Hydrogen Headstart Program Consultation

HYDROGEN HEAD START
VIEW at consultation paper

1st August 2023

Questions:
2.1 Please provide any feedback on the proposed eligibility requirements. Are there any
other requirements the Program should consider?
The current eligibility requirement is sufficient. However, if necessary, when the program
gets reviewed, additional eligibility requirement, such as environmental impact assessment
could be added. Other considerations are biodiversity and sustainability (CO2 and NOx
emissions)

2.2 Is a minimum deployment size of 50 MW appropriate for the Program?
Minimum deployment requirement of 50MW is reasonable and may be able to filter out
unnecessary competition as well as fast tracking application process by DCCEW. However, we
are also concerned that it may exclude smaller-scale projects that could still contribute to the
promotion of renewable hydrogen production. Therefore, the Program could consider
offering separate funding options or categories for smaller-scale projects to ensure that all
eligible projects have an opportunity to participate in the program. Other suggestions are:
the possibility to apply different MW size for different states (or between east coast and west
coast) or apply with a suite of small projects.

2.3 Are there, benefits considering a suite of projects sizes, with both large and smaller scale
projects (for example less than 50 MW) being eligible?
Yes, there are benefits to considering a suite of project sizes and making both large and
smaller scale projects eligible for funding.

Firstly, smaller-scale projects can often be more flexible and quicker to deploy than large-
scale projects. This can be particularly important for promoting the uptake of new
technologies and approaches, as smaller projects can help to prove the viability and
effectiveness of these approaches before scaling up to larger projects. By making smaller-
scale projects eligible for funding, the program can incentivize innovation and
experimentation in renewable hydrogen production, which can ultimately lead to more cost-
effective and efficient solutions.

Secondly, smaller-scale projects can also be more accessible to a broader range of
stakeholders, including community groups, small and medium-sized enterprises, and local
governments. By supporting smaller-scale projects, the program can ensure that a diverse
range of stakeholders can participate in the transition to renewable hydrogen production,
which can help to build support and momentum for the broader goals of the program.
Finally, by supporting both large and smaller scale projects, the program can promote a more balanced and diversified portfolio of renewable hydrogen production. A mix of large and smaller-scale projects can help to ensure that the benefits of renewable hydrogen production are distributed more widely across different regions, sectors, and communities, which can help to build resilience and reduce the risk of supply chain disruptions.

Therefore, offering a suite of project sizes can be a strategic approach to promoting the uptake of renewable hydrogen production and ensuring that the benefits are shared equitably across different stakeholders and regions. However, it is important to be clear on the rules of eligibility if different sizes need to be considered.

2.4 Are there, benefits considering projects that may only have scale if aggregated across multiple, but regulated sites?
That, certain helps in particular in States or area where it is not feasible to have co-located production facilities (say both RE and GH2) or under transportation use case where location can become a constraint because it has to close to the demand load.

2.5 Other international schemes have sought to implement additional requirements of the renewable energy used in hydrogen projects such as new build or time matched renewable energy. Please provide your views on any additional requirements the Government should consider for the Program in relation to renewable energy.
Right now, we recommend that the requirement of RE should be as relax as possible given the fact that it reduces the burden for the H2 industry to source their green energy. So long as the project can source power from a green source directly (or via green cert.). It should be considered by The Program. When the industry starts getting matured and indeed dedicated
RE source can be built easily. The Program could then consider requiring that the renewable energy used in hydrogen production is sourced from projects that are located in close proximity to the hydrogen production facilities.

2.6 Some International schemes have limitations on proposed end uses of hydrogen such as the UK scheme which specifically excludes gas blending. Should any limitations be placed on the end uses eligible for the Program?
Not at the early stage where the industry is still trying to explore the possibility on different use case. On Gas blending, we noted that there are many initiatives by Australian companies to achieve at 10% renewable gas usage according to their network. It is a long-term goal and the HeadStart program will help to facilitate for the growth. Our view is that only after such goal is being reached, then perhaps a review should be done to examine for more continuous support. Besides, by support H2 on Gas blending, it would open the door for any
H2 production for more use cases which could give more merit and benefit for potential H2 producers. The Govt. should have complimentary policies in helping and incentive the industry and end users to change equipment to better adopt 100% H2.

2.7 Other international schemes consider both export and domestic use of hydrogen as eligible while others specifically exclude export projects. How should the Program consider projects with proposed export offtake and the extent to which this offtake may support support the development of an Australian hydrogen industry or other additional benefits to
Australia?
The Program should carefully consider projects with proposed export offtake, taking into account the potential benefits and risks associated with these projects. Export projects could help to support the development of an Australian hydrogen industry by creating new markets for Australian hydrogen and promoting the development of the necessary infrastructure and supply chains. However, it is also important to ensure that these projects do not come at the expense of domestic hydrogen use or the broader energy and climate policy objectives.

