Hydrogen Headstart Program Consultation

Feedback on proposed eligibility requirements:
• Large projects are required to establish the green hydrogen (and derivatives) market. Projects require adequate scale to optimise economics. However, this will likely to ultimately be dealt with in merit criterion / selection.
• To establish a sustainable hydrogen industry, eligibility requirements / merit criterion should ensure the prioritisation of projects with the lowest carbon intensity (in selection and level of funding).
• Technology requirements should ensure that hydro / renewables projects completed before the implementation of the MRET legislation qualify for the production of renewable hydrogen. This could be dealt with in the eligibility requirements, or by reference to GO Scheme (if there is certainty it will be dealt with under the GO Scheme). An alternative mechanism is required to confirm the energy input is renewable in these instances.
• Projects with significant export focus should be supported, or even prioritised. Note that it may be more appropriate to deal with this concept in Merit Criterion rather than in Eligibility Requirements.
o The green hydrogen market needs to be supported to become a large export market in Australia to replace large fossil-related exports in Australia’s trade portfolio (e.g. LNG, coal).
o Export projects can build industry in regional areas that are in need of economic/social development and have vast areas of vacant land available for new renewable energy development.
o Export projects may be able to attract co-funding from foreign governments.

Additional suggested eligibility requirements:
• Grid connected projects may cause an issue with the credibility of the scheme (and undermine the inception of the market) given to break even with grey hydrogen, electrolysers need to be supplied with average electricity emissions intensity of <0.25 (kgCO2e/kWh or tCO2e/MWh).
Current (FY22/23) electricity emission factors:
NSW: 0.73
VIC: 0.85
QLD: 0.73
SA: 0.25
WA (SWIS): 0.51
TAS: 0.17
NT: 0.54
ACT: 0.73
• To ensure timely project realisation, the bidding stage of the auction should be preceded by a qualification phase to ensure the commitment and reliability of the bidders. Developers should submit proof of land use rights and preliminary environmental approval works, and demonstrate technical and financial capability to build projects on schedule.
• Bidders should provide a bid bond before joining the bidding stage of the auction, and winners should provide surety and performance bonds before contract signing.

Yes. Australia needs to progress large scale volume projects in order to kickstart the green hydrogen market, encourage technology development, and start to bring production costs down. Larger projects will be needed in order to be cost competitive and successfully build the industry. Supported projects need to be of an adequate size to provide an accurate indication of the true economics of the mass production of green hydrogen.

Funding multiple smaller projects will not achieve the intended outcomes of the Program to develop the Australia’s hydrogen industry, catalysing clean energy industries and helping Australia connect to new global hydrogen supply chains. It will just create a large set of uneconomic pilot projects that do not achieve the scale required to create a pathway to economic projects, or establish an industry. There would also not be domestic learnings in operating a hydrogen plant at scale – which is needed to support Australia to create larger economic projects and become a green hydrogen superpower.

Enabling delivery of 2-3 larger projects per annum on a rolling “A-4” auction process will provide direction, transparency and certainty to the market and investors. There will be significant learning benefits accrued to and shared across the industry in operating large scales hydrogen and derivative plants. Extending the Hydrogen Headstart funding (in addition to $2b) until the competitive auctions see a cross over between grey and green hydrogen pricing will likely be a 10-12 year process.
Bilateral agreements between the Australian and green hydrogen importing countries aligned with the carbon accounting agreement will be fundamental to growth of the industry in the same way as the iron ore and LNG industries begun for Australia and Asian customers.

Unlikely. These projects will lack the economies of scale required to establish the most economically efficient green hydrogen market and establish Australia as a green hydrogen exporter / superpower.

The Program should prioritise (in selection and level of funding) projects with the lowest carbon intensity and the greatest level of time-matched renewable energy.

Consideration should be given to the fact that whilst Australia’s main electricity markets (the NEM and SWIS) are undergoing a transition from thermal to renewable generation, addition of new loads (electrolysers) will require incremental new renewable capacity to be built earlier than would be the case if the Hydrogen Headstart program was not in place. Therefore consideration should be given to the inclusion of the following 3 pillars of green hydrogen:
• Powered by additional renewable generation, so as to avoid the indirect increase of fossil generation.
• Must have temporal matching to ensure hydrogen is produced from renewable electrons.
• Proof of deliverability such that the renewable electrons are actually received by the electrolyser, or eligibility is linked to the carbon intensity of the grid to which the project is connected.

