Hydrogen Headstart Program Consultation

Frontier considers the following additional eligibility important to ensuring the program objectives can be effectively met:

1. Zero Carbon certification

To ensure a net reduction in carbon emissions, Frontier considers that projects that utilise renewable energy, must demonstrate zero carbon certification or provide a clear pathway to achieving such certification.

Where non-pre-certified projects are eligible, this would create a risk that hydrogen production incentivised by Government could result in a net increase in carbon emissions. This would be counter to Government’s overarching objective of reducing carbon emissions.

2. Early construction is enabled by access to critical infrastructure and resources already being in place at the time of EOI

To ensure the first round Headstart funding awarded for 2026/27 is utilised to build green hydrogen capacity, Frontier believes that the qualifying criteria should include demonstrable access to necessary infrastructure to achieve production in 2026/27, including:

• clean water supply secured
• access to gas pipeline infrastructure (where required for domestic or export offtake)
• export terminal (for export offtake)
• electricity grid connection and power supply, if electrolysers are not driven entirely by behind the meter power supply
• sufficient land holdings, including appropriate heritage and environmental assessments in place to enable commencement of hydrogen production in 2026/27
• skilled workforce

These criteria are relevant because each of these is an essential element to building a green hydrogen project. Based on Frontier’s experience, if one or more of these infrastructure elements are not in place, it would take many years to identify, secure and/or build this infrastructure, which would put the project investment case at risk. Therefore, allocating 2026/27 Hydrogen Headstart funding would not be a prudent allocation of funds to projects that do not meet all the final criteria.

The minimum 50MW deployment size is appropriate; however, projects must demonstrate material scalability. Frontier considers the eligibility criteria for unrestricted project size to be robust. As an example, Frontier’s Project is technically ready for deployment. Phase One will develop 114MW of solar generation capacity and an integrated 72MW hydrogen plant.

Frontier does not consider that large scale is an appropriate criterion for the Program initially, because Frontier’s market testing has shown that currently there is no large-scale demand for green hydrogen . Far more important is scalability.

it is Frontier’s view that any early-mover green hydrogen company must create its own offtake or partner with an offtaker ready to consume green hydrogen, however there is currently no ready offtake demand, as various potential markets for green hydrogen are still in their infancy.

Frontier considers that the market will grow rapidly once initial use cases are demonstrated. Project scale should grow in tandem with growth in market demand, and therefore scalability should be a key assessment criterion, far more so than scale because the market for large scale projects is currently not yet developed. The Project can be scaled to 1GW to meet demand over time.

To ensure a net reduction in carbon emissions, Frontier considers that only projects that utilise renewable energy, and have obtained and can demonstrate a clear pathway to achieving zero-carbon certification, should be eligible.

Where projects require new build renewable energy assets, significant additional funding, and time to construct these assets will be required.

No, there should be no such restrictions. Unlike in the UK, which is located in close proximity to potential export destinations, in Australia domestic demand is essential to support the industry’s initial growth and competitiveness.

In Frontier’s opinion, for the scheme to achieve its target date for 2026/27, markets where hydrogen can replace current carbon emitting fuel sources that require no technological advancements, mass adoption or legislative changes are the most likely first adopters/consumers of green hydrogen. For example, energy storage and power generation in a hydrogen-fuelled (dual fuel) peaking plant provides a near term opportunity, given maturity of the technology and the well-established market for electricity generation.

Frontier also considers it would be better for the scheme to specify priority use cases, rather than disqualify some use cases. For example, injecting hydrogen into natural gas transmission pipeline assets for domestic gas transportation/supply is likely to be one of the near-term applications in Australia, because gas infrastructure is already in place, with many industrial consumers receiving natural gas via these pipelines. Decarbonising steel and alumina refinery plants through hydrogen and natural gas blending would be an effective way to support these industries in meeting zero-carbon targets.

Studies on the DBNGP have shown up to 9% hydrogen could be injected immediately. Many hard-to-abate sector companies consume natural gas directly off this transmission pipeline.

Australia’s comparative advantages in its natural resources and distance to export markets give Australia a significant advantage to becoming an exporter of choice for hydrogen and its derivatives. Renewable electricity and fuel exports could replace the energy currently exported by Australia through liquified natural gas (LNG) and coal. The replacement of Australia’s LNG exports with green hydrogen produced with solar photovoltaic sytsems is a realistic pathway to achieving our country’s goal of becoming a renewable energy superpower in the longer term, once export transport constraints have been overcome.

