Hydrogen: a golden ticket to net zero?

From cars to homes to industry, hydrogen has been hyped as an all-encompassing solution to meeting Australia’s emissions targets. But is it the golden ticket to a net-zero future? With the National Hydrogen Strategy under review, it’s time to get truly strategic with hydrogen.

Listen to energy experts Alison Reeve and Richard Yan discuss their new report, Hydrogen: hype, hope, or hard work?.

Transcript

Richard Yan: From cars to homes to industry, hydrogen has been hyped as an all encompassing solution to meeting Australia’s emissions reduction targets. But is it the golden ticket to a net zero future? With the National Hydrogen Strategy under review, it’s time to get truly strategic about hydrogen. I’m Richard Yan, Senior Associate in Grattan’s Energy and Climate Change Program, and with me is Alison Reeve, Deputy Program Director.

Together with our Program Director, Tony Wood, we’ve authored a new report, Hydrogen, Hope or Hard Work? It’s this question in the title of our report that we’ll be tackling in today’s Grattan podcast. Alison, for a while there, it seemed everyone was really excited about hydrogen. Why was that, and why does hydrogen matter?

Alison Reeve: Well, let’s start with why it matters. Hydrogen is a really amazing fuel. So despite being the smallest and lightest molecule in the universe, it contains heaps of energy. You can make it without producing any greenhouse gas emissions and you can burn it without producing any, any greenhouse gas emissions.

And with the world trying to get to net zero, that does, it kind of, like you said, it kind of makes it feel like it is a golden ticket. And from about 2017 onwards, there started to be a lot of excitement about it for these reasons. So countries like Japan and Korea signaled that they wanted to start importing hydrogen as a replacement fuel instead of oil and coal and gas.

Here in Australia, we realized that Using our vast renewable energy resources to make hydrogen would be a way to stay as an energy superpower as the world decarbonizes. And then in Europe, Europe started to move away from using gas both for climate reasons and also more recently in response to the war between Russia and Ukraine.

The U. S. has also started to subsidize hydrogen production and hydrogen use as part of the Inflation Reduction Act. I should also disclose, probably for, for our viewers as well, that I’m partly responsible for this hype around hydrogen. So in a previous job, I was responsible for Australia’s first national hydrogen strategy, along with Dr. Alan Finkel. And a lot of the reason that that hydrogen strategy was done was, was being driven by this excitement about making Australia a world leader in hydrogen.

Richard Yan: And so now, with the Federal Government reviewing its National Hydration Strategy, it seems like we’re becoming a bit more pragmatic about it.

Why is that, and how did we get here?

Alison Reeve: I think the big thing that has changed is that people have actually started to engage with the practicalities. Hydrogen is difficult to move around. If, if you’re going to use hydrogen, you need to be able to get it from the people who are making it to the people who are going to use it.

Like I said before, it’s a tiny, tiny molecule that weighs almost nothing, which makes it really difficult to handle. The other thing about it is it’s not a drop in replacement. You can’t just take a process that’s in most cases that’s using, say, oil or coal and just pop hydrogen in there instead. You also, also have to switch to using a different technology or a different asset.

So for example, a fuel cell car that uses hydrogen is not the same as a petrol car and it’s not the same as a battery electric car. If you want to use hydrogen to make steel, you have to have a different type of furnace compared to using coal. And there’s an expense associated with that, right? And then I think the other thing that really came along too was that people began to realize that making hydrogen cheap, even if you have vast amounts of renewable energy to use in that process, it’s actually really, really hard.

Richard Yan: Yeah. And that’s precisely one of the things that we wanted to elevate in the report. If you actually run the numbers, hydrogen looks to be quite expensive and hard to move around to get to where it needs to be. Just looking at the cost of producing hydrogen, to produce zero emissions hydrogen, you need both renewable electricity and the electrolyzer, which is the device that takes electricity to split water into oxygen and our green hydrogen.

Electrolyzers themselves are quite expensive. Yeah. But this cost is likely to come down over time through deployment and as global production scale ramps up. Yeah. But. We think that the cost of electricity is more important for the cost of hydrogen because it makes up most of the cost of producing a kilo of hydrogen.

How expensive it is also depends on Whether you take that electricity from the grid in which case you’ll be paying for not just the wholesale price for electricity, but also the network charges. The alternative is building your own renewables, building behind the meter or dedicated renewables. That will get your costs to be cheaper, but that’s not something you can just do anywhere.

