How to make hydrogen work for Australia - Grattan Institute

For such a small molecule, hydrogen’s possible contribution to fixing climate change has been hyped beyond reality. Yet, hydrogen offers three big opportunities that should be grasped now, and several others that could be developed down the track. Realising these opportunities without undue hope or excessive long-term subsidies requires focused analysis and clear policies.

Australia is potentially close to achieving its legislated target of reducing emissions by 43 per cent below the 2005 level by 2030. This achievement depends on lifting renewables’ share of electricity generation to 82 per cent by 2030 and nailing the revised Safeguard Mechanism that imposes binding constraints on big industrial emitters.

Beyond reaching these targets lie two big questions for which hydrogen could be a partial answer: how can Australia reduce domestic industrial emissions without de-industrialising, and what could replace the export revenue and jobs that come from our coal and gas sectors?

The first Hydrogen Strategy, published in 2019, explored a range of hydrogen-based opportunities, and much effort from governments and industry has been expended to turn these hopes into real projects. Australia has not been good at turning hydrogen hopes in physical projects, partly due to the dilution of effort across too many areas.

For Australia, the best strategic uses of hydrogen are in the production of ammonia (used to make fertilisers and explosives), alumina (halfway between bauxite and aluminium) and iron (halfway between iron ore and steel).

All three commodities are likely to remain in demand in a future net zero world. They are bulk materials which are crucial for building the products and infrastructure necessary for Australia to contribute to the world’s decarbonisation, and where the underlying economics could play to Australia’s latent competitive advantages. Critically, they are commodities where there are no or few economic and technical alternatives to using hydrogen to green production.

Need for more ambition

It is clear that the hydrogen supply chain is more complex and more expensive than had been hoped. All uses for green hydrogen depend on reliable, low-cost, renewable electricity, and lots of it. Applying hydrogen to the three prioritised uses would require more than 30 gigawatts of electricity, 60 per cent more than we have in the National Electricity Market today. The logistics of making and combining such electricity with water to make hydrogen and getting that hydrogen to a physical end use add complexity and cost.

Green production of ammonia, alumina and iron will cost more than incumbent versions unless significant, sustained action is taken. The government’s revised Safeguard Mechanism will create a carbon price for heavy industry, but with current settings, it will not close the cost gap. More ambition should be considered.

The state of technology development and the scale and pace of change necessary to get to net zero emissions demands policies targeted at sectors and technologies with the greatest credible potential to reduce costs – a 21st-century industry policy.

The government should begin with its Hydrogen Headstart initiative. Under this policy, the government shares some of the market risk of the new technologies with industry while avoiding windfall profits for the project owners, using contracts for difference. Projects based on green hydrogen could form the foundation of this program. It should be broadened to include projects for green commodities that have a chance at being cost-competitive to produce in Australia, regardless of what fuel they use.

Beyond the initial three uses of hydrogen are other potential opportunities, such as power generation, synthetic fuels and long-distance road freight. These opportunities tend to have complex supply logistics or face competing technologies, or both. Government should move more cautiously on these uses.

Finally, the government should rule out supporting uses of hydrogen where alternatives have a stronger case, such as electrification to replace natural gas in homes and small businesses and petrol and diesel in light vehicles.

Australia’s objective should be to develop a hydrogen industry capable of supplying reliable low-cost hydrogen to the industries where it would add greatest economic value.

The cost could be in the order of $2 billion a year. The prize would be reduced domestic emissions from ammonia, alumina and iron, and export industries with a robust future across all three. A wider green industry, with domestic and global significance, can grow from this base.

Alison Reeve

Energy and Climate Deputy Program Director
Alison Reeve is the Climate Change and Energy Deputy Program Director at Grattan Institute. She has two decades of experience in climate change, clean energy policy, and technology, in the private, public, academic, and not-for-profit sectors.

Tony Wood

Energy and Climate Change Program Director
Tony has been Director of the Energy Program since 2011 after 14 years working at Origin Energy in senior executive roles. From 2009 to 2014 he was also Program Director of Clean Energy Projects at the Clinton Foundation, advising governments in the Asia-Pacific region on effective deployment of large-scale, low-emission energy technologies.

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