Meeting local trading partner needs

The Australian Government has a significant number of MoUs and agreements in place to drive collaboration on climate change and the building of new clean energy industries, including hydrogen.

Whilst this level of collaboration is laudable, it has been relatively passive. The agreements have not – so far – led to implementable industrial decarbonisation policies. With the notable exceptions of HyGATE and the Singapore agreement, the agreements are unfunded and do not carry an expectation of any investment taking place.

Overall, hydrogen export options for Australia are likely but not guaranteed in any particular type, volume or timeframe. The value to be gained (or lost) by Australia is enormous. There is much more that can be done to support a refreshed NHS, to attract investment, meet trade partner needs, and maximise value to Australia from risk sharing and friend-shoring.

AHC travelled to Korea, Japan and Singapore in June 2023 and undertook a series of meetings and roundtables with a range of companies and investors to discuss existing investments in their own country and across the region, their views on the emerging hydrogen industry in their own country and across the region, and their views on Australia’s investment proposition and what we could be doing better to attract significant investment.

A number of key themes were repeated across the various conversations:

·         Australia is held in high regard, our industry leaders are well respected, as are our education and technology sectors. There is however a sense that the country is moving too slowly to adequately counter the centrifugal pull of the IRA on clean energy investments – that we need to improve our competitiveness and the range of incentives available for the emerging hydrogen industry.

·         Australian planning is seen as hampering our competitiveness on two fronts: at a national level it is lacking, with no guidance or central management to guide complex projects on matters such as access to electricity, land and water; and at a local level it is overly slow and complex to deal with regulatory and environmental processes. There remain concerns about sovereign risk from changed Australian policy regarding measures such as the safeguard mechanism and domestic gas reservation.

·         Project costs of operation are viewed as too high relative to our competitors, some of this is due to labour costs, though the higher costs of transport and logistics in remote regions where projects are more likely to be located are a significant contributing factor.

·         While green or renewable hydrogen was seen as the future, there was increasingly a view that blue or low carbon hydrogen would be utilised in the first instance as the cost of producing green hydrogen reduces over time. This is also because each market has little to no willingness to pay a green premium or to bear the costs of decarbonising faster than their competitors.

·         Our trading partners are seeking partnerships and have expressed frustration with what appears to be a transactional approach from Australia.  There is a need to build on our existing relationships and demonstrate commitment to sharing the costs of building this new industry and trade. Countries (and companies) are keen to build multilateral supply chains across the region and potentially also enable technology transfer to increase the pace of decarbonisation efforts across ASEAN and other resource constrained regions.

·         Interestingly, all mentioned the need for Australia to focus on building domestic demand: to focus on and invest in the local use of hydrogen and ammonia rather than only exporting. This would serve to de-risk investment in export supply chains as it demonstrates a commitment from government and local industry to the continued production, storage and utilisation of hydrogen and derivatives. It also assists in building social licence, stimulates training of skilled workers, and is seen as more likely to foster a robust research and development sector focused on hydrogen and derivatives.

Several of the issues raised do not lend themselves to easy solutions, at least not without potentially increasing Australia’s own financial, social and political risk beyond currently acceptable political and community thresholds. There is, however, room for improvement in Australia’s value proposition.

Singaporean, Japanese and Korean companies – producers, trading companies, industrial players, as well as in some instances power companies and shipping companies – are demonstrating a willingness to seek out and enter agreements and make investments to secure their position in the emerging supply of hydrogen and ammonia to their respective markets.

Australia’s trading and political partners in Asia are unlikely to cease investing in energy projects Australia; however, in the development of hydrogen and ammonia production capacity, where price sensitivity of off takers (whether for power users or for industry) is a key consideration, Australia may be overlooked for initial offtake agreements to meet targets in the late 2020s and early 2030s unless we develop a series of policies and incentives to increase Australia’s capacity to attract investment.

For Australia to remain competitive in the negotiations of future investments, the Australian Government should as a matter of priority signal its willingness to negotiate government-to-government development and funding of critical supply chains to Korea, Japan, Singapore and other trading partners in the region, that also serve to meet Australia’s domestic decarbonisation goals such as DRI, green fertiliser, and clean minerals processing.

For example, the Singapore-Australia Green Economy Agreement, alongside the Hydrogen Headstart funding, could position Australia as a front runner for the establishment of supply chains to both Singapore and Asia. The Australian Government could potentially lead multilateral discussions to position at least one of the projects selected for support under Headstart as a supplier of hydrogen or derivatives to Singapore, Japan and Korea under their respective hydrogen programs, thereby securing offtake for the Australian projects, improving the economics of the supply chain, as well as meeting the energy and import needs of key trading partners and progressing decarbonisation targets across the broader region.

The size, scale and complexity of the first large scale hydrogen export projects will require bilateral agreements between governments for bespoke joint support packages. These will need to meet the specific strategic and economic interests of each party, as well as allocate appropriate levels of risk across private and public sector partners. The agreements are likely to include significant expenditure on the required infrastructure, as well as provision of underwriting support for the trade itself.

It will also be necessary to set expectations on potential future reservation policies and royalties.

Recommendation 11: Support the refreshed NHS through a clear investment proposition.

The Net Zero Economy Agency should use the modelling and cost analysis from Recommendation 4 and the targets from Recommendation 9 to engage with DFAT, Austrade and the jurisdictional trade and investment offices to create an investment proposition to take to international markets. This work will need to be sufficiently funded and will also require clear coordination across posts, with reporting lines through to the Net Zero Economy Agency. 

Recommendation 12: Develop joint support packages between Australia and its trading partners to support trade in hydrogen and hydrogen derivatives.

The Australian Government should develop bespoke joint support packages between Australia and its trading partners that underwrite trade and support necessary infrastructure.

These should also cover multilateral agreements to incentivise investment and collaboration, for example, between Australia as a producing country, Singapore as a key intermediary for shipping and the nations of North Asia as key customers for hydrogen, its derivatives and also products produced using hydrogen.