Suggest inclusion of a requirement for a minimum percentage of new build renewable energy to supply project (e.g. 75% of energy) initially behind the meter and later grid connected once decarbonisation of the NEM and SWIS is complete.

Gas blending is currently the least economically attractive end use for green hydrogen. It also raised concerns about the extension of natural gas use in the Australian economy. Therefore, gas blending should be excluded.

Exclusive transportation of green hydrogen in existing gas infrastructure should be considered eligible.

The future Australian hydrogen industry will likely be predominantly export and has the ability to replace the LNG export market. Whilst some Australian industry will utilise green hydrogen/derivatives (e.g. green steel), Australia has the renewable resource and land to significantly electrify its own energy/industrial uses. Australia will play a large role in helping other countries, that lack these advantages, to decarbonise with Australian green hydrogen/derivatives.
Projects with significant export focus should be supported, or even prioritised as the earlier customer base for Australia’s green hydrogen industry.
• The green hydrogen market needs to be supported to become a large export market in Australia to replace the LNG export in Australia’s trade and to displace CO2 emissions in hard-to-abate sectors.
• Export projects can build industry in regional areas that are in need of economic/social development and have vast areas of vacant land available for new renewables development. These areas do not currently have adequate load for renewables projects that sell into a grid (and attract a LCOE premium) and are therefore more sensible locations to place large scale renewables for hydrogen production. That is, it provides industry opportunities in places where they do not necessarily exist, and ensures the hydrogen project is not competing for land/power with grid-connected power projects.
• Export projects may be able to attract co-funding from foreign governments.
• Support maintaining a level of domestic product reserve (if there is demand at price above the subsidised cost).

GO Scheme should be based in factual data and make it simple to compare projects (and avoid manipulation). This will be particularly important given the large number of accreditation schemes being created globally. A maximum emission intensity is not required, so long as Hydrogen Headstart funding has mechanisms to prioritise lowest emissions intensity projects.

Suggest GO Scheme includes a ‘First Nations’ project accreditation element – as this may be able to attract a price premium in some markets.

If the GO Scheme is designed well, a maximum emission intensity is not required. Market will be able to compare, price and select.

We agree with the Australian Hydrogen Council’s position:
There are several important themes that should underpin future Australian hydrogen policy, as follows.
1. Energy policy is industrial policy. Incentives to deliver increased generation and lower power costs inevitably increase the pace of manufacturing investment. We can also grow sovereign capabilities across a range of sectors, which provides both growth opportunities and a degree of economic resilience to external shock.
2. Cost competitiveness with fossil fuels will not happen without extensive government policy. Governments must be market creators at this stage of the energy transition. This means levelling the playing field with fossils fuels, using an appropriate mix of policy and funding levers. This is not only about funding for pilots but also about major infrastructure investment in the public interest.
3. Government must help investors see value. The complexity and uncertainty of the investment environment and the overall ecosystem (multiple states, regulatory differences, permitting within states) is making investors’ decisions unnecessarily difficult. Government thus has a role to direct investors’ attention to the opportunities; to help create value propositions that investors recognise. This is also about packaging up opportunities to support regional projects, such as port re-developments with onshore or offshore renewable energy zones, pre-approvals for nearby industrial zones, and supporting or co-funding additional transmission or pipeline infrastructure as required.

AHC – Securing Australia’s Hydrogen Future – March 2023: https://h2council.com.au/wp-content/uploads/2023/02/230301-AHC-Policy-Paper-Securing-Australias-hydrogen-future.pdf

For the auction mechanism process, much can be learned from Brazil’s New Capacity auction system which has been the world’s longest and most successful reverse auction mechanism over the past 3 decades and helped Brazil meet and transform its energy needs.

Large scale green hydrogen project off grid, will have incremental and symbiotic benefits to new renewable energy projects on grid – making the decarbonisation of Australia’s electricity system and hard to abate sectors faster and cheaper than it will otherwise be without a green hydrogen export industry – in the same way Western Australia’s LNG export industry subsidised "cheap” gas supply to WA domestic industry.

