Power-to-X: Redefining Australia’s Energy Exports

As the world shifts to a net zero footing, nations like Australia – whose economies heavily rely on exports of natural gas, coal, and raw materials for carbon-intensive industries like steelmaking – are at risk of being left behind. For many, the obvious answer is power-to-X.

Australia is a nation built on its vast natural resources, and its economy is still largely powered by its mineral wealth. In revenue terms, Australia’s exports of iron ore, coal, and gas dwarf the second major source of foreign income, which comes from its agricultural industries. But the world is changing. Nations are increasingly turning to clean and low-carbon energy systems. This trend clearly threatens Australia’s long-term prosperity, given its reliance on global fossil fuel markets and carbon-intensive industries like steelmaking.

Nonetheless, while Australia’s economy is potentially at risk of being left stranded as an anachronism in a modern era, the net zero energy transition also represents huge opportunities. Demand is soaring for clean molecules that can serve as low-carbon analogues for their fossil fuel equivalents. Hydrogen is an obvious example of a replacement for natural gas, but there are many others. Known as e-fuels, these are drop-in alternatives to liquid fossil fuels like diesel, petroleum, or Jet A and will inevitably drive the global economy in the coming decades. Creating these fossil fuel alternatives invariably requires clean electrons in a group of processes collectively known as power-to-X.

For Australia – which is blessed not only with vast mineral wealth but prodigious renewable energy resources too – power-to-X could be the route to long-term prosperity, exporting green hydrogen and other renewable energy-based products like e-fuels and green steel.

Delivering Australia’s power-to-X ambitions

Recognizing this as an opportunity, the latest Australian budget has allocated substantial funding to seed developments, and industry focused on hydrogen production and other power-to-X technologies. For example, the 2023 Federal Budget established the A$2 billion Hydrogen Headstart initiative. Administered by the Australian Renewable Energy Agency (ARENA), the program is designed to foster large-scale green hydrogen projects by backing early projects to reduce the cost of green hydrogen produced using renewable energy and will scale up the country’s hydrogen sector.

Announcing the scheme, ARENA CEO Darren Miller noted that the projects being developed under the Hydrogen Headstart umbrella will be among the world’s largest and will create thousands of regional jobs and help reduce industrial emissions in line with climate targets. The initiative is expected to support two to three flagship hydrogen projects that could potentially deliver up to 1 GW of electrolyser capacity by 2030. Expressions of interest are expected to open in early 2024 for project selection. The funding is designed to bridge the current gap between the cost of hydrogen produced from renewable energy and the market price, which is based on steam-reformed natural gas.

To date, ARENA says it has already provided A$236 million to 43 renewable hydrogen projects, including A$25 million this year for hydrogen R&D and a further A$50 million for four hydrogen projects as part of the joint Australian-German HyGATE initiative. Clearly, the latest budget dwarfs previous efforts and signals a major shift in policy. As Treasurer Jim Chalmers said in his Budget speech: “Seizing these kinds of industrial and economic opportunities will be the biggest driver and determinant of our future prosperity.” Indeed, according to a recent Future Market Insights analysis, global power-to-X is expected to expand at a combined annual growth rate approaching 10%, reaching a market value of US$484 million (A$730 million) within the next decade. This is still small beer compared with the fossil fuel sector, but is certainly indicative of massive potential.

However, while Australia clearly has an unparalleled opportunity to become a global green hydrogen and power-to-X powerhouse, competing nations are also setting out their ambitions to stake a big claim in the power-to-X space.

China is a major threat to Australia’s power-to-X plans. According to the International Energy Agency, China is already the world's largest producer and consumer of hydrogen, while the government has set out ambitious plans to reach green hydrogen production of 100,000-200,000 tonnes per year by 2025 that will be used in transport, energy storage, and industry.

The passage of the Inflation Reduction Act (IRA) in the US also represents a game-changer for hydrogen, generating huge interest and commercial-scale deployments with its provisions for clean energy tax credits and hydrogen incentives. This year, the US Department of Energy (DoE) said it intends to invest up to US$1 billion (A$1.5 billion) in a demand-side initiative to support the hydrogen market under its clean hydrogen hubs (H2Hubs) scheme. Six to 10 H2Hubs will be announced later this year, with eligibility for up to US$7 billion (A$ 10.6 billion) in federal funding.

A report from the Hydrogen Council earlier this year notes that about 2.1 million tonnes per year of clean hydrogen production has already passed a final investment decision, in addition to the 800,000-tonne annual operational capacity. Of the renewable hydrogen projects moving forward, China is the largest market at 35% share. It is followed by the Middle East and North America with about 20% each. Europe trails, accounting for less than 5%, but there are particular highlights. In March, for instance, Denmark launched a DKK 1.25 billion (A$280 million) subsidy scheme to support power-to-X projects with a goal of reaching 4-6 GW of electrolysis capacity by 2030.

Becoming a global powerhouse

While these kinds of schemes from global economic giants like China and the US put Australia’s federal government measures into sharp contrast, there is still scope for a significant scale-up driven by the private sector and supported by the government.

For example, iron ore billionaire Andrew Forrest has set up a clean energy venture, Fortescue Future Industries (FFI), to drive forward green hydrogen projects with an estimated war chest in excess of A$1 billion. Among recent projects, FFI and Channel Infrastructure are to investigate the pre-feasibility phase of a 300 MW green hydrogen facility at Marsden Point in New Zealand to produce sustainable aviation fuel. If the project progresses, it could supply some 60 million litres of e-fuel to the aviation sector per year. More recently, FFI made a power-to-X play in the US with the acquisition of the Phoenix Hydrogen Hub, which is developing a green hydrogen project near Phoenix, Arizona. Phase one of this project plans an 80 MW electrolyser and liquefaction facility capable of producing up to 12,000 tonnes of hydrogen annually. Closer to home, in Queensland, FFI is close to starting production at a 2 GW electrolyser factory that will be used to produce the company’s in-house technology. Construction on the A$116 million plant began last year, originally in partnership with Plug Power.

Utility group Origin Energy is progressing its own Hunter Valley hydrogen hub with A$70 million in Federal government funding to support a commercial-scale hydrogen supply chain in the Newcastle industrial area. Given the final go-ahead, the project's first stage consists of a 55 MW electrolyser, expected to produce up to 5,500 tonnes of green hydrogen a year from around 2026.

Beyond power-to-X, Australia’s remarkable renewable energy resources are attracting inward investment too. Australia is expected to feature heavily in Canadian fund management firm Brookfield’s plans for reportedly up to A$30 billion (EUR17.9 billion) of new renewable and storage assets in Australia. There’s scope for some of this power to be diverted directly into exports too, for example if the Australia-Asia Power Link project, which could deliver Australian renewable energy to Singapore via an HVDC cable, goes ahead. Developers SunCable, now owned by Grok Ventures, are planning to anchor the project around what is flagged as the world’s largest solar array in the Northern Territory with a capacity of up to 20 GW.

There are clearly multiple positive developments underway and evidence of gathering momentum behind power-to-x and a new national economic model. But for Australia to compete globally and replace its revenues from existing exports, it must scale both renewable energy infrastructure and electrolyser capacity as a matter of urgency, as well as all the related supply chains. The energy transition is happening, and given Australia’s abundance of natural resources, it is well-placed to capitalise on this unique opportunity. The alternative is economic stagnation.