ESG Focus: Hope For Green Hydrogen

This story features FORTESCUE LIMITED, and other companies. For more info SHARE ANALYSIS: FMG

FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future: 
https://www.fnarena.com/index.php/financial-news/daily-financial-news/category/esg-focus/

ESG Focus: Hope For Green Hydrogen?

The Federal Government appears to have confirmed its commitment to Australia's nascent green hydrogen industry in this week's budget, but the low dollar commitment at a critical juncture raises a big question mark.

-Breakdown of the Federal Budget Commitment 
-Government reiterates its commitment to green hydrogen
-Gladstone, Whyalla and the Hunter targeted as recipients
-List of major ASX companies with green hydrogen plans in targeted regions
-Analysts response

By Sarah Mills

The Australian Federal Government appears to have confirmed its commitment to Australia’s nascent green hydrogen industry, announcing a $2bn Hydrogen Headstart program. 

The funding is the government’s first salvo against the US Inflation Reduction Act and European Green Deal subsidies to protect Australia's pipeline of green hydrogen projects – the largest in the world.

But the relatively low dollar commitment in the global scheme of things at a critical juncture in the industry’s development suggests considerable timidity on behalf of the government.

Fortescue Metals Group ((FMG)) Chief Executive Elizabeth Gaines tactfully described it in an ABC interview “as a good start”.

But it falls well short of the $15.5bn industry investment that consultancy Deloitte Economics estimated in a February report is needed to combat global subsidies. Deloitte advised a failure to respond would cause Australia to export -65% less a year than it would otherwise.

To add insult to injury, only $156m of that will be spent in the next four years, with the bulk of the $2bn to be deferred past the next election cycle.

This hardly indicates support, particularly coming at a time when Australia’s green hydrogen industry most needs support and incubation.

In the Albanese Government’s defence, it is early days in its term, and the tender process alone is likely to take a year or two.

The government is also starting well behind the eight-ball given the general disinterest of its predecessors. 

But one would assume that would be all the more reason to up the ante – if one was truly committed that is.

Breakdown Of The Federal Budget Commitment

The government’s $2bn Hydrogen Headstart program represents half of the Federal Budget’s total renewable energy spending package, which is in itself a strong “sign” of support.

The program does not target capital investment but revenue support, the government allocating an undisclosed credit per kilogram on the price of production. 

The project attempts to bridge the gap between the market price of hydrogen and the production cost of hydrogen for large-scale renewable contracts.

The green hydrogen credit would need to equate to $2kg price to be competitive with US prices. 

To put this in perspective, the US government has announced a hydrogen production credit of up to US$3kg.

Without a specific dollar-commitment the government’s Hydrogen Headstart program is essentially meaningless, so one assumes a second, more material announcement will be forthcoming in the not-too-distant future.

The government explained its choice to adopt a production credit over capital investment.

It said that industry consultation highlighted that capital expenditure support was less critical than near-term operating costs, given green hydrogen is above the market price of hydrogen (something we all know).

However, the industry has been very vocal in the past year about the acute need for capital investment as well. IRA subsidies can fund up to 50% of the capital costs of a project.

Only $156m of the total $2bn Hydrogen Headstart package will be spent over the next four years.

Of that, $38.2m will be allocated to a Guarantee of Origin scheme (an emissions certification scheme) for clean energy, “in particular hydrogen” says Treasury, to boost the country’s green hydrogen export credentials.

Another $5.6m will fund a Department of Climate Energy Environment and Water-led analysis of the implications of global competition for clean energy industries for Australia – better late than never – due at the end of 2023.

The study, conducted in conjunction with the Australian Renewable Energy Agency, will identify actions to “further catalyse clean energy industries, ensure Australian manufacturing competitiveness and attract capital investment”.

It would be reasonable to expect the study should clarify the government’s position and options in relation to green hydrogen, paving the way for further industry announcements in early 2024.

Meanwhile, the Capacity Investment Scheme to unlock about $10bn of investment in clean dispatchable power to supply grid reliability and security is still in play, and the budget makes mention of Capacity Investment scheme auctions in 2023.

A month ago, the Federal Government passed its $15bn manufacturing investment scheme, the National Reconstruction fund, through the Senate, which aims to invest in renewables and low-emissions technologies, among other things. The investment can be in the form of loans, equity and guarantees, and could help bridge a potential finance gap during a period of tighter monetary policy. An initial $5bn is available, with the balance to be made in installments from June 2029. 

And there is the Clean Energy Finance Corporation in the mix, which received $1bn in the budget (albeit for home upgrades).

Gladstone, Whyalla And The Hunter Targeted As Beneficiaries

The Hydrogen Headstart program aims to fast-track large-scale renewable hydrogen projects to position it for 1 gigawatt of electrolyser capacity by 2030 through two or three flagship projects.

A competitive tender will be undertaken to select the projects and the government has identified Gladstone, Whyalla and The Hunter region as the most likely beneficiaries.