Alison Reeve: Yeah, that’s right. Like not everyone is going to have the space to do that. And the other thing as well is that you, you need. very, very large amounts of wind and solar in order to create enough hydrogen to replace some of the things that we use industrial fuels for now. And this all sort of adds to the expense, right?

I think it’s really good that you raise that point about moving it around because what this will come down to for users is they’re going to need to make choices. If you want to be close to your renewable energy source with your, when you’re producing your hydrogen in order to avoid, as you were saying, the network charges and so on.

Well, that might mean you’re further away from your end user, which means you have to sort of make a choice about are you going to move the electricity, or are you going to move move molecules of hydrogen. Now, one of them, you know, you move the electricity, well, you have to pay for power lines, but you don’t have to pay for pipes, or for trucks, or storage, and so on.

And vice versa, you might choose to move the molecules, but that means, you know, you save on transmission lines. But you might have to build special pipelines, you know, set up the logistics and all of that sort of thing. There’s also other factors that come into it. If you’re an industrial facility, often where you’re located is driven by other factors, like for example, is it cheaper for you to be near the particular ore that you’re using in your smelter?

Do you need to be near a port because you’re a big exporter? And all of these decisions are going to come into play. And I think this is the sort of the practicalities that people are really starting to grapple with. And the fact that whichever set of choices you end up making, It still looks like an expensive and complicated exercise.

Richard Yan: That’s right, and that’s one of the reasons that we say in the report, there are some uses for hydrogen that are just really not worth bothering with, or for the government to consciously support. In our report, we put light vehicles and using hydrogen to replace gas use in homes and commercial buildings in that category.

On the light passenger vehicle side, we think that, well, hydrogen fuel cell cars are competing with battery electric vehicles, which have the benefit of Of logistics in terms of having that existing significant logistical infrastructure of power lines to draw on already with hydrogen, you’ll need a whole new logistical infrastructure to make that work with high hydrogen fuel cell cars on using hydrogen to replace natural gas in homes.

We’ve made the case in a previous Grattan report that was released earlier this year, getting off gas that heating and cooking in homes and commercial buildings. is just much more efficiently, cheaply and cleanly done by using heat pumps and induction cooktops instead. And so Alison, there’s a clear need to be more strategic about hydrogen use.

There are some uses that just don’t make sense, as we’ve just discussed, and perhaps it’s the role of government to rule those cases out or to not provide support. Definitely. On the flip side, where do we think the the more, more promising uses of hydrogen?

Alison Reeve: So we looked at 11 different use cases in the report for hydrogen, and we assessed whether they were the best technical solution for decarbonisation.

What sort of supply chain they’d need to actually get access to hydrogen. The emissions abatement potential here in Australia. And then also whether those use cases could provide a future source of export income for Australia. And we sort of got three groups out of that. There’s the group that you just talked about, the ones where we said don’t go any further with these.

And then there’s a group where we think the prospects look really good and governments should start moving on those pretty much immediately. And then there’s a second group where we think the jury’s still out a bit. It’s still not clear whether hydrogen, whether and where hydrogen will be the best solution for those end uses.

So just talking about that prospective group, the ones that we landed on as being the most promising immediate uses. are using hydrogen to make ammonia, using it as part of the process of creating alumina, and using it to process iron ore into iron. Now, the reason that these are prospective uses are that Australia already does these things and we do actually quite a lot of them.

They’re commodities that are going to be in demand into the future, even when the rest of the world moves to net zero. We’re still going to need ammonia for fertilizer, and we will potentially be using it as fuel as well. We’re going to need alumina to make aluminium, which is a really important component in a lot of electronics and electricity system stuff, as well as other things.

And of course, we’re going to keep using steel because we’re still going to want cars and buildings and tables and all of the other stuff that we make out of steel. The reason that we do a lot of these at the moment is that we have the minerals here. So we have bauxite to make alumina and we have iron ore to make iron.

Those are some of our biggest exports at the moment. And if we can put those together with our renewable energy endowment via hydrogen, it feels like we get a significant economic prize out of doing that. The last thing I’ll say about those three commodities as well is that they have. Very few alternatives to using hydrogen in the case of alumina and iron There are some ways that you can use electricity directly But that is actually a more expensive and less efficient pathway than using hydrogen and with ammonia you actually don’t have an alternative to using hydrogen because hydrogen is a chemical part of ammonia.

