Hydrogen Headstart Program Consultation

Department of Climate Change, Energy, the Environment and Water
GPO Box 3090
Canberra ACT 2601
By email: hydrogenheadstart@dcceew.gov.au

3 August 2023

To whom it may concern,

Hydrogen Headstart Consultation Paper

ENGIE Australia & New Zealand (ENGIE) appreciates the opportunity to respond to the Department of
Climate Change, Energy, the Environment and Water (“the Department” or “DCCEEW”) in response to the
Hydrogen Headstart Consultation Paper (“the Consultation”).

The ENGIE Group is a global energy operator in the businesses of electricity, natural gas and energy services. In Australia, ENGIE has interests in generation, renewable energy development, and energy services. ENGIE also owns Simply Energy which provides electricity and gas to more than 720,000 retail customer accounts across Victoria, South Australia, New South Wales, Queensland, and Western Australia.
ENGIE is committed to developing the value chain of renewable hydrogen, produced by electrolysis using a green energy supply. Hydrogen is a missing link in a decarbonised ecosystem, allowing for the harmonious progress of cities, territories and societies around the globe. To that end, ENGIE is already partnering with governments and other businesses on trials, feasibility studies, and early commercial projects in order to develop the know-how that will allow the hydrogen sector to scale up quickly. This involvement has a global footprint, including projects in France, South Africa, Australia, Singapore, UAE, Chile, the USA and more.
ENGIE’s long term aim is to operate across the entire value chain of renewable hydrogen, from carbon-free power generation to the three key end uses: mobility, industry, and energy storage.

The Headstart program differs from other competitive funding rounds
The Headstart program has been likened to previous ARENA-funded technology deployment programs. But there are some relevant differences. One of the most obviously successful programs is the large-scale solar funding round. This ended up supporting 12 projects at a cost of $90m. This represented only around 10 per cent of the total capital costs. The Headstart program has a budget of $2bn to support two projects. While solar projects may need a PPA to get low-cost financing (noting that the CEFC also supported ten of the 12 projects) they do not have to prove up underlying demand for their output as they can sell into existing markets. Similar points apply to the large-scale battery storage and demand response funding rounds. But green hydrogen use cases are still being firmed up and existing demand for hydrogen is essentially being

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met by existing supply. Accordingly, there is a greater risk - and greater consequence - of one of the successful projects failing to complete. This would represent a major missed opportunity and compromise the objectives of the scheme. Accordingly, the experience of the proponent developing and delivering renewable and hydrogen projects should be a key merit criteria.

It is also pragmatic to be open to supporting more than two projects if the budget allows, and to have some flexibility on the more arbitrary aspects of the criteria without completely departing from the core objectives of the program. Likewise, where a project can access other funding streams to cover indirect project costs, this should be permitted. This also extends to foreign grant funding programs where projects that can leverage international funding should be rewarded.
On the issue of project size, ENGIE is slightly surprised that the Government is minded to support projects with 50MW electrolysers. While a hard threshold may be counterproductive, ENGIE would recommend projects with electrolyser sizes of around 150MWs be targeted by the program. We see the greatest benefits will be derived by scaling up the sector with larger projects over smaller projects.

The proposed uncertainty mechanisms may be counter-productive
The Consultation proposes a mechanism that successful projects would rebate 50 per cent of any upside profit to ARENA. It also includes a refund clause if the project becomes viable on a standalone basis within the lifetime of the support contract (ten years). Conversely, it canvasses the idea that the support contract could include a volume support clause.
While ENGIE understands the policy intent of including uncertainty mechanisms, and of seeking to ensure value-for-money from public subsidy by having clawback clauses, we consider that the drawbacks of such clauses may outweigh their benefits.
Firstly, the likelihood of windfall profits appears small. This is a competitive tender with the expectation that only two projects will be successful. Such a competitive dynamic is the best protection against tenders inflating their revenue requirements.
Additionally, the successful projects are likely to be those with efficient financing arrangements. This in turn will most likely be achieved by risk management tools such as ensuring robust offtake arrangements for at least the first ten years as well as long term contracts to lock in key input costs such as electricity. This does not necessarily mean that all aspects of a project will be fixed; for example, an offtaker may prefer to have an escalator built into the price. Where such a term is factored into the overall rate of return of the project, it could become problematic for the project proponent if this is interpreted as a “realised sales price increase” and their hydrogen production credit payments curtailed as a result. Similarly, there may be ambiguities over what represents a cost decrease for a project. Monitoring this will require detailed accounting reports, and evaluation of these reports. The upside sharing clause, given its asymmetry, may bias proponents against what may otherwise be commercially practical contract terms in order to avoid the risk of activating the clause. This is not conducive to market development, one of the underlying objectives of the scheme.

