Is Australia on a Path to Becoming a Green Hydrogen 'Superpower'?
Production costs, recent subsidy allocations, and the international competitive landscape
By Matthew Rogozinski
Our analysis shows that Australian production costs will be too high for green hydrogen to compete with alternatives in many applications, making its production uneconomic until the 2040s. However, the green hydrogen subsidies, including those announced in the 2024 federal budget and totalling A$10.7b, can kick-start the green hydrogen industry. The government will need to increase subsidies further for Australia to become a green hydrogen 'superpower'.
First, we outline our approach to assessing the costs of green hydrogen production:
Our chosen production configuration is based on dedicated solar and onshore wind capacity "behind the meter," feeding a PEM electrolyser;
We used the CSIRO 2023-24 draft GenCost projections for capital and operating expenditures of solar and onshore wind electricity generation and electrolysis at an industrial scale. The modelled costs do not include water for electrolysis and hydrogen storage and transportation;
We optimised the electricity generation-electrolyser system capacities to minimise the levelised cost of hydrogen (LCOH) for a target annual hydrogen output. The LCOH represents the unit cost of production averaged over the plant lifetime, which we assume to be 25 years, with the electrolyser electrodes replaced every ten years. The discount rate was 7%, as per the AEMO central scenario;
We used three-year hourly solar and onshore wind energy traces observed in southeast Australia's renewable energy zones (REZs). We selected REZs in coastal areas for export purposes and chose the lowest production cost zones in Queensland (Q4), Victoria (V4), Tasmania (T2) and South Australia (S5).
We present the results in the chart below.
Tasmania (T2) has the lowest LCOH for plants commissioned in the 2030s, while Queensland (Q4) has the lowest LCOH for plants commissioned from 2040. The reordering of the lowest-cost production sites from Tasmania to Queensland is due to the interplay between projected declining generation and electrolyser capital costs and local solar and wind conditions.
We arrived at the above estimates by considering dedicated renewable electricity generation. We assumed the deployment of PEM electrolysers because this technology is well suited to intermittent renewable energy. Another option is to use firm renewable electricity supplied from the grid. This approach allows high electrolyser utilisation and deployment of cheaper alkaline electrolysers. Based on 85% electrolyser utilisation, a 10-year plant lifetime and an electricity price of A$69 per MWh (CSIRO low-range price forecast of the renewable, firm and transmitted electricity in 2030), LCOH is A$5 a kilogram in 2030.
Can we expect a viable industry to be established with these cost structures? At A$5 a kilogram, green hydrogen is competitive as fuel for trucks, which explains the mining companies' green hydrogen investments. However, we set the bar for broad industrial competitiveness of green hydrogen at A$3 based on the following data and analyses:
Grey hydrogen from natural gas costs US$0.7-1.6 a kilogram; blue hydrogen from gas with carbon capture and storage costs US$1.2-2.1 a kilogram, although it is not made at scale yet (IEA);
CSIRO estimates potential growth applications such as industrial feedstocks, grid-firming services, residential heat, and synthetic fuels all require hydrogen prices below A$3 (National Hydrogen Roadmap);
McKinsey estimates that by 2050, 90% of clean (green and blue) hydrogen exports will come from regions with production costs below US$2.
It will be uneconomic to produce green hydrogen in Australia beyond select transport applications until after 2040, when we see LCOH dropping below A$3 a kilogram—unless the market places a premium on green hydrogen (e.g., due to higher carbon prices or stricter emissions regulations) or governments introduce demand-side subsidies that potential Australian producers can access (e.g., under consideration in Japan). Alternatively, supply-side subsidies are needed to kick-start the Australian green hydrogen industry now rather than in a decade.
The federal government supply-side subsidies comprise the 2023 and 2024 Hydrogen Headstart Round 1 and 2 (A$4b) and the 2024 Hydrogen Production Tax Incentive (A$6.7b), which provides a 10-year A$2 a kilogram tax credit.
Are these subsidies sufficient to kick-start an industry? The A$2 a kilogram tax credit is needed to make alkaline electrolysis-based production commercially viable in plants commissioned from 2030. The subsidy will likely stimulate private investment, provided potential operators can secure renewable electricity from the grid at up to A$69 per MWh.
However, the subsidy in its present size is unlikely to establish a 'superpower' industry. The A$6.7 b subsidy can support an annual industry output of 0.335m tonnes (at A$2 a kilogram for ten years). The domestic demand for green hydrogen is expected to be 0.5m to 0.8m tonnes, and the export potential is 0.24m to 1.1m tonnes by 2030, suggesting that the domestic and Australian export markets will be undersupplied.
The Australian federal supply-side subsidies total A$10.7b, which is well below the allocations available to producers in other countries:
The US Infrastructure Investment and Jobs Act allocated US$9.5b in grants for clean hydrogen development (A$14.5); in addition, the US Inflation Reduction Act provides tax credits up to US$3 a kilogram to clean hydrogen producers for ten years;
The EU 'Important Projects of Common European Interest' scheme allocated €10.6b in public support for clean hydrogen projects in 2022 and €5.4b for hydrogen infrastructure development (2024); the European Hydrogen Bank administers an additional €3b fund (total A$31b);
Canada allocated C$17.7b (A$19.6b) for the Clean Hydrogen Investment Tax Credit till 2035.
By establishing the green hydrogen production subsidy, we buy an option to secure export markets. We do so based on the belief that international markets will develop over the next few years and that entering these markets a decade later would be more costly. Given the global competitive landscape, we may need to top up the subsidy pool to make this bet pay off.