One approach could be to prioritize projects that have a domestic component, such as projects that have a dual-use or export/domestic split of hydrogen production. This could help to ensure that the development of export markets is coupled with the development of domestic hydrogen markets, which can help to promote the uptake of hydrogen and support the broader energy transition.

Another approach could be to require that projects with proposed export offtake demonstrate additional benefits to Australia, such as the creation of local jobs, the development of new technologies or supply chains, or the promotion of sustainable development. This could help to ensure that the export of hydrogen supports broader economic and social goals, and is not solely focused on the export of a commodity.

2.8 The proposed GO scheme will be used to support the verification of hydrogen production. Are there projects where this would not be suitable? Should the Program apply a maximum emissions intensity for hydrogen production on a project lifecycle basis?
We do not recommend a maximum emissions intensity for hydrogen production on a project lifecycle basis; however it can be used to valuate with points. We also believe that H2 production projects that is grid connected may still have some difficulties to accurately verify the renewable portion of the production through the GO Scheme. In such cases, alternative verification mechanisms may need to be considered. It may not be appropriate in all contexts, particularly in cases where there is limited market demand for certificates or where the cost of certificate creation and trading is prohibitively high.

4.1 Please provide feedback on the proposed funding mechanism.
The requirement for applicants to nominate a realistic estimate of their production capacity and a value for the HPC that represents the difference between the expected sales price and the cost of production (inclusive of a justifiable return on capital) is a good way to ensure that funding is directed towards economically viable projects. However, we also wanted to highlight three disadvantages or risks associated with the program, which are as follows:

1. Off-taker's share: One disadvantage mentioned is the amount taken by the off-taker, referring to the portion of the produced hydrogen that the off-taker consumes or purchases.
This can pose a challenge for projects relying on pay-or-take contracts, where the off-taker commits to purchasing a certain amount of hydrogen. The text suggests that this aspect may be difficult or even impossible to manage effectively.
2. Technology reliability: The second mentioned disadvantage relates to the reliability of the technology used for hydrogen production. As many electrolysers (devices used for electrolysis to produce hydrogen) are relatively new in the market, their performance and potential malfunctions may not be fully proven. The energy company involved would naturally strive to minimize any downtime caused by malfunctions or technical issues.
3. Inflation and project costs: The text notes that if a hydrogen project is phased or implemented in stages, the loan components of the project may increase over time.
Additionally, certain components required for the project may become scarce, potentially leading to increased costs. The HPC, as it stands, does not account for these inflationary factors, which can pose risks to project viability.

To address these disadvantages and reduce associated risks, the text suggests that the government consider partial risk reduction measures. It proposes exploring ways to mitigate the off-taker's share issue, ensuring better technology reliability, and accounting for inflationary factors during the project's implementation. The goal is to create an environment that reduces risks for developers and promotes the growth of the hydrogen industry.

4.2 Are there, other design features or structures for the proposed Program that you think could be more impactful or efficient to catalyse large scale hydrogen production in Australia?
We recommend the following to improve the impact of the Program:
1. Incentives for local content - Provide additional incentives for projects that use
Australian equipment, technology and labour. This can help promote domestic
industry, create jobs and improve supply chain resilience.
2. Encourage collaboration - Collaborations between industry, research institutions and
government agencies can share knowledge, resources and accelerate hydrogen
development. This can drive innovation and lower costs.
3. Funding flexibility - Allow changes to the funding volume cap and HPC value over
time and reallocate funding between projects to ensure funding goes to the most
effective projects.
4. Focus on specific end uses - Focusing on key end uses like transport, industry and
power can help drive demand, lower costs and develop infrastructure.
5. International collaboration - Collaborate with other countries to create markets for
Australian hydrogen and develop necessary infrastructure and supply chains.

4.3 How should the Program treat additional Commonwealth or State Government funding or other support for the same project?
The Headstart Program should allow projects to secure additional government funding as hydrogen production is still in the early stages and requires risk capital. Additional funding would prove a project is worthy of support.

• The Program can determine the appropriate HPC level by comparing the economic
benefit with Headstart funding alone vs. combined with additional funding.
• The Program can update criteria when projects obtain additional funding by:
1. Coordinating with other government programs to ensure funding goes to the
most effective projects and avoid duplication.
2. Integrating with other government programs to provide a more comprehensive
funding approach and reduce application burden for developers.

