by Emil Billquist, Managing Director, Frank Ochel, Senior Principal, and Thomas Culbert, Senior Manager, Accenture
There has been a lot of hype about Australia’s future as a hydrogen exporter, with many commentators talking up the prospects of the fuel for the oil and gas industries. A clear-eyed analysis of the near horizon for hydrogen delivers a very different picture. There is definitely significant potential, but the leaders will be utilities using low-cost renewable energy to produce hydrogen. And the most immediate market for their product will be existing domestic markets with the capability to scale.
As the price of equipment falls, the proportion of the cost of producing green hydrogen through electrolysis that is accounted for by energy will rise to around two-thirds of the total cost.
Australian utilities already have a considerable renewable energy footprint and the intermittent nature of this generation – especially solar – means that excess energy is often available at zero cost during the day.
According to the University of Melbourne’s Dr Rebecca Yee, there will not be any likely cost reductions in mineral-produced hydrogen.
“Efficiency gains have plateaued for coal and natural gas Haber-Bosh (HB) ammonia since the 1990s and there won’t be much more optimisation to be had,” Dr Yee said.
Australia’s power network is such that a surplus of cheap renewables often sits idle to avoid overloading the network. The ability to create green hydrogen through electrolysis using this surplus puts utilities in a commanding position to drive the next phase of Australian hydrogen.
To capitalise on this opportunity, Australian utilities should identify domestic markets such as gas suppliers who are using hydrogen gas for blending into their own fuel mix, and the mining and resources industries, before seeking export opportunities.
A “local-first” approach can secure long-term customers who deliver price certainty and current revenues, rather than exposing a fledgling industry to the volatility of global export markets.
Customers that present immediate opportunity are those with an urgent need to decarbonise and burnish their sustainability credentials.
These customers must be able to afford to pay a premium to do so, because the reality is that– at least in the short term – green hydrogen will cost more than hydrogen produced from mineral fuels.
They must be able to scale effectively, and Australia has a massive and increasingly sophisticated mining industry more than capable of providing the scale required. Sustainability is key to their social license to operate.
They produce outsized revenue, with the largest having a far greater return on equity than companies in most other sectors. We have seen Fortescue make aggressive hydrogen plays in recent months and the likes of Rio Tinto and BHP will be seeking their own supply of green hydrogen to keep up in the sustainability race.
Gas blending has similar scalability, as well as offering immediate offtake and being within the direct business of many utilities. Curiously, some of the most vaunted markets for hydrogen are among the least promising. The economics of the much-hailed green steel are nothing short of horrible.
Steel producers are already competing against low-priced competition globally, and margins are wafer-thin. The domestic fertiliser and explosives industries have been mooted as a customer for ammonia – currently the primary method of transporting hydrogen.
Scalability is the obstacle stopping ammonia being a domestic growth market well into the future. Unlike gas suppliers who can blend greater amounts of hydrogen as technology improves and miners who are constantly seeking new projects, the local market for ammonia is unlikely to grow for any reason.
Ultimately, agricultural ammonia is a stepping stone for long-term hydrogen plays. In addition to choosing the right domestic markets, utilities leading the hydrogen charge will need sophisticated collaboration strategies.
The immediate task is not to grab market share at all costs, but to increase the size and viability of the overall market by striking the right partnerships. These partnerships fall into three main categories – innovation, capital and regulation. On the innovation side, the brief is to drive down costs.
In terms of capital, partners seeking long-term, low-risk investments should be sought to support the initial capital outlay. There is of course a role for banks and the Clean Energy Finance Corporation, but infrastructure, superannuation and sovereign wealth that invest for the long term are also ideally suited to this kind of investment.
Utilities should be seeking financing below a five per cent weighted average cost of capital. For these investors, domestic hydrogen is an attractive proposition because, unlike oil and gas, it is not exposed to ‘carbon risk’ global price volatility and currency fluctuations.
Profitability over the long term will be driven by cost reductions rather than price hikes. Cost reductions will occur in two areas. One is the cost of power, which thanks to renewable energy is already falling quickly. The other is cost savings driven by innovation and cooperation.
We can look to solar panels for an example of how this can occur – through a mixture of Australian innovation and global manufacturing.
Research and development partnerships between Australian utilities and original equipment manufacturers (OEM) manufacturing offshore for the global market can push down the cost of equipment to below the key benchmark of $30 per megawatt-hour.
The final key area for partnerships and cooperation is on an industry/regulatory level. A multilateral dialogue with all players in the hydrogen industry is needed to ensure that the industry is growth ready, safe and profitable as quickly as possible.
We need agreed standards for what constitutes clean/green hydrogen as well as standardised equipment and infrastructure for maximum interoperability and efficient use of R&D capital. Beyond traditional energy regulators, there are safety regulators, as well as those covering equipment standards, competition and land use.
There could be a role for a body like the COAG Energy Council to coordinate the development of a coherent regulatory approach to hydrogen that lays a firm foundation for a thriving domestic industry.
There are some urgent and rewarding actions that utilities can take to advance their hydrogen position today. The time for small-scale testing and feasibility studies has passed, so there is no point investing in more 10MW test sites.
Even the latest trials from ARENA have emphasised that the technology is mature and proven, and that its testing is purely about price discovery.
Few organisations are in the position to commit to something as large as the Asian Renewable Energy Hub where $50 billion is earmarked to be spent on 26GW of hydrogen production capacity. The sweet spot for most utilities will be “no regrets” projects between 100MW and 1GW, with capital outlay of less than $1 billion.
The cost savings necessary for a viable domestic industry to underpin the nascent export capability will only come from scale – it’s time for utilities to take the hydrogen mantle from oil and gas, develop a sound strategic roadmap for domestic markets and start to scale aggressively.
Emil Billquist, Frank Ochel and Thomas Culbert are part of Accenture’s strategy and consulting business in Australia and New Zealand.