And so we have to find a way to do that cleanly.

Richard Yan: Yeah. So that all sounds very positive, but we haven’t talked through the additional green premium that will, will be incurred by producers of these commodities once they sort of go towards low emissions production.

Alison Reeve: That’s right. So the, the green premium is the extra that you have to pay to go down the green production pathway. And it’s, it sort of comes out as, as what you’re paying to do that, compared to staying on the conventional pathway, which is the one that has carbon emissions in it, where that premium comes from is, is both from the fact that you might have to retrofit your existing asset with new kit.

Go, going back to what I was talking about before it’s. There are only very few cases where you can just drop hydrogen in and do nothing else. Or, particularly in the case of iron and steel, you have to build an entirely new asset in Australia. The other part of the green premium, of course, is the cost of the hydrogen itself, and that is really expensive.

Richard Yan: Yeah, so a large chunk of the green premium comes from that sort of hydrogen. Clearly, one of the things that can be done there by governments is to help try and reduce that cost. And as we’ve discussed earlier, the largest component is is the cost of electricity and the cost of hydrogen. We do have a renewable energy potential in Australia.

We have a lot of land with great potential. solar and wind potential, but I think it’s perhaps more correct to call it a latent potential. There’s a lot of hard work that needs to be done to make it happen. And you hear a lot of a lot of this in the news at the moment, the rollout of renewable energy is running into a bunch of barriers, community opposition to transmission and renewables builds reliability issues due to underinvestment in dispatchable capacity and the closure of coal fired power stations.

This is one area that the government is already putting in a lot of effort, but it’s absolutely needed if it wants to realize it’s renewable energy and a superpower vision.

Alison Reeve: Yeah. I think in the report we said, this is kind of the backbone, right? This is the thing that if you don’t get this right, then none of the rest of the vision works.

Richard Yan: That’s right. And to put that into scale even a modest level of ambition for a hydrogen industry in Australia will need a lot of electricity and a lot of renewable generation. An estimate that we had in the report is that to move existing ammonia, alumina, and iron production in Australia onto using hydrogen requires about 70 terawatt hours of electricity.

That’s about 40 percent of what was used by the entire national electricity market in 2022.

Alison Reeve: That was huge. That really blew me away when you brought me that calculation. I know it’s just like that, I think, puts some perspective around how much hard work you’ve got to do to make any of this happen. Of course, the other thing about that cost gap between green production and grey, what you call grey production, or going down the traditional pathway, is the role that carbon pricing plays.

So the conventional production methods are going to be more costly by comparison to the green ones, if the people who are using those pathways are required to pay for their emissions. The federal government safeguard mechanism now does require large Australian industrial facilities to pay for their emissions, but the price it imposes is pretty small, and it’s not enough to make the alternative of using hydrogen attractive at the moment.

Richard Yan: Also, carbon prices are a quite blunt instrument. Yeah. It applies to many sectors across the economy. All heavy industrials in, in the case of the safeguard mechanism, it might also not be the right tool to be using.

Alison Reeve: That’s right. You know, you could, you could try and bump the carbon price up in order to help hydrogen out.

But what that might mean is it means for other commodities, they suddenly become uneconomic for some reason. And we don’t, you know, we don’t necessarily want to do that. And that was why in the report we think, well, there’s this other lever that governments can use. And that one is, is industry policy. So rather than just letting market forces determine what.

Industries we end up with, government could decide to put incentives in place to give particular industries a bit of a leg up. And there’s actually three reasons why they might want to do this. The first one is that markets don’t really give you adequate incentives around risky new technology. And that’s particularly the case for low emissions technology, because that tends to be very capital intensive.

But also because there’s a case for shifting to low emissions technology. But it’s underpinned by our need to reduce emissions. This is sort of the second reason why markets aren’t necessarily the only tool you want to use. And that’s because that view about how quickly we need to reduce emissions, and by how much, and who needs to do it, is often very much about decisions that governments make, rather than decisions that markets make.

And that makes it difficult if you’re going to a bank to try and borrow money to do this, right? The third part of it, of course, is the net zero deadline. We’ve got 26 years to get to net zero, maybe less, and during that time, we have to fundamentally restructure the Australian economy. And markets are not good at managing structural change at high speed in conditions of uncertainty.