4.4. How should the Program treat a project that has been able to attract international government investment such as that under H2Global? How can the Program best leverage this support?
Similar to our response on 4.3. The Program can also consider adding local element or focusing on giving HFC to H2

4.5 How should the HPC consider inflation?
We do note that inflation adjustment may add complexity to the Program and introduce uncertainty for developers. The key of considering inflation is really down to whether such inflation adjustment can directly link to the ongoing production cost (such as electricity price
(assuming grid connected), O&M costs, loan, etc). If such connection can be established, investor/developer should then be entitled for such inflation adjustments.

5.1 Other international schemes have varying upside arrangements such as the UK scheme which requires projects to share 90% of upside back to the government. Please provide your views on the proposed upside sharing arrangements for the program, including with reference to the methodology for sharing upside (a reduction in the HPC)?
Our views are:
• Implementing upside sharing arrangements, like 50/50 sharing of upside and reduced
HPC, depends on the goals of the Program.

• In the early stages, the Program should focus on attracting investment and developing
the hydrogen industry. Upside sharing could discourage investment at this stage.

• There is not yet a critical mass of projects and the industry is still emerging, so upside
sharing could impact the success of the Program and delay industry development.

5.2 Please provide any additional feedback on the proposal for recipients to repay
Government support in the event the sales price increases materially during the 10 year period.
We are sceptical of implementing repayment based on higher-than-expected prices, as there are many other factors to consider and price increases are unlikely in the short term.
Certainty of funding is more important to encourage investment.

6.1 Do you think the Program should include volume risk support? If so why?
Most definitely and particularly if the use case is for, say Mobility or gas blending. The user could fluctuate and may not meet the expected number of users at the expected period. For example, an investment decision could be made with reasonable estimate about the adoption of H2 trucks. However, if it turns out that truck industry had not adopted enough trucks in their fleet, it may not reach the anticipated demand. Volume risk support could help to support offtake agreements between recipients and customers.

6.2 If volume risk support is required, what is the preferred structuring of the mechanism?
The preferred structuring of the volume risk support mechanism depends on the goals of the
Program. Potential options include: a) Top-up payments based on qualifying volumes below a percentage of forecast offtake volumes. This helps mitigate the risk of lower demand from offtake customers and hydrogen sales falling below fixed costs.
b) Increased HPC credit for each kg of hydrogen produced. This helps mitigate volume risk but may be complex to administer and require more monitoring.
c) A combination of top-up payments and increased HPC credit to provide a more comprehensive risk mitigation strategy.

The mechanism could be the shortfall in actual offtake volumes compared to the business case and financial model, multiplied by 90% as it keeps the parties motivated to secure offtake.

7.1 Please provide any feedback on the proposed payment frequency and term.
The proposed payment frequency and term for the HPC payments appear reasonable and appropriate for the Program. Quarterly payments in arrears can provide regular cash flow to the recipients and help to support the ongoing development and commercialization of the projects. As to whether 10 years is sufficient, it may be depending on whether the investor/development can secure a reasonable return within that period. The proposed payment frequency and term for the HPC payments appear reasonable and appropriate for the Program. Quarterly payments in arrears can provide regular cash flow to the recipients and help to support the ongoing development and commercialization of the projects.

9.1 Please provide any feedback on the proposed merit criteria?
The key suggestion is to make the criteria more measurable and incentive-based, broadening the focus to include social and environmental sustainability, and expanding certain criteria to capture relevant but related experiences:

• Consolidating similar criteria to reduce the large number of criteria which may be
difficult to operationalize and score accurately.
• Increasing the weighting of broader social and environmental criteria to incentivize more
sustainable hydrogen development.
• Providing more concrete and quantifiable metrics where possible instead of subjective
criteria.
• Expanding the "capability and capacity" criterion to include experience with related
renewable energy and cleantech projects.
• Including considerations for community engagement, permitting, and minimizing
impacts under the "deliverability and risk" criterion.
• Preferring projects with a higher proportion of equity funding under the "financial
capability" criterion to incentivize less debt-heavy structures.
• Adopting similar guideline or current standard on "knowledge sharing" criterion to
enable broader learnings. but at the same time, protecting the necessary intellectual
properties in which individual investors may hope to retain in order to keep their
competitive edge in the industry.
• Evaluating the applicant's plans for public engagement and communication to promote
understanding of hydrogen energy.

