renewable energy producers, network businesses, suppliers of hydrogen technology, shipping companies and energy off-takers is needed to achieve competitive pricing. Hydro Tasmania believes it is appropriate for the COAG Energy Council and the Federal Government to take a lead in coordination of these parties. For example, trade and investment delegations can help businesses explore opportunities with overseas commercial partners, and directly promote prospective production zones leading prospects such as Tasmanian capability and opportunity.

There is also a requirement for transmission pricing and environmental charges within Australia to be competitive globally in order to achieve internationally competitive prices. An exemption for exports for charges associated with the LRET and STCs should be considered to ensure that input costs into energy production are in line with other exporting nations. This is similar to the approach to exemptions for Emission-Intensive-Trade-Exposed industries (EITEs). A strategic zoning approach may be necessary to ensure efficient use of transmission systems.

The medium to long-term impact of hydrogen production on domestic input costs should be considered to ensure the industry can develop in a way that adds economic value for Australia, and improves on national and state energy productivity and security goals.

It is important to provide some certainty as to the requirements for industry developing hydrogen export ventures. Hydro Tasmania recommends that a scheme be developed by the first half of 2021 to meet emerging investment timeframes, referenced with those operating internationally.

Principles of guarantee of origin should be agreed with Australia’s key international trading partners to ensure consistency and least-cost. Hydro Tasmania believes that a practical approach to guarantee of origin is to cover scope 1 and scope 2 emissions, with inclusion of scope 3 to be considered in the long term. An agreed form of certification to account for scope 1 and 2 emissions will be required for 100% green hydrogen product. Domestically, this should be through the National Greenhouse and Energy Reporting (NGER) framework with similar principles applied to international GO certification to ensure transparency.

It should be sufficient to have certification of embedded carbon with the hydrogen. It will be necessary though to have an agreed tradeable certificate process to enable a producer to offer certified emissions free hydrogen to an international customer. Consistency with existing international precedents is essential.

Hydro Tasmania considers the most appropriate body to administer certification is the Clean Energy Regulator (CER). The CER already regulate the NGER scheme and the Renewable Energy Target.

It would be expedient to target key development zones nationally and at state government level to enable streamlining of approvals processes.

As identified in the issues paper, newer gas distribution networks including Tasmania and the ACT were built with high-density polyethylene (HDPE) pipe, which is appropriate for transporting hydrogen. Hydro Tasmania believes that Tasmania could be best suited for demonstrations of hydrogen blending, similar to that already taking place in Victoria, SA and WA. The combination of hydrogen-ready infrastructure and low domestic gas usage in the state can minimise disruption to users while blending small amounts of hydrogen into regional areas of the distribution network. This could progress towards trials of 100% hydrogen use with further investment and social acceptance.

Hydro Tasmania believes that hydrogen production is best developed through grid connected application over the next decade. This will allow achievement of higher capacity factors, assisting the production economics. Falling costs and growing share of renewables in Australia will put downwards pressure on production costs for hydrogen.

To connect to the grid at large scale, electrolysers will need to work as flexible loads to both limit maximum demand on transmission networks, and offer grid support to reduce the net cost of electricity supply. As the issues paper addresses, the use of hydrogen in this sector can lead to increasing power purchase agreements with renewable generators, to continue downwards pressure on costs and help to achieve Australia’s global emission targets.

As mentioned previously, Hydro Tasmania is exploring repurposing some of the existing hydro system in Tasmania for pumped hydro – to store wind and solar generation during high supply peaks. Hydrogen can add another layer of grid-firming to storage in the NEM. This issue could be considered further with respect to the development (and possibly co-optimisation) of REZs and hydrogen production zones.

Provision of demand response services from hydrogen production will be key to both achieving economic cost of supply and to partially balance large scale on grid variable solar and wind generation.

Supporting optimal production levels of hydrogen will be realised through collaboration between hydrogen producers and electricity market participants. The growing focus on storage in the NEM can help integrate hydrogen into the electricity system. There is an identified need in the market for long-term storage to provide reliability and security to the market. Introducing hydrogen in parallel with pumped hydro and other energy storage options would increase opportunities to support the market’s transition to greater renewables. In addition, connection of hydrogen production could increase utilisation rates of transmission and generation infrastructure. The role of hydrogen in the broader electrification of the economy (EVs, fuel switching etc.) should be considered.

Demonstration projects should capitalise on existing infrastructure including:
• Reliable renewable energy resources to support economic production capacity factors,
• Port facilities for export market, and
• Existing transmission connection.

There should be a clear line of sight to medium term commercial operation, and opportunities for regional economic growth through support industry and skills development.

Evaluation needs to be given to total hydrogen production, consumption and transportation value chains, with a view to localised economic productivity benefits as well as export potential, including domestic ammonia production and use.

Government and industry need to collectively address application of Australian standards and design rules which limit the ability to import fit for purpose fuel cell vehicles (inclusive of buses, trucks, light vehicles and machinery). If this is not done, we risk potentially delaying the development of the domestic hydrogen industry and constraining de-carbonisation of the transport sector. It will be difficult for Australia to reduce the risks of introducing fuel-cell electric vehicles (FCEVs) domestically until the international market develops further. This suggests a role for the Government in positively contributing to international efforts to develop and support emerging international markets, but ensuring effective emissions and fuel standards are in place to remove barriers.

Coordinated demonstration of fuel cell technologies will be valuable in addressing heavy transport, buses and rail projects. Especially to consider challenges around refuelling infrastructure – the main challenge with the hydrogen bus trial in WA from 2004-07. If these demonstrations were successful, introducing heavy fuel cell vehicles in regional Australia could significantly develop community acceptance in areas where hydrogen production will likely occur (and as promising technology or high mileage vehicles). This could also present opportunities for Government to support education to introduce skills and expertise as a means for benefitting communities.

Hydro Tasmania considers the simplest way at demonstrating the usability of FCEVs is in heavy vehicle applications with return to base at hubs on major transport routes. As noted above an early challenge is availability of rolling stock. Consideration should be given to collaboration with bus fleets, major transport operators and rail. This simultaneously demonstrates vehicle safety and Government and industry support. This approach may also facilitate light fuel cell vehicle demonstrations with additional access to hydrogen fuel as availability of vehicles increases.

While there is a significant future opportunity for Australian hydropower production, there is also a clear role for Government(s) if this is to be achieved. Initially, demonstration and development projects should be a focus in order to reduce costs and move towards sustainable revenue models.

A hydrogen economy should be considered holistically including for its ability to decarbonise multiple sectors of the Australian economy. As the discussion papers note, there is significant integration and overlap with domestic gas, transport and electricity sectors. These issues need to be understood for a hydrogen industry to return value to Australia and work efficiently with these other sectors. Hydro Tasmania supports COAG continuing to support and coordinate these processes.