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By contrast, simply awarding a fixed hydrogen production credit on a $/tonne basis to the projects requiring the lowest subsidy (subject to satisfying the other criteria), provides best value for the taxpayer without the same level of ongoing cost and revenue reporting and evaluation. Project proponents are best placed to manage their own risks and the possibility of both upsides and downsides will be factored into their tenders.
There is also a conflict between a fixed budget and uncertain mechanisms. It would be counterproductive to reserve some budget for volume support that may not be required as this would lead to less initial support being available. Conversely with no certainty over whether upside factors or reimbursements will eventuate, such surplus funds cannot be earmarked for support for other projects.
There are a large number of merit criteria, which may hamper efficient project selection

While it is appropriate to ensure that high-quality projects are chosen that align with the objectives, there is a risk that the competitive dynamic of the tender process is compromised by having to satisfy too many criteria. This is especially the case where there are trade-offs that cannot be quantified and so the selection process will be unduly reliant on unclear qualitative assessments.
Some of the 37 proposed criteria will be dependent on assumptions that may vary between proponents.
For example, estimates of the emissions avoided by the project may depend heavily on assumptions of the counterfactual if the project does not proceed. Similarly, “the potential of the project to lead to future…manufacturing opportunities” is something that can neither be proved or disproved at the point of project assessment. Little, if any, weight should be placed on criteria that are not capable of substantiation.
With this in mind ENGIE would prefer that the scheme identify a smaller set of objectives with clear weightings and preferred end uses.
For example, ENGIE appreciates that value of that additionality in this context. Therefore, applying a geographic and annual based criteria for certification should be clearly ranked in the assessment. Annual time stamping based on location is sufficient enough to provide the relevant additionality benefits without over complicating the process and production.
Likewise, where specific end uses are preferred, then those projects should be clearly ranked accordingly.
This is in ENGIE’s view a critical component of the scheme that should favour processes where green hydrogen is expected to become the dominant method of decarbonisation.
ENGIE believes that the end use of the hydrogen or derivative molecule should not be a relevant consideration for the design of the Headstart Program. Instead, the principles driving investment should prioritise projects that foster: (i) the development of a sustainable long-term growth to Australia’s GDP, (ii) development of local manpower to manufacture, build and operate the new assets and (iii) decarbonisation of existing and new industrial assets in the country.
A key challenge for projects will be to source demand for their output and it would be counterproductive to restrict eligible end uses. All end uses (including export) will contribute broadly to the development of a hydrogen production industry in Australia, which is the core objective. More broadly, individual projects - even those benefiting from government support - cannot be expected to bear the full weight of industry

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development responsibilities. This will also require governments co-ordinating and contributing to supply chain development, workforce skills and a wider range of end use cases by way of judicious complementary policies.
Finally, successful projects will have to meet explicit and implicit criteria imposed by other processes. They will need planning approval, which will entail them demonstrating that they will not harm the local environment. They will need social licence to proceed. Part of this is likely to involve providing some community benefit. What the local community requires of the project may be more or less or simply different from what’s presumed in the merit criterion “the extent to which the proposal supports development of…social infrastructure”. Having to meet similar but not identical criteria under multiple processes represents a form of double jeopardy.

Should you have any queries in relation to this submission please do not hesitate to contact me on, telephone, 0477 299 827.

Yours sincerely,

Jamie Lowe
Head of Regulation,
Compliance, and Sustainability

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APPENDIX B – PROJECT DETAILS

To inform the design of the Program, we are asking you to provide us with information on the projects that you consider
may be most prospective in your portfolio under the Hydrogen Headstart Program. This information will be used by
DCCEEW and ARENA to develop the final design parameters. Completion of the form is not considered an application to
the Program and is optional. Please note that DCCEEW and ARENA also accept that the information provided in this
response is subject to change as you develop your project.

Please complete the form with respect to each Project you wish to apply for funding under the Hydrogen Headstart Program.
If you are intending to submit applications for multiple projects, please complete a new form for each project. Please note all
responses and information provided will be treated as commercial-in-confidence and will not be released publicly.