The merit criteria should not be against start up companies which may find themselves disadvantaged. Some of the criteria could be more flexible depending on the size of the project or investors involved.
9.2 How should merit criteria be structured or weighted to ensure the success of delivery of hydrogen from projects? For example, by adding weighting criteria that deal with: the capability and capacity of a project proponent to deliver its proposal; the credibility and level of conditionality of the off take agreement, the extent to which the project has already undergone project planning processes including feasibility/Feed studies, the identification of sustainable water sources, other environmental aspects and community engagement; and or the unique attributes of the project).
This is rather open topic for the program to consider, particularly related to the exact weighting %. However, we think the ones that proposed are reasonable and could form the basis for the selection process. Based on the example given, we could see the weighting can be distributed in the following manner: the merit criteria could be structured or weighted to promote successful delivery of hydrogen projects:

1.Capability and capacity - Higher weighting should be given to criteria that assess the proponent's experience, expertise, consortium members, and project plans. This helps ensure the proponent has the capabilities to actually deliver the proposed project.
2. Commercial readiness - Offtake agreements, feasibility studies, and other indicators of commercial and financial readiness should be weighted more heavily. This provides confidence that the project has a clear path to implementation and funding.
3. Environmental and social sustainability - Aspects like sustainable water sourcing, environmental impact assessments, community engagement, and carbon emissions reductions should receive significant weight. This rewards projects that adopt responsible practices.
4. Innovation and uniqueness - Unique aspects of the project that contribute meaningful innovation in the hydrogen industry could have higher weighting. This helps support disruptive and transformative projects.
5. Risk mitigation - Plans to mitigate key risks like supply chain, cost overruns, permitting delays, etc. should factor into the weighting. This favours projects with robust risk management strategies.

9.3 Should an applicant be required to have at least a conditional off take agreement in place before applying to the Program? What standard should be applied to determine the reliability of such an arrangement?
We reckon a conditional off take agreement is the minimum as this form a basis for any project will not be realised. That said, we noted the difficulty to secure offtake agreements
prior to securing funding. To balance these considerations, the program could implement a few options:
1. Make an offtake arrangement a preferred but not required part of applications.
Projects with offtake arrangements could receive higher weighting or scores on the
merit criteria.
2. For projects without offtake arrangements, require a more detailed market
assessment and analysis to demonstrate likely demand for the proposed hydrogen.
3. Set some sort of standard for assessing the reliability of offtake arrangements,
considering factors like:
o Conditionally of the arrangement (e.g. subject only to project funding)
o Creditworthiness and financial strength of the off taker.
o Volume and price terms specified in the arrangement.
o Length of the offtake agreement.
o Binding nature of the arrangement (e.g. signed term sheet vs. contract).

9.4 What additional outcomes should be incorporated into the formal merit criteria for the
Program in order to deliver broader benefit? (For example: level of private investment leveraged: number of jobs created; number of apprentices supported; level/value of common user infrastructure supported; level/value of social infrastructure supported; level/ value of local suppliers; use of hydrogen towards existing or new manufacturing industries; level of knowledge shared with the broader industry).
We reckon that the suggested example had covered a broad range of good and measurable criteria. Below are further elaborations of these additional criteria. However, the program should also strike a balance and not to leaning too much on additional criteria for a successful application. Indeed, The Program should only consider these additional criteria if certain similar applications are committing with each other very closely.

9.5 What other aspects of an export-oriented proposal should be assessed to ensure the
Program funds demonstrate tangible benefits to Australians?
Export-oriented proposals have the potential to generate significant economic benefits for
Australia, but it is important to ensure that these benefits are shared widely and that the funded projects have tangible benefits for Australians. Below could be certain areas that can be considered:

1. A discount on the hydrogen price for the use of domestic consumer use.
2. Local Content Requirements: This need to be considered in conjunction whether, it will
hinder the progress of the production simply because such local content may take time
to build up.
3. Job Creation and Training: Another aspect that could be assessed is the number of jobs
created by the project and the level of training and skills development provided to local
workers.
4. Infrastructure Investment: The project could demonstrate that it has the potential help
to improve the competitiveness of Australian businesses and support the development
of new industries.
5. Community Engagement and Benefits: The extent to which the project can facilitate the
engagement with local communities.
9.6 How should emissions abatement calculations consider the different end uses of hydrogen and greenfield vs brownfield facilities?
When calculating emissions abatement associated with the use of hydrogen and comparing greenfield vs brownfield facilities, the program can certainly take reference on European standards (EU standards). A full lifecycle emissions assessment considering end uses, baseline scenarios, facility types, locations, scales and timelines is needed to accurately calculate emissions abatement potential. While greenfield facilities may achieve greater absolute reductions due to new technologies and scale, brownfield facilities can likely achieve reductions sooner due to existing infrastructure. Each project must be evaluated on its specific factors.

15.1 Does the timing proposed for the Program outlined below appear appropriate? If not, please note in your view an appropriate alternative.
We share the concern that time for securing demand and electrolyser (for larger scale project) may be long and hence might hinder the certainty of those contracts at the time of submission. The Program can consider giving flexibility on handing important information
(such as signed agreements on offtake) to ensure that it gives plenty of time for investor and off taker to work the deal. The timelines should also factor in any potential requests for clarification, adjustment of plans or resubmission during the assessment process. This could extend the overall duration.