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Australia’s hydrogen tipping point:

The urgent case to support renewable

hydrogen production

February 2023

Contents

Executive summary

1. Hydrogen’s role in Australia’s future

2. Australia’s role in the global hydrogen market

3. Australia’s competitiveness is at risk

4. Elements of the necessary policy response

About us

Acknowledgement

Disclaimer

Page 3

Australia’s hydrogen tipping point: The urgent case to support renewable hydrogen production

Executive summary

The transition to net zero is ushering in a new economics

of comparative advantage and clean manufacturing –

the energy-industrial complex reigns supreme.

For much of Australia’s post-war industrial history,

tyranny of distance, the cost of labour and our

small domestic market have worked against

our ability to compete as a global industrial

powerhouse. But in the transition to a low carbon

world, access to renewable energy will become an

increasingly important cost driver. Markets and

firms that decarbonise their supply chains swiftly

and at low cost will rise to the top. This promises

new opportunities for Australia, if we act swiftly

enough to seize the moment.

Our future is not just ours to make, but it is for

others to take. As economies around the world

embark on the greatest transformation since the

industrial revolution, our destiny is one for us

to forge, for the things that we can do, with one

eye on our global competitors. In the current

transformation, the competitive landscape has

been radically altered by the comprehensiveness

and aggressiveness of the Inflation Reduction Act

of 2022 – on a scale and magnitude which cannot

be ignored.

The economic race is a transformation of the

entire production system of our economy – to

generate economic growth and jobs and income,

decoupled from high emissions intensity. The

transformation begins with the energy which

powers our economy – namely a shift towards

clean, renewable energy as a reliable, efficient, and

effective input into our production systems. It will

trigger development of a new energy-industrial

complex, which will become a driver of innovation

and productivity growth, a determinant of price

levels, and a barometer for economic resilience.

The acceleration of investment into renewable

power is the first enabler of the new energy-

industrial complex.

Hydrogen has the potential to be a tipping

point for Australian manufacturing

As the energy fuel mix shifts, particularly towards

clean electrification, hydrogen emerges as a

significant new component of Australia’s energy

needs. This is because hydrogen has the potential

to decarbonise ‘hard-to-abate’ industries, such

as heavy transport, metals refining and fertiliser

production. Australia’s competitive position in

renewable hydrogen could tip the playing field

back in Australia’s favour as a manufacturing

economy by lowering input costs and accelerating

agglomeration effects in industrial clusters.

Today, Australia stands at a crossroads. We

could be on the edge of the precipice of a

virtuous cycle where accelerating deployments

of renewable electricity and renewable hydrogen

unlock clean manufacturing at scale in regional

Australia, accelerating our transition, distributing

the benefits, and increasing national economic

complexity.

Yet crossing this tipping point is proving

challenging and the clock is ticking because

emerging global competitors are moving quickly.

This decade matters – hydrogen producers

are likely to develop significant and persistent

first mover advantages and the USA, Europe

and Gulf State producers are entering into a

bidding war for market share and dominance

The global hydrogen market is expected to deliver

significant first mover advantages and positive

economic spillover effects driven by long-term

contracts. This dynamic is expected to trigger a

race to scaled production where innovation

drives production down the cost curve. But the

economic and commercial benefits of innovation

extend beyond technology development and

maybe sticky and persistent supply contracts are

likely to accrue to the early movers.

A delayed start due to low competitiveness could

leave Australia with limited opportunities for the

hydrogen value chain, a smaller clean energy

manufacturing base, forgone labour productivity

gains, and a mountain to climb to break into

scaled hydrogen production in later years.

In turn, this would slow the decarbonisation of

Australia’s industrial base, inhibit momentum

for regional economic diversification, and delay

development of a new tax base. More than this,

delay risks forgoing opportunities for low cost

renewables and hydrogen to cornerstone the

revival of Australian clean manufacturing.

Page 5Page 4 Australia’s hydrogen tipping point: The urgent case to support renewable hydrogen production

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Australia’shydrogentippingpoint:TheurgentcasetosupportrenewablehydrogenproductionFebruary2023ContentsExecutivesummary1.Hydrogen’sroleinAustralia’sfuture2.Australia’sroleintheglobalhydrogenmarket3.Australia’scompetitivenessisatrisk4.ElementsofthenecessarypolicyresponseAboutusAcknowledgementDisclaimer48182637474748Page3Australia’shydrogentippingpoint:TheurgentcasetosupportrenewablehydrogenproductionExecutivesummaryThetransitiontonetzeroisusheringinaneweconomicsofcomparativeadvantageandcleanmanufacturing–theenergy-industrialcomplexreignssupreme.FormuchofAustralia’spost-warindustrialhistory,tyrannyofdistance,thecostoflabourandoursmalldomesticmarkethaveworkedagainstourabilitytocompeteasaglobalindustrialpowerhouse.Butinthetransitiontoalowcarbonworld,accesstorenewableenergywillbecomeanincreasinglyimportantcostdriver.Marketsandfirmsthatdecarbonisetheirsupplychainsswiftlyandatlowcostwillrisetothetop.ThispromisesnewopportunitiesforAustralia,ifweactswiftlyenoughtoseizethemoment.Ourfutureisnotjustourstomake,butitisforotherstotake.Aseconomiesaroundtheworldembarkonthegreatesttransformationsincetheindustrialrevolution,ourdestinyisoneforustoforge,forthethingsthatwecando,withoneeyeonourglobalcompetitors.Inthecurrenttransformation,thecompetitivelandscapehasbeenradicallyalteredbythecomprehensivenessandaggressivenessoftheInflationReductionActof2022–onascaleandmagnitudewhichcannotbeignored.Theeconomicraceisatransformationoftheentireproductionsystemofoureconomy–togenerateeconomicgrowthandjobsandincome,decoupledfromhighemissionsintensity.Thetransformationbeginswiththeenergywhichpowersoureconomy–namelyashifttowardsclean,renewableenergyasareliable,efficient,andeffectiveinputintoourproductionsystems.Itwilltriggerdevelopmentofanewenergy-industrialcomplex,whichwillbecomeadriverofinnovationandproductivitygrowth,adeterminantofpricelevels,andabarometerforeconomicresilience.Theaccelerationofinvestmentintorenewablepoweristhefirstenablerofthenewenergy-industrialcomplex.HydrogenhasthepotentialtobeatippingpointforAustralianmanufacturingAstheenergyfuelmixshifts,particularlytowardscleanelectrification,hydrogenemergesasasignificantnewcomponentofAustralia’senergyneeds.Thisisbecausehydrogenhasthepotentialtodecarbonise‘hard-to-abate’industries,suchasheavytransport,metalsrefiningandfertiliserproduction.Australia’scompetitivepositioninrenewablehydrogencouldtiptheplayingfieldbackinAustralia’sfavourasamanufacturingeconomybyloweringinputcostsandacceleratingagglomerationeffectsinindustrialclusters.Today,Australiastandsatacrossroads.WecouldbeontheedgeoftheprecipiceofavirtuouscyclewhereacceleratingdeploymentsofrenewableelectricityandrenewablehydrogenunlockcleanmanufacturingatscaleinregionalAustralia,acceleratingourtransition,distributingthebenefits,andincreasingnationaleconomiccomplexity.Yetcrossingthistippingpointisprovingchallengingandtheclockistickingbecauseemergingglobalcompetitorsaremovingquickly.Thisdecadematters–hydrogenproducersarelikelytodevelopsignificantandpersistentfirstmoveradvantagesandtheUSA,EuropeandGulfStateproducersareenteringintoabiddingwarformarketshareanddominanceTheglobalhydrogenmarketisexpectedtodeliversignificantfirstmoveradvantagesandpositiveeconomicspillovereffectsdrivenbylong-termcontracts.Thisdynamicisexpectedtotriggeraracetoscaledproductionwhereinnovationdrivesproductiondownthecostcurve.Buttheeconomicandcommercialbenefitsofinnovationextendbeyondtechnologydevelopmentandmaybestickyandpersistentsupplycontractsarelikelytoaccruetotheearlymovers.AdelayedstartduetolowcompetitivenesscouldleaveAustraliawithlimitedopportunitiesforthehydrogenvaluechain,asmallercleanenergymanufacturingbase,forgonelabourproductivitygains,andamountaintoclimbtobreakintoscaledhydrogenproductioninlateryears.Inturn,thiswouldslowthedecarbonisationofAustralia’sindustrialbase,inhibitmomentumforregionaleconomicdiversification,anddelaydevelopmentofanewtaxbase.Morethanthis,delayrisksforgoingopportunitiesforlowcostrenewablesandhydrogentocornerstonetherevivalofAustraliancleanmanufacturing.Page5Page4Australia’shydrogentippingpoint:TheurgentcasetosupportrenewablehydrogenproductionAggressiveindustrialpoliciesfromglobalcompetitorswillreduceAustralia’srenewablehydrogenproduction–wemustrespondDespiteAustralia’scleanenergyambitions,therealityisourglobalcompetitivenessisdeclining.Inpartthisisdrivenbyhigherdomesticrenewableelectricitypricesthanincompetitormarkets,butitisalsodrivenbydecisivepolicyactioninthesemarketstoo.TheInflationReductionActisthemostvisibleexampleofthis,buttheEU,Canada,andanumberofGulfStateshavealsoembracedmarketintervention.WeestimatethatifAustraliadoesnotrespondtotheInflationReductionAct,wecouldexport65%lesshydrogenp.a.by2050thanbeforetheIRA’sintroduction,withscaledproductiondelayeduntilafter2030.Thiscouldmeanthatrenewablehydrogenneverreachesacomparablescalewithourcurrentfossilfuelexports,withimplicationsforourbalanceoftradeandcleanmanufacturingaspirations.Industrypolicyischanging,andAustraliamustrespond.ThisdoesnotrequireAustraliatoblindlyfollowpolicysettingsinothercountries.Butitdoesrequirecarefulconsiderationofwhatitwouldtaketocompetewherewehaveexistingadvantages,andhowwecanachievethisatleastcosttooureconomy.WesuggestsixdesignprinciplesthatshouldshapearenewedAustralianindustrialpolicyincludingforrenewablehydrogen:1.Timebound;surgicalinterventionfocusedoncriticalelementsofthevaluechain2.Leveragethebenefitsofcompetitionandshapemarketsthatunambiguouslybenefitdomesticandexportobjectives3.Prioritiselong-termandsustainablevaluetodriveeconomicdevelopmentandprovideaneconomicandsocialdividendfrominterventions4.Governmentinterventionneedstobesimpleandefficienttoimplement5.Reinforcedynamicindustrialandserviceecosystems6.Enableplace-basedjusttransitions.SwiftpolicyactioncouldensureAustralia’sglobalcompetitivenessOuranalysissuggeststherearesubstantialdifferencesbetweenpolicytheleversthatAustraliacouldchoosetoincentivisehydrogenproduction.Productioncreditsemergeasmoreefficientatincentivisingadditionalhydrogenproductionthancapitalgrantsorinvestmenttaxcredits.OuranalysisalsosuggeststhereisaGoldilockszoneforpolicyintervention–aroundaA$2/kghydrogenproductioncredit.ThisisaroundhalfthelevelofthemaximumcreditintheIRAforrenewablehydrogen,reflectingAustralia’sunderlyingcomparativeadvantagesandkeepinganeyeonfiscalobjectives.ThiswouldrequirepublicinvestmentofA$15.5billionintoday’stermsoveradecade.Ifwegetitright,Australiawouldbeontracktoproducealmost16milliontonnesofrenewablehydrogenayearby2050,withexportsworthA$17.4billionayearintoday’sterms.Crucially,wewouldmatchthedeclineofourfossilfuelindustrieswiththegrowthofnewcleanindustries.Newindustrialpolicysettingsmustdemonstratelong-termpublicvaluePolicysettingsforhydrogenwillneedtostrikeabalancebetweencompetitiveness,communityexpectations,andgeostrategicpowershifts.Wecannotdevelopahydrogenandcleanmanufacturingeconomyinthewayofpreviousresourcebooms.Thismeansacknowledgingthetrade-offsupfrontandtakinganapproachwhichbuildsoutplace-basedindustrialecosystemsandofferssupportacrossvaluechainstomaximisevalue-addedeconomicactivitywithinAustralia.ThewindowtoactisclosingfastMuchlikecarbon,thereisatimevalueofindustrialpolicy.ThereisashortwindowforAustraliatoactandensureitscompetitivenessandlaythefoundationsforasignificantnewindustry.Thecompetitionwillcontinuetoincrease,butwithoutintervention,Australiarisksasmallerindustrythatdoesnotliveuptopublicpromises,failstodeliverforregionsintransition,andfailstooffsetdecliningfossilfuels.ExecutivesummaryPage7Page6Australia’shydrogentippingpoint:Theurgentcasetosupportrenewablehydrogenproduction1.Hydrogen’sroleinAustralia’sfutureTheeconomicsofcleanmanufacturingFormuchofAustralia’spost-warindustrialhistory,ourtyrannyofdistance,labourcostsandeconomiesofscalehaveworkedagainstourabilitytocompeteasaglobalmanufacturingpowerhouse.1Inmorerecenttimes,Australianmanufacturinghasbeentiedtoenergyprices,whichhaveremainedhigherthancompetitors.2Asaconsequence,oureconomyhasgrownlesscomplex,lessresilient,andthecaseforrebuildingamanufacturingbasehasremainedanaspiration.Thetransitiontonetzeroisalteringthestructureofnationaleconomies.Inatransitioningworld,manufacturingwillremaindrivenbyeconomiesofscale,butaccesstorenewableenergyandcleanfeedstockswillbecomeanincreasinglyimportantcostdriverandenablerofmarketaccess.Withsignificantrenewableenergypotential,Australiahasclearcomparativeadvantagesinalowcarbonfuture.ThisisthelogicthatunderpinsaspirationsforAustraliatobecomearenewableenergysuperpowerbuildingourcapabilitiesingreenmetals,fertilisersandrenewableenergycomponentvaluechains.AsExhibit1shows,hydrogenwillbeakeypartofAustralia’scompetitivenessinthisneweconomicorder–makingup10-15%ofourenergymix.3Inthisnewworld,cleanenergyandmanufacturingvaluechainsareafundamentalofeconomicgrowth.Theenergy-industrialcomplex(seeExhibit2)becomesadriverofinnovationandproductivitygrowth,adeterminantofpricelevels,andabarometerforeconomicresilience.Inthisfuture,speedandscaleofrenewableenergyandcleanmanufacturingdeploymentmatter,asfast-movingtechnologyfrontiersmakemarketssensitivetocompoundinginnovationandadvantagesarelikelytobesticky.1McLean,Ian,(2012)‘WhyAustraliaProspered:TheShiftingSourcesofEconomicGrowth’2Deloitte(2022)‘BringingManufacturingHome:HowcompaniescansucceedontheglobalstagewithAustralianmanufacturing’<https://www2.deloitte.com/au/en/blog/consulting-blog/2022/bringing-manufacturing-home.html>3Deloitte(2022)‘TheElectrificationofEverything’<https://www2.deloitte.com/au/en/pages/energy-and-resources/articles/energy-system-deep-dive.