Expressions of interest are expected to open in the first quarter of 2024.

Fortescue Metals is the odds on bet for subsidies in the Gladstone region. Fortescue Future Industries owns Squadron Energy at the North Queensland Super Hub, and its $913m electrolyser factory’s first stage is due for completion this year.

South Australia plans to build Australia’s first 200MW green hydrogen power plant at Whyalla. Fortescue Future Industries is understood to be one of roughly 60 international companies bidding to participate in the $593m project. 

In the Hunter Valley, Origin Energy ((ORG)) has signed an agreement to collaborate on a Hunter Valley Hydrogen Hub and to use a grid-connected electrolysis to produce green hydrogen for the industry’s heavy transport operators.

AGL Energy ((AGL)) plans to develop the Hunter Energy Park and the Hunter Energy Hub and is exploring developing a hydrogen and ammonia facility at the Liddell and Bayswater power station sites.

Woodside Energy ((WDS)) appears to have missed out, given it has green hydrogen plans for Perth, Tasmania and Oklahoma, but Bell Bay has been nominated an area of potential support by the Albanese Government.

Rio Tinto ((RIO)) also has interests in Bell Bay and Pilbara, another area more broadly targeted as an area of government support.

Macquarie Group ((MQG)) also has an interest in the Pilbara’s Australian Renewable Energy Hub.

ReNu Energy ((RNE)) has an interest in Bell Bay.

A further breakdown of Australia’s green hydrogen projects can be found at this link: https://www.fnarena.com/index.php/2023/04/26/esg-focus-aust-hydrogen-projects-left-hanging/

Government Reiterates Its Commitment To Green Hydrogen

The major positive to be drawn from the package was the government’s avowed commitment to Australia’s Hydrogen Industry.

Federal Treasurer Jim Chalmers described the global shift to clean energy as “Australia’s biggest opportunity for growth and prosperity”, and said the government was making the “biggest ever investment in Australia’s energy transformation”.

He added the program would enable Australia to be a “world leader in producing and exporting hydrogen power”.

“Seizing these kinds of industrial and economic opportunities will be the biggest driver and determinant of our future prosperity,” said Chalmers.

This follows earlier pronounced commitments to the industry.

The Albanese Government has promised $40bn to make Australia a renewable energy superpower. Australia has the largest pipeline of renewable energy projects in the world.

The government has committed to spend more than half a billion dollars to build regional hydrogen hubs across Gladstone, the Hunter, Bell Bay and Pilbara.

Analysts’ Response Muted

Given the relatively small dollar amounts involved, analysts’ responses were understandably muted given it is unlikely to shift the money dial in the near term.

Macquarie identified Fortescue Metals, Viva Energy ((VEA)) and Origin Energy as likely beneficiaries.

Morningstar believes the funding falls short of that needed to incentivise Australian hydrogen production, but expects more support is likely to emerge in the form of tax breaks.

This analyst also believes Fortescue Metals Group stands to be a major winner from the announcement, but adds that iron ore is likely to dominate the company’s earnings for the foreseeable future.

Otherwise, immediate commentary was thin on the ground.

Economy And Inflation Likely To Weigh

Much also depends on the global economy and domestic inflation.

The government announced its expectation of a $4bn budget surplus, thanks to strong commodity prices, a strong jobs market and a boost in net migration.

Should global demand for iron-ore, copper and other critical minerals remain strong, a surplus might continue (although the pundits are expecting social welfare expenses will weigh heavily going forward).

If so, and should domestic inflation cool, it could free up funding to invest in the broader green transition, firing growth (surpluses typically imply a withdrawal of funds from the economy and slower growth, which might be a preferred option should inflation persist).

Meanwhile, State governments are also in play.

Australia will not want to wait long. Industry members and experts have warned Australia is at a tipping point due to the US subsidy scheme and that we will ignore the green hydrogen prospect at our peril.

So yes, hopes for Australia’s green hydrogen industry remain, but the industry cannot live on hope, and high promises alone.

Port Of Newcastle’s Hydrogen Hit 

The news was good timing for the Port of Newcastle, which announced today (May 10), it would collaborate with 10 global energy “enablers” to accelerate the energy transition through the Platform Zero Global Partnership for Hydrogen Innovation.

CEO Craig Carmody says the collaboration will allow the Port and Region to learn from international Port and to contribute to the development of a scalable clean energy trade pathway, supporting storage, transportation and scaling of innovative hydrogen technologies.

The alliance includes ports and innovators from Australia, Brazil, Chile, Portugal, the UK and the Netherlands.

Yesterday, the Port of Newcastle was named one of four finalists at the World Hydrogen 2023 Awards in the Port of the Future Award category.

FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future: 
https://www.fnarena.com/index.php/financial-news/daily-financial-news/category/esg-focus/

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

FNArena is proud about its track record and past achievements: Ten Years On

Click to view our Glossary of Financial Terms