PROJECT DETAILS

1. Name of project – Yuri Phase 1 as part of the Pilbara Green Hydrogen Hub.

2. Key project contact (name and email) Jamie Lowe, Head of Regulation, Compliance, and Sustainability, jamie.lowe@engie.com
0477299827
3. Project proponent(s) (include all project development partners) ENGIE Hydrogen Pty Ltd and YARA

4. Project location (City, State) Maitland, WA

5. Proposed electrolysis capacity (initial phase) (MW, total electrical load of the
electrolyser only)

The initial phase will be 250MW of electrolysis

6. Proposed electrolysis capacity (total final project capacity, inclusive of all
development phases) (MW, total electrical load of the electrolyser only)

A fully scaled up project will require 1.5GW electrolysis

7. Proposed hydrogen production per annum (tonnes per annum)
16 ktpa initial phase (140 ktpa for final scale up)

8. If the project involves the conversion of hydrogen into a derivative, please specify the
derivative (ammonia, methanol, liquefied hydrogen, other) and proposed production per
annum of the derivative (tonnes per annum)

Ammonia: 90ktpa NH3 initial phase. 800ktpa NH3 for the final phase.

9. Proposed hydrogen or derivative end use(s) (select all that apply - industrial
(chemical processing, manufacturing, iron/steel, alumina), ammonia and other e-
fuels, transport, electricity, gas-blending, export, other) ENGIE will be responsible for
renewables and green hydrogen generation for delivery to YARA’s ammonia plant.

10. Do you have identified offtakers? Green Hydrogen anchor offtaker will be YARA, opportunities for local hydrogen sales to industry will be
determined as those industries evolve closer to FID.

11. Estimated cost of hydrogen (or derivative) production? ($/kg or other
appropriate metric)

12. Current status of project development (pre-feasibility, feasibility, front-end

HYDROGEN HEADSTART – CONSULTATION PAPER 5
engineering and design underway, front-end engineering and design complete)

Yuri roadmap has multiple phases: Yuri Phase 0-1-2-3.

The first phase of the project is currently under construction (Yuri Phase 0).

Yuri phase 1 is in Pre-Feasibility stage, if confirmed viable it will be expedited to
full feasibility & FEED as part of the DCCEEW/DISER Pilbara Green Hydrogen Pub
Design and Development Grant (grant agreement signed with ENGIE in June
2023).

13. Proposed date for final investment decision (mm/yyyy)
within 2025

14. What is required to meet final investment decision?
Positive acceptance from existing lease holders to pass over a portion of land for solar generation (Maitland SIA buffer zone).
Successful Environmental and Heritage Approvals.
Successful outcome of the Hydrogen Headstart program.

15. Proposed date for construction commencement (mm/yyyy) H2 2025

16. Proposed date for commissioning (initial phase of production) (mm/yyyy) within 2027, flexibility of these dates needs to remain open as
projects proceed through land tenure agreements and environmental approvals.

17. Proposed renewable energy supply & reasons for that approach (power purchase
agreement, behind the meter solar/wind, grid connection with
LGC purchase, other) Dedicated behind the meter solar (500MW for the initial phase), supported by batteries.

18. Estimate development costs to be incurred throughout the FEED stage? To be confirmed

19. Estimated development costs to be incurred between FEED and FID? To be confirmed

20. Please outline the estimated additional benefits that are likely to result from the
development and operation of the project including jobs, training opportunities,
local supply chains, developing local industry expertise, social license,
community or regional benefit.
This project will facilitate the upskilling of local labour, creating additional regional jobs, establishing long term infrastructure
that supports a community throughout a 35-year project duration. Most importantly, the Project will accelerate the energy
transition to a green future in a region that relies heavily on hydrocarbons.

The local economy will have circa AUD$300 million direct (i.e., Yuri Phase 1 money spent in the Pilbara on local contracts,
labour & materials) and a large value of indirect spending from the Pilbara hub construction on its own merit.

Operation & Maintenance over the project life cycle will inject AUD$20 million per year in value directly into the local
economy. It will facilitate heavy industries in the region to convert to a green hydrogen & ammonia future as the local mining
and transport industries will have certainty that a supply chain of green fuel is available for them to fast track their energy
transition plans.

HYDROGEN HEADSTART – CONSULTATION PAPER 6
APPENDIX B – PROJECT DETAILS

To inform the design of the Program, we are asking you to provide us with information on the projects that you consider
may be most prospective in your portfolio under the Hydrogen Headstart Program. This information will be used by
DCCEEW and ARENA to develop the final design parameters. Completion of the form is not

considered an application to the Program and is optional. Please note that DCCEEW and ARENA also accept that the information
provided in this response is subject to change as you develop your project.

Please complete the form with respect to each Project you wish to apply for funding under the Hydrogen Headstart Program.
If you are intending to submit applications for multiple projects, please complete a new form for each project. Please note all
responses and information provided will be treated as commercial-in-confidence and will not be released publicly.