And so for these reasons, we reckon industry policy is what you need. And we need to use that as a way of giving hydrogen a leg up. The thing is, though, we think we need to do it in quite a targeted and quite a strategic way.

Richard Yan: That’s right. And in the report, we suggest a specific type of policy to do it in that targeted way.

We call the specific policy that we suggest is a policy of providing contracts for difference, or CFDs. That’s something that governments should use to help accelerate the development of green industries, including ones that might use hydrogen. I wasn’t familiar with CFDs when I first started on the report, but it seems to be, wherever I look now, a policy tool that governments seem to be using quite a bit in the energy and climate change space.

The EU are using it to underwrite large Large scale renewable investments here in Australia, New South Wales and ACT are using CFDs for renewable projects and energy. And the federal government is also using CFDs or things with CFD characteristics. Through including in the expanded capacity investment scheme and it’s hydrogen head start program.

Alison, can you explain what these contracts for difference are and what we’ve suggested in the report?

Alison Reeve: If you’re producing a green commodity, you’ll probably have higher production costs than competitors who are using traditional fossil fuel production. So that means you might have trouble finding a buyer.

And it means your project is riskier and it’s harder for you to go to the bank and borrow money in order to do your project. A contract for difference helps you to share this risk with the government. And kind of like it says in the name, it’s a contract, and it is based on the difference between what you can afford to sell at, that’s often referred to as a strike price, and the market price, which is what people are willing to buy, willing to pay to buy your product.

If the market price is lower than your strike price, then what the contract does is says that the government will make up the difference to you. If the market price is higher than the strike price, so you can find someone who’s willing to pay more to have a green commodity, then you pay the government for the difference between the market price and the strike price.

Because we know the strike price in advance, That gives you certainty over your revenue and that makes it much easier if you want to borrow money to do your project because the person you’re borrowing from understands where the money is going to come from to pay back their loan. Now as your production costs decrease and as more people get willing to pay more for green commodities, the gap between your strike price and the market price will get smaller and the government subsidy will fall away.

In the case of using hydrogen for ammonia or steel or alumina production in Australia, what this would do is help to underwrite an early shift to green production of these commodities so that Australia is positioned to get more economic value out of them in a decarbonising global economy.

Richard Yan: So, that’s what we should do for ammonia, alumina, and iron, as well as some other green commodities.

Alison Reeve: There is this other group, though, that we talked about in the report.

Richard Yan: Yeah, so there, there are some uses of hydrogen or a derivative where Hydrogen could be a viable option in decarbonizing those activities, but where the case for using hydrogen isn’t quite as clear right now. So I think there’s probably a couple of things in this space.

You have using hydrogen for heat, especially high temperature heat for industrial use and manufacturing. You have using hydrogen or a derivative. As a transport fuel, the derivative could be synthetic fuel or methanol, and you could use that in applications such as heavy road transport, planes and ships, and also hydrogen can also be used as a form of dispatchable storage. for the for providing electricity to the grid.

Alison Reeve: So playing the role that batteries or gas turbines are playing at the moment.

Richard Yan: Exactly. And it can do it in a zero emissions way. These are some diverse uses of hydrogen, but there are some common characteristics across some of them, which mean we put them in this category together.

I think it’s not quite clear across all of these uses, what role hydrogen technically will play in the future. For some of these cases as well, Australia doesn’t have an existing industrial base to build upon. And there’s also no clear guidance yet from governments in the form of sectoral based strategies or carbon signals.

So I think the role of government in this space instead should be to set those sector wide decarbonization policies and also work to assess and plan for the role of hydrogen in broader energy and decarbonization policy frameworks.

Alison Reeve: That’s really one of the key messages of the whole report, wasn’t it?

That It’s time to stop thinking about hydrogen in isolation, and we need to start considering how it fits into the overall picture of decarbonizing the Australian economy, and then doing the hard work that’s really required to make that a reality. If you’d like to know more about hydrogen and what Grattan thinks governments should be doing about it, the report’s available to read on our website, or you can let us know what you think via social media.

We are @grattaninst on X, formerly known as Twitter and @GrattanInstitute on all other platforms, including now Blue Sky. This report like all of Grattan’s work over the last 15 years was made possible by the generous support of our donors. If you’d like to support our work, you can make a donation via our website at grattan.edu.au/donate.

Thanks for listening today.