Based on analysis by the Rocky Mountain Institute, learning curve and manufacturing-economies-of-scale caused by government "pull through” policies for green hydrogen will help ensure and speed up the cost reduction in wind, solar and batteries.

Electricity Market Design and Renewable Energy Auctions: https://www.sciencedirect.com/science/article/pii/S0301421521004286

The Energy Transition in Five Charts and Not Too Many Numbers: https://rmi.org/the-energy-transition-in-five-charts-and-not-too-many-numbers/

Any funding received by an eligible project prior to FID and receipt of HPC should not be considered in the HPC funding eligibility or quantum.

Projects should state all expected funding sources at the time of prequalification and include them in their HPC bidding.

Suggest that changes to funding sources that have a material impact on the rate of return to the project investor would require a project to withdraw from that HPC round and participate in the next round with the new funding source included in their HPC bid. Such a withdrawal would not result in forfeiture of the bid bond.

Per answer to 4.3 above, Foreign Governments (e.g. Japan) are particularly keen to co-fund with Australian Government. There should be mechanisms to encourage/enable this, maximising the benefit of the Program funding without enabling windfalls. However, Foreign Government funding should not be a prerequisite.

This could be achieved by including Foreign Government funding in the pre-qualification phase.

Projects should be allowed to quote their indexation requirements in each HPC. ARENA should publicly advise of the discount rate it proposes to use in calculating economic merit of projects.

• A competitive reverse auction HPC scheme with a fixed (escalating) HPC price will drive:
o Technical innovation;
o Delivery innovation;
o Commercial innovation; and
o Funding innovation.
• Inclusion of uncertain claw-back / upside sharing mechanisms will result in additional risk and therefore cost of equity applied at the time of the HPC bidding.
• If project proponents wish to take some element of merchant risk, they can do so by bidding lower volumes of the project output into the HPC auction.
• It can be expected that, as occurred in the MRET and LNG markets, early projects will bid on a fully contracted and project financed basis (to produce the lowest cost of equity hurdle rate) and as the industry matures, both the price and volume will reduce in future bid rounds of the HPC.

Per answer to question 5.1, this should not be considered if the greatest certainty and lowest cost is to be achieved.

• Providing volume support to projects will reduce the HPC price bid but increase risk to ARENA.
• We suggest that the early auctions require bid that include and not include volume risk coverage. Government can decide if they will accept both bids and if so, then project proponents can choose which they prefer to take up.

Annual top up payments based on audited volumes produced and sold by project versus the proposed volume stated in HPC bids.

Proponent should be able to select alternative payment intervals above 3 months (i.e. 6 months may be preferred due to cost/time of administration).

First payment should be any time between 2026-2030 or annual A-4 auctions should be run from 2024 with payments commencing 4 years from the bid date.