PROJECT DETAILS RESPONSE

21. Name of project – POSCO Australia Green Hydrogen Project (Phase 1).

1. Key project contact (name and email)
Daniel O’Doherty Daniel.odoherty@engie.com
2. POSCO Holdings – Minwoo Lee ho230668@posco-inc.com

3. Project proponent(s) (include all project development partners) POSCO Holdings and ENGIE Hydrogen Pty Ltd

4. Project location (City, State) Port Hedland, WA

5. Proposed electrolysis capacity (initial phase) (MW, total electrical load of the electrolyser only) The initial phase will require 150 ~
500MW electrolysis

6. Proposed electrolysis capacity (total final project capacity, inclusive of all development phases) (MW, total electrical load of the
electrolyser only) Over 30 GW Total Electrolysis (Approx. 2MMtpa of H2 required to fully decarbonize POSCO’s DRI/HBI plants by
2050)

7. Proposed hydrogen production per annum (tonnes per annum) 20-40ktpa in Phase 1
8. If the project involves the conversion of hydrogen into a derivative, please specify the derivative (ammonia, methanol, liquefied
hydrogen, other) and proposed production per annum of the derivative (tonnes per annum)
In Phase 1, no conversion of hydrogen is required since all the produced hydrogen will be consumed by the DRI/HBI plant. In the
subsequent expansion phase(s) leading to 2050, the project aims to produce green ammonia for hydrogen export.

9. Proposed hydrogen or derivative end use(s) (select all that apply - industrial (chemical processing, manufacturing, iron/steel, alumina),
ammonia and other e-fuels, transport, electricity, gas-blending, export, other)
All the hydrogen produced up to Phase 1 will be utilized in POSCO's HBI/DRI plants in Pilbara to facilitate green iron production. In
the subsequent expansion phases H2 will be used for both domestic use (DRI/HBI plant) and for export to South Korea and other
countries for co-firing in power generation, iron/steel making in Korea, and other potential industries.

10. Do you have identified offtakers? Green Hydrogen anchor offtaker will be POSCO (Steel) HBI JV. Opportunities for local green hydrogen
sales will be determined as those industries evolve closer to FID.

11. Estimated cost of hydrogen (or derivative) production? ($/kg or other appropriate metric)
Based on the prevailing market price of natural gas (approx. $6-7/GJ) used as a reduction agent in the DRI / HBI process, the
projected price parity level for hydrogen production is set at around $1/kg. This price will be the ultimate target goal for hydrogen
production.
During Phase 1 development, the optimal LCOH and reasonable sales price of hydrogen will be determined through a joint Pre-F/S
study and close collaboration with the offtaker, POSCO (Steel).

12. Current status of project development (pre-feasibility, feasibility, front-end engineering and design underway, front-end engineering
and design complete)
HYDROGEN HEADSTART – CONSULTATION PAPER 7
POSCO Holdings is currently conducting the Front-End Engineering Design (FEED) for Phase 0 development, which involves a 1%
Hydrogen Blend case with max. 2,000 tons H2/year. The Joint Pre-Feasibility Study for Phase 1 (10% Hydrogen Blend Case) will
commence in August ’23 as a co-development between ENGIE and POSCO Holdings.

13. Proposed date for final investment decision (mm/yyyy) mid 2025

14. What is required to meet final investment decision?
- Successful outcome of the Hydrogen Headstart program to improve the project economic for achieving POSCO group’s internal
investment target hurdle for both Green hydrogen and Green steel project
- Successful Environmental and Heritage Approvals
- Successful land access and lease agreements
- Feasible infrastructure corridor approvals (with potential to co-share)
- Securing Long term hydrogen offtaker(s) including POSCO(Steel) HBI JV.

15. Proposed date for construction commencement (mm/yyyy) Late 2027

16. Proposed date for commissioning (initial phase of production) (mm/yyyy) Late 2029

17. Proposed renewable energy supply & reasons for that approach (power purchase agreement, behind the meter solar/wind, grid
connection with LGC purchase, other)

Mainly 1) Behind the meter solar and wind, supported by batteries, and alternatively 2) PPA from 3rd party energy suppliers in Pilbara
region

.

HYDROGEN HEADSTART – CONSULTATION PAPER 8
PROJECT DETAILS RESPONSE

18. Estimate development costs to be incurred throughout the FEED stage?

19. Estimated development costs to be incurred between FEED and FID?

20. Please outline the estimated additional benefits that are likely to result from the development and operation of the project including
jobs, training opportunities, local supply chains, developing local industry expertise, social license, community or regional benefit.
See Cover letter.

HYDROGEN HEADSTART – CONSULTATION PAPER 9