Hydrogen Headstart program: Who will the Australian Government pick as the front runner?

Consultation opened on Friday, 7 July 2023 for the design of the “Hydrogen Headstart” program. This program was first announced by the Australian Government on 9 May 2023 through a commitment to invest $2 billion to accelerate the development of Australia’s hydrogen industry, catalyse clean energy industries, and help Australia connect to new global hydrogen supply chains. The funding is expected to support the delivery of at least 2 large-scale hydrogen projects.

ARENA and the Department of Climate Change, Energy, the Environment and Water have published a consultation paper outlining indicative specifications for the program. The consultation paper covers proposed objectives, eligibility criteria and detail regarding the proposed funding mechanism, as well as other features of the program.

The consultation period will close on Thursday, 3 August 2023.

Funding mechanism

The funding mechanism is designed to provide a “Hydrogen Production Credit” (HPC) to underwrite the difference between the expected sales price of hydrogen (or hydrogen derivative) and the applicant’s cost of production (inclusive of a justifiable return on capital). Applicants will nominate a HPC value (per kilogram or equivalent) and total volume cap.

The support period will be 10 years.

The design of the funding mechanism requires long term assumptions to be made on:

• production costs (noting that projects will likely commit to long term power purchase agreements to de-risk power costs); and
• the expected long term sales price – it may be challenging for some projects to match the length of their offtake contracts to the support period.

The funding mechanism (as proposed) does not, unlike some international programs, include volume risk support (e.g. offtake customers reduce demand).

Upside sharing

Potential upside arising from decreased operating costs or increased sales price term will be shared on a 50/50 basis. To the extent that the realised sales price increases or the cost of production decreases beyond a materiality threshold, the HPC payment for that period will be reduced to represent a 50/50 sharing in upside.

In addition, if the sales price materially exceeds the level of support required within the 10 year period, recipients will be required to pay back an amount of the support received in previous years.

Eligibility requirements

The key eligibility requirements are:

• new deployment of electrolysis/renewable hydrogen production facilities. Deployment may utilise existing energy generation or hydrogen end use infrastructure;
• the hydrogen production must be renewable hydrogen;
• all end uses are proposed to be eligible;
• minimum electrolysis deployment is 50 MW (there is no maximum capacity);
• project must be located within Australia; and
• applications must have a valid commercial case for the end use of hydrogen, and include a commercialisation pathway.

Hydrogen production must be 100% powered by:

• behind the meter renewables (where LGCs are surrendered);
• grid electricity where LGCs created within 12 months of production or other certificates eligible under the proposed “Guarantee of Origin Scheme” are surrendered; and/or
• electricity from a renewable generation PPA with associated surrender of LGCs.

Time matched renewable energy is not required. The consultation paper has sought feedback on this.

Export vs domestic projects

It will be interesting to see whether domestic or export projects are prioritised. The consultation paper leaves open providing support to both types of projects (but states that consideration will be given to “the balance between hydrogen production for export and domestic use”). For an export project to be preferred, it will likely need to demonstrate that it will support the development of the Australian hydrogen industry and provide other additional benefits to Australia, and/or also supply to the domestic market.

Assessment process

It is proposed that there will be a two-stage process (EOI followed up a full application) and will be assessed against a merit criteria.