As suggested earlier, having a pre-qualification round demonstrating project approvals, construction methodology and funding support (debt and equity) will mitigate the need to weight the Merit Criterion listed above.
Well-developed projects will meet all the merit criteria listed above. All project financiers will require the merit criteria listed above to be achieved.
In relation to Merit Criterion A, we suggest the following objective and measurable criteria be included:
• the alignment to the Competitive Round Objectives;
• the total funding request for a project, and the justification for the amount of funding requested;
• the cost competitiveness and efficiency of the project with reference to the following:
o the implied cost per kilogram of hydrogen (and hydrogen derivative product where applicable) delivered over the contract term (including capital and operating costs) excluding any concessional funding;
o MWh / tonne of hydrogen delivered over contract term;
o Program funding $ / tonne of CO2e abated; and
o Program funding $ / kg of hydrogen delivered or $ / tonne of hydrogen derivative product such as ammonia or methanol (i.e. value of HPC) over contract term (10 years).
In relation to Merit Criterion B, we suggest the following objective and measurable criteria be included as pre-qualification requirements to the HPC bid:
• the demonstrated level of experience and expertise of the applicant and/or applicant’s consortium (including major equipment suppliers and Engineering, Procurement and Construction (EPC) contractors) including where members of the consortium have successfully delivered hydrogen or other projects of a similar nature, scale or value in Australia or internationally;
• the quality and completeness of project documentation and agreements provided (such as procurement processes, timelines and participation agreements), as well as the extent to which these provide evidence of the applicant’s capability and readiness to implement the project; and
• First Nations free and prior informed consent in place, including signed Indigenous Land Use Agreement for land covered by native title.
In relation not Merit Criterion C, we suggest the following objective and measurable criteria be included as pre-qualification requirements to the HPC bid:
• the quality and completeness of the Project Plan, including the level of project definition and the hydrogen use case or offtake agreement (where relevant);
• the level of project technical definition, current development work completed to date and pathway to complete the front-end engineering and design phase (FEED) including process flow diagrams, utility flow diagrams, preliminary piping and instrument diagrams, plot plan, developed layout drawings and engineered process and utility equipment lists;
• the completeness of the project timeline and the timing of project development and delivery up to and including the point of commissioning. The timetable should include expected timing of:
o total project cost moving to more definitive confidence levels (e.g. from +/-30% to +/- 5%);
o key technical design milestones;
o key commercial and financial milestones;
o other key activities;
o the applicant’s internal investment decision making process (including interim and final approvals);
o overlay of Competitive Round timetable;
o financial close for the project; and
o commissioning for the project;
• the level of detail regarding management of water source for the project including detail on the proposed source of water, water consumption, water quality and access and the environmental impact of the proposed water source;
• the quality of the risk management plan (including hazard and operability analysis, supply chain risk, EPC constraints, price pressure, availability of specialist advisors, workplace health and safety, safety management plan and (where relevant) modern slavery) and the extent to which key risks have been identified and mitigated in project contracts and the financial model;
• the identification and consideration of securing the proposed site and all required permits (including environmental and planning), licences, approvals and consents for the project;
• the extent to which the applicant accepts the terms of the Funding Agreement template (template to be developed);
• the applicant’s compliance with any other requirements outlined in the Guidelines;
• a jobs and skills training program for young people, apprentices, Aboriginal and Torres Strait Islander individuals and people with disability;
• the extent to which the proposal supports development of utility (for example water) and social infrastructure (for example community facilities); and
• the extent to which the project has engaged with the community including First Nations communities including free and prior informed consent in place, including having a signed Indigenous Land Use Agreement for land covered by native title.
In relation to Merit Criterion D, we suggest the following objective metrics be included and supported with a bid bond at the time of the HPC bid:
• the amount of the proposed HPC credit;
• the cost of emissions abatement (where the hydrogen or derivative product use-case is known);
• deliverability of the financing plan;
• level of conditionality of the funding commitments;

• creditworthiness of proposed hydrogen offtaker/s and level of conditionality of the offtake agreements;
• the risk of cost overruns;
• the financial strength and capability of the applicant and/or applicant’s consortium to deliver a large-scale hydrogen project, including the ability to contribute required equity to the project and capacity to manage cost overruns;
• the quality of the financial model and assumptions for the project; and
• ability of the proposal to leverage investment from international investors.

Proposed HPC Auction process below.

1. ARENA HPC Publication
- Announce bid
- Request pre-qualification

2. Pre-qualification
- Developers present projects
- Merit criterion B, C and D met

3. Qualification
- Announce projects qualified to bid
- Bid bond lodged

4. HPC Auction
- Merit criterion A met
- Winning bidders sign contracts
- Surety bond posted

5. Project FID
- Developer closes EPC and funding agreements
- Delivery within [4] years from contract signing

Minimum standard should be a letter of intent with an agreed term sheet and price range. There is a significant chance the offtake agreement will still be under negotiation up to the pre-qualification stage and only be finalised/executed just before FID.

• Level of FPIC / First Nations involvement, economic empowerment and capacity building.
• Level of social infrastructure supported.
• Level of community engagement and social licence.

Projects that build industry in regions with high unemployment, high economic/social indicator disparity, and low level of industry should be prioritised.

This will provide co-benefits to other areas of Federal Government (e.g. Social Services, Infrastructure, Corrective Services).

Should be end use agnostic – that will unnecessarily complicate a Program that is already seeking to establish a new industry.

Dates appear appropriate and optimal to establish the Australian green hydrogen market in the time required to ensure Australia can play an important role.