Frontier believes that the Program should consider potential for export through the lens of the necessary pre-requisites required to commence exports, including:
• availability of export port terminal, including footprint for liquefaction facilities and power supply and other amenities to convert hydrogen gas to an exportable state.
• infrastructure from project site to export port terminal (e.g. hydrogen pipeline).
• if hydrogen is to be converted to a derivative (e.g. green ammonia), availability of footprint for conversion facilities, likelihood of obtaining approvals to construct these facilities and supply of other raw materials required for conversion (e.g. nitrogen if converted to ammonia).
• funding capacity to construct export and chemical conversion facilities and infrastructure.

If one or more of these prerequisites for commencing exports are not in place, it could take years to put them in place and the cost of putting them in place could potentially put the project investment case at risk and the target delivery timeframe under immense pressure.

In the shorter term, green hydrogen could enable LNG exporters to meet their domestic gas obligation. For example, in WA this would entail allowing LNG exporters to supplement their domestic gas supply with green hydrogen and thereby satisfy their domestic gas obligations and enabling LNG producers to export an equivalent amount of higher priced LNG.

Frontier’s assessment is that most projects on both the supply and demand side are materially underdeveloped, so the final Program will need to be flexible enough to ensure that it does not further limit its application.

On the basis that any near-term pricing for hydrogen cannot currently be linked to an index price, and that offtakers are more likely to use the hydrogen to displace existing fossil fuels (meaning they would seek to use existing commodity prices e.g. natural gas, diesel oil, coking coal as indices), the Program must consider project specific indices. Where producers of green hydrogen own the renewable energy asset as well, the opportunity cost must be considered in the form of an index, for example, trading electrons in the existing market versus producing green hydrogen.

Frontier considers that the status of most projects is likely to be better supported by contract for difference type mechanisms. For example, applicants under the Program are asked to nominate a Hydrogen Production Credit (HPC) for each use case.

The HPC must consider a realistic index over the period so that producers and offtakers are not penalised for being early movers.

Projects should have the ability to utilise all financial support available, because the green hydrogen industry, along with available markets for green hydrogen, is still in its infancy. Allowing projects to utilise funding support from different sources will enhance the overall commerciality of projects under development and support the overall goal of the Program to encourage a green hydrogen industry to develop in Australia.

The relatively low maturity of the industry essentially means that traditional ways and mechanisms of capital deployment may not necessarily support the Program’s overall objective of developing the Australian hydrogen industry but could result in adverse impacts such as delays, which could see the industry fall behind other countries.

Inflationary risks are very real and directly impact the survival of many companies and projects. In the current climate, Frontier considers the management of inflation to be critical, and careful thought must be given to the type of support the scheme will provide in managing inflationary risk. Construction cost blowouts and significant cost increases across the supply chain could result in business cases failing, and the Program must consider support in such circumstances. A two-step process of an initial HPC (pre-construction) and a final HPC post-construction could be one appropriate structure.

The proposed structure for the Program is silent on how potential cost fluctuations will be managed, implicitly suggesting that all risk should be borne by the project proponent. If this is the case, then this risk is likely to be factored into the production price and HPC tendered by project proponent under the scheme, resulting in a greater drawdown of government funding for potentially lower volumes of production. This also could inadvertently render highly credible/realistic projects disadvantaged because their proponents have a higher risk appetite.

In addition, the document makes clear that changes to the HPC are not allowed once the project has been selected. This is overly inflexible, given that the HPC tendered could become void long before contracts are awarded, particularly given the lengthy timelines for HPC awards proposed by the scheme.

Sharing of upside gains can be a great opportunity to incentivise outperformance in mature markets, if administered correctly. However, in an immature industry such as green hydrogen in Australia, limiting investor upside potential (for example by implementing a gain share mechanism too early) would potentially stifle investment in the industry before it can mature.

In building a green hydrogen project, the recipient of Headstart funding puts at risk capital that is sourced from equity investors and debt lenders. An obligation to pay additional capital, in the form of return of previously received funding support, in the event of higher-than-expected prices, skews the risk/return profile for these providers of capital. This will make it harder for project proponents to attract equity and debt funding in the first instance and would be counterproductive unless projects are substantially funded by governments grants.

In negotiating debt and equity financing, the proposed upside sharing and the proposal for clawback of support will serve to decrease lender/investor appetite and increase risk to projects. Project developers will need to ensure that they can demonstrate contingency to their investors and lenders that, if this clause is enacted, sufficient funds would be available to repay the required amount.

