When will Australian hydrogen projects start turning a profit?

The Albanese Government is aiming to make Australia a global leader in hydrogen by 2030. So far, it has committed $2 billion towards the Hydrogen Headstart program – designed to encourage investment and to “help bridge the commercial gap” for early projects.

While the program is a welcome start, it’s only natural for investors to wonder when Australian hydrogen projects are likely to become profitable!

Here’s an overview of the hydrogen landscape as it stands now, some insight into the challenges facing the nascent industry, and where the eventual profit might be.

Hydrogen production: key investors and users

Hydrogen investors are diverse and include private companies (energy, tech and motor vehicle firms), venture capitalists, electrolysis companies and of course the government, as it looks for ways to meet Australia’s climate targets.

Examples of major investors and their activities include Fortescue Future Industries (green hydrogen), Sumitomo (liquefied hydrogen pilot projects) and Toyota (hydrogen fuel-cell electric vehicles).

The key buyers and users are equally diverse. Demand is likely to occur wherever there is strong need for industrial heat (e.g. green steel or iron), as well as for electricity production and/or energy storage in the way of fuel cells.

Other demand areas may include the transport sector (heavy haulage and public transport), maritime companies, aerospace and remote mining.

Hydrogen could play an important role in replacing natural gas, and as a backup to diesel on remote mining sites such as the Pilbara.

What is driving the growth in hydrogen?

Horizon Power CEO Stephanie Unwin considers the main drivers to be government commitments to the Paris Agreement, the competitive advantage hydrogen offers commercial companies, and international demand. Horizon has developed a demonstration project in Denham (WA) that uses solar to power a hydrogen electrolyser.

Joel Gilmore, the General Manager of Energy Policy and Planning at Iberdrola Australia, says key growth factors include the desire to decarbonise the supply chain, and the commercial demand for end-products such as green metals.

Iberdrola Australia is developing one of the largest green hydrogen plants in the world in Tasmania.

Gilmore believes there is “almost unlimited potential” for hydrogen in Australia – especially given land availability and our proximity to Asia, which could help us build a strong export industry.

The main challenges to creating profitable projects

Key challenges include the high upfront cost of projects, the approvals process, environmental considerations, the technology requirements and – very importantly – finding someone that wants to buy the product!

“We need to produce at scale for reasonable cost in order to compete, especially given the US Inflation Reduction Act,” Unwin says.

Getting projects off the ground also requires considerable community consultation on heritage needs and land-holding interests – which can take several years.

“The affected communities can get pretty annoyed if they see no benefit in it for them,” Unwin says.

Unwin also sees the lack of a skilled workforce as a hurdle. However, she says there is no reason we could not re-skill and capitalise on the existing and oil and gas workforce.

Gilmore agrees that it will be difficult to compete with the US, especially given the $369 billion the Biden Administration has set aside for clean energy projects as part of the Inflation Reduction Act.

He says accessing the global supply chain is a key challenge for Australia, citing the need for electrolysers as an example.

“The electrolyser industry is still ramping up globally. Can I compete with, for example, the United States? Am I going to be able to pay as much for my electrolyser as they are, when there’s limited supply?”

Overcoming these challenges means building relationships. He points out that no one is about to deliver a single piece of equipment to Australia. But with a renewable energy target, clear trajectories for decarbonisation, and a growing industry, it becomes about building a relationship to supply not just one unit, but a thousand of them over a decade.

Gilmore also believes we really need to value reducing emissions. He sees the Hydrogen Headstart program as a fantastic first step, and a clear signal that the government is serious about a hydrogen economy.

Where will profit likely lie – the domestic or export market?

“It depends on price, and the cost of production,” says Unwin. “In the short-term, we will need a balance of both.”

However, she sees big opportunities for hydrogen in Australia’s mining sector, as a reliable backup for diesel and energy storage.

Gilmore says it really depends on how quickly industries move, as well as what costs are involved. And while he sees big export opportunities, he says we should not be “putting all our eggs in any one basket”.

He considers that Australia is in a prime position to explore the potential of hydrogen.

“If we don’t do it, it’s ours to lose. (We’re) not saying this is definitely the answer…. in five years’ time there might be a technological breakthrough in electrical storage, or we find different pathways and hydrogen might be smaller than we expect. But it’s also potentially much, much bigger. It would be silly not to take a serious look at this now.”

How can we get to profitability?

Both Gilmore and Unwin believe having the right policy frameworks in place is crucial for profitability, and that Hydrogen Headstart is a good first move.

Gilmore considers government support to be important for opening up both export and domestic markets, by providing the certainty and financial support companies need.

“We need to look at ways to encourage competition,” says Gilmore.

“But the government needs to avoid ‘picking winners’ that look good on paper.”

He also points out that the Renewable Energy Target will be important for transforming the electricity sector, and believes it should be increased beyond the current level of 82% by 2030.

Unwin considers the quickest way is to create a carbon pricing mechanism like Canada’s. She says that change happens when we “make the new thing good” – in other words, when stakeholders can see the benefit of making such changes. This might include not only government incentives but also improvements to brand reputation and ability to attract investment.

She also believes building strong trade relations is crucial – especially within the Asian markets.

So back to our original question – when will projects be in the black?

Gilmore’s short answer is “when they’re built!” He also says it will take time to determine if the financial models are good, and if so, he anticipates we should get to profitability before 2030.

Unwin says projects will need a “decent amount of time” to get to profitability. She anticipates that in the absence of government support it won’t be happening before 2030.

In the meantime, Unwin says there is an ongoing urgent need to invest in R&D and pilot projects – with the aim of “getting projects out of the lab, and into deployment.”