Costly Australian renewable hydrogen may lose upcoming supply deals to Middle East, US

Australia's renewable/low carbon hydrogen projects could miss out on large offtake deals due to high production costs and a greater focus on renewable hydrogen in a crucial year when Asian buyers are set to launch tenders for their future needs for environment-friendly fuels.

Japan and South Korea are set to launch their subsidy schemes in 2024-25 for low carbon hydrogen/ammonia and analysts and industry members said Middle East and US were better placed to cater to their demand owing to their low-cost fuels and established supply lines.

"Low carbon ammonia will be in use first," said Ankit Sachan, Principal Consultant at S&P Global Commodity Insights. "Australia is not much inclined towards low carbon hydrogen/ammonia production so there is a possibility that majority of this demand in Korea and Japan could be fulfilled from US Gulf Coast or Middle East mainly."

Low carbon ammonia/hydrogen is usually made with fossil fuels with carbon captured and stored, while renewable hydrogen is mostly produced at an electrolysis plant powered by renewables such as solar or wind power.

Sachan said the cost of production has gone up for renewable hydrogen post COVID, sparked by a rise in commodity prices which was the biggest roadblock for large scale uptake for Australian renewable hydrogen.

Because offtake agreements have eluded big projects in Australia, investors have shied away, resulting in delays. Fortescue missed its deadline to secure a final investment decision on March 31 for its Gibson Island project, its renewable energy partner Genex Power said in April.

Ark Energy was supposed to start production in 2022, according to an interview by CEO Daniel Kim with S&P Global Commodity Insights. But the company website says it will start production this year.

Fortescue and Ark Energy did not respond to a request for comment.

S&P Global's Hydrogen Production Assets database shows Australia has about 156 renewable or low carbon hydrogen projects with a combined projected capacity of around 10 million mt. Around 146 of these are renewable hydrogen projects.

The data showed only about three projects have attained Final Investment Decision in Australia.

Data from Commonwealth Scientific and Industrial Research Organization (see table) shows the projects expected to start operations this year are demonstration and small-scale projects.

LCOH up 11%-32%

Electrolyzer costs have increased by 20%-45% since 2021 and that has raised the levelized cost of hydrogen (LCOH) by 11%-32%, according to S&P Global's Electrolyzer Capital Expense Model report in January.

In addition, inflation and first of-a-kind project challenges have increased balance of plant component prices and indirect costs like engineering, procurement and construction, permitting and site preparation, S&P Global said.

In comparison to the Middle East where existing infrastructure is being repurposed to produce and transport low carbon ammonia, Australian projects are mostly greenfield, big builds and therefore, costly.

"Very large projects also have to build ports and other costly infrastructure which is expensive and difficult for approvals," Brian Kitney, director Meliora Investments, a clean energy consultant in Australia, said.

Amid that uncertainty, many renewable hydrogen projects were in limbo and "have yet to decide whether liquid hydrogen, clean ammonia, or Methylcyclohexane (MCH) is the best," further delaying FID, Kitney said.

Australian federal and state governments are supporting renewable hydrogen projects, owing to political pressure from the highest representation of green parties in the parliament and a stronger than before climate consciousness in society.

The A$2 billion ($1.3 billion) Hydrogen Headstart program opened applications in 2023 to fund only renewable hydrogen projects this year.

Global tenders

Japanese and Korean entities, Australia's trading partners and also project proponents in several renewable hydrogen projects in Australia have taken several low-carbon ammonia supplies from Middle East in the last few years.

INPEX and Itochu got low carbon ammonia supplies from ADNOC in UAE in 2021 while Korea's Lotte Fine Chemical took a low carbon ammonia cargo from Saudi Arabia's Aramco in 2022.

In January, Japan's largest power generator JERA awarded Norway's Yara International and US-based CF Industries in its tenders seeking up to 500,000 mt/year of low carbon ammonia from long-term contracts starting in 2027-28.

Now, both regions are ready to roll out their procurement schemes this year with an eye to having supplies before 2030.

In South Korea, "one of the key decarbonization tools will be using clean hydrogen or ammonia in the existing thermal (power) plants," Vince Heo, Research and Analysis Associate Director at S&P Global said.

"The important condition for the bidder is that they need to begin the shipment by 2027."

Likewise, this year Japan intends to launch its subsidy scheme for low-carbon hydrogen and its derivatives which would look to provide revenue support to both domestic and internationally produced hydrogen via a contract for difference approach, the December 2023, S&P Global Hydrogen Market Monitor says.

To be sure, in the long run, Sachan said when cost parity is attained between low carbon and renewable hydrogen on the back of evolving technology, Australia is expected to emerge as the big renewable hydrogen supplier.

Platts assessed Queensland hydrogen produced via Coal Gasification with CCS at $0.95/kg April 14, down 4% month on month.

It assessed Saudi Arabia hydrogen produced via Steam Methane Reforming with CCS at $1.30/kg April 24, up 3.17% from a month ago.