On the other hand, the Program should consider downside risk sharing. Where a project incurs additional costs but demonstrates the cost is in fact unavoidable and beyond the proponent’s control, the Program must allow recovery of such cost.

Frontier believes that an alternative way for Government to participate in upside would be taking minority equity stakes in supported projects. This would enable the sharing on the upside as well as appropriately sharing in the risk of the downside. It would demonstrate commitment to the success of the emerging industry, as well as signal a commitment to developing new funding and finance mechanisms more in line with the required pace and scale of change to respond to the climate emergency and the energy transition.

The price of any commodity is by its nature cyclical (high commodity price incentivises additional supply which in turn acts to put downward pressure on commodity price). The green hydrogen price dynamic is unlikely to be different. Therefore, prices may be materially higher than expected in some periods and materially lower than expected in other periods. Seeking to adjust the funding for these commodity price cycles adds complexity, without necessarily resulting in a better outcome for the Government in the long run.

Volume risk support is a crucial building block to project’s ability to attract finance. Many offtakers are reluctant to provide underwriting to foundational projects/volumes. Government underwriting of volumes which support minimum debt servicing would add a safety net for project proponents and would help to incentivise investment. Furthermore, foundational volume risk support would enable negotiation of additional offtake, improving the overall bankability of the project.

The scheme should consider guaranteeing the HPC for the duration of the agreement so that debt can be serviced even if physical volumes are lower than planned. This should not replace the usual commercial protections that a developer would seek to include in offtake contract arrangements, such as take-or-pay arrangements that protect developers against volume risk, it would essentially protect developers against default on their offtake contracts by offtakers.

A shorter payment frequency, for example 30-days would significantly improve cashflow in early mover projects.

Frontier considers that funding should be made available not later than FY26. The announcement of the Headstart Program implementation time frame, whilst positive in providing clarity, has stalled offtake negotiations as buyers seek to clearly understand the Headstart terms before committing to offtake. An unintended consequence is the delay of commercialisation of many projects. Frontier’s Project is now targeting FID in late 2024 or early 2025, to commence production in 2026/27. Any further delays would have significant negative ramifications for the development of the Project.

Frontier considers the Merit Criteria broadly align with the program objectives and can be reasonably satisfied. However, Merit criterion C – Scope, Methodology, Deliverability and Risk – should require clarity of project maturity to render projects eligible. For example, risk management plans, supply chains etc. are detailed and available for projects that have completed FEED; however, the guidelines propose that projects demonstrating a pathway to FEED – i.e. prior to having de-risked and secured key supplies - would be eligible. To meet the program timelines and minimise the risk of stranded cash i.e. projects that have high technical barriers (and consequently implementation delays) being supported by the Program, projects with the highest technical maturity should be weighted the highest.

Further, Frontier considers that that there should be additional ‘threshold criteria’ which evaluates the criteria specified in response to question 2.1, most notably:
• The project reduces emissions on a net basis and is certified as such.
• The project has access to all infrastructure required to produce and distribute the hydrogen.

Projects which demonstrate higher levels of maturity in the areas of constructability, consentability and investability should receive higher weighting. Any weighting criteria must recognise the maturity of projects in the following areas:

• pre-certified zero carbon.
• have a completed Definitive Feasibility Study .
• have all or most approvals in place to build renewable energy generation and electrolyser facilities, including environmental and Heritage.
• have secured water supply.
• have secured access to infrastructure that enable delivery of the hydrogen e.g., gas pipeline.
• have secured access to the electricity grid (if required).

The proposed eligibility requirements include that large-scale generation certificates (LGC) created by behind the meter renewable energy generation should be surrendered. LGCs are created to address liabilities held by large scale entities under the Renewable Energy Target. The proposed eligibility requirement to surrender LGCs would be counter to the intent of the program because it would disincentivise the commercial viability of large-scale green hydrogen production.

For example, based on an LGC price of $50, surrendering LGCs would increase the cost of producing green hydrogen by an estimated $2.75/kg - which would be directly passed onto the consumer or Government as part of this program.

Furthermore, forcing the surrender of LGCs for behind-the-meter green hydrogen produced in effect introduces a new definition around green hydrogen that sits separate to established carbon accounting principles.

Frontier considers the EOI and application timeline appropriate, however, any acceleration of the timeline would be favourable, in particular for securing offtake.
An accelerated timeline would better align the Headstart Program with ready projects but will also demonstrate the requisite level of urgency in Australia’s response to the global investment challenge posed by the US Inflation Reduction Act and the range of policies already announced by other jurisdictions.