Australia's A$2/kg Production Tax Incentive for renewable hydrogen to help energy transition

Australia's Production Tax Incentive of A$2/kg ($1.3/kg) for renewable hydrogen production from 2027-28 and a new round of A$2 billion under the Hydrogen Headstart program announced in the budget for the new year is designed to accelerate energy transition, industry members said May 15.

Australia announced its federal budget for fiscal 2024-25 (July-June) late May 14 with a string of measures aimed at attracting investors for renewable hydrogen projects and domestic manufacturing of goods, including solar panels.

The government is "supercharging Australian renewable hydrogen" with A$6.7 billion over the decade for the new Production Tax Incentive, Minister for Climate Change and Energy Chris Bowen said. The government is also giving "long-term certainty for the large-scale renewable hydrogen industry," with new funds for Hydrogen Headstart.

While the Production Tax Incentive for renewable hydrogen is a new plan, the Hydrogen Headstart was announced in last year's budget.

The A$2 billion Hydrogen Headstart shortlisted six hydrogen developers in December 2023. These companies, including BP Low Carbon Australia's H2Kwinana project in Western Australia and Stanwell's CQ-H2 project in Queensland are to submit final applications in June.

Now, an additional A$2 billion was announced for Hydrogen Headstart by Treasurer Jim Chalmers in his budget speech May 14, in what could have a bearing on Australian clean hydrogen pricing.

Platts, part of S&P Global Commodity Insights, assessed Queensland hydrogen produced via alkaline electrolysis (including capex) at $4.98/kg May 14, down 16% month on month.

It assessed Japan hydrogen produced via alkaline electrolysis (including capex) at $3.92/kg May 14, down 2.97% from a month ago.

To attract buyers

The incentives for clean fuels, the extent of which was not seen in any budget before, was hailed by industry members for giving more confidence to developers.

"The A$2/kg production tax credit doesn't go as far as the US' IRA, but it does help close the gap and will attract the attention of buyers," said Logan Reese, Research and analysis associate director at Commodity Insights.

"Without an Australian tax credit, the delivered cost of green ammonia into Japan would be more than double that of the same product coming from the US that leverages the IRA."

Under the US' Inflation Reduction Act, renewable hydrogen could draw an incentive of up to $3/kg, which makes it an attractive destination for clean energy projects, analysts have said.

Large Australian developers such as InterContinental Energy, Fortescue and Hydrogen Energy Supply Chain are in talks with potential offtakers where discussions are centered around prices and duration of agreements, the developers have said.

The government's incentives will also help in derisking investment to help to drive renewable hydrogen production, and go a step further to help the low carbon projects as well, BP said.

"By helping to derisk green hydrogen production in the short term, these policy measures will encourage investment in low carbon projects that will be essential to Australia's energy future," Lucy Nation, Vice President of Hydrogen Asia Pacific of BP, said.

At H2Kwinana, a former oil refinery, BP has plans to produce renewable fuels including Sustainable Aviation Fuel and renewable diesel. BP has two other large clean hydrogen projects in Australia.

Eyes accelerated progress

The budget incentives are aiming to push developers into meeting timelines, accelerating Australia's energy transition, Reese said.

"The budget announcement was another step forward to accelerating Australia's green hydrogen industry, highlighted by the timeline imbedded in the production incentives," Reese said.

"The Hydrogen Headstart program gives preference to projects that come online by 2027 and the newly announced production tax credit requires recipients to reach Final Investment Decision by 2030."

The budget document said an estimated A$8 billion over 10 years starting from 2024–25 (and an average of $1.2 billion/year from 2034-35 to 2040-41) is proposed to support the production of renewable hydrogen.

This includes the hydrogen Production Tax Incentive from 2027-28 to 2040-41 with the budget of A$6.7 billion, it said. It also includes funds for the Hydrogen Headstart.

Carbon tax absent

The other significant announcement by Treasurer Chalmers was a A$22.7 billion Future Made in Australia package for domestic manufacturing of goods like green metals and low carbon fuels which would, to an extent, bank on use of domestically made clean fuels.

Australia is subsidizing producers of new fuels and green manufacturers in the absence of a carbon tax which is the call of the hour, said Rod Sims, chair of The Superpower Institute in a post budget webinar organized by the IGCC.

"The government recognizes that, rather than introducing carbon price which they have decided for the moment not to do... they are using that as logic for providing government support [to new fuels and green manufacturing]," Sims said.

"That is the right thing to do if you don't have a carbon price -- you can't let green products try and compete against black products when you are not pricing in the cost of the damage to the environment."

Australian Prime Minister Anthony Albanese announced the 'Future Made in Australia Act' in April to support clean energy and green manufacturing projects to draw investment and compete better against other nations' clean energy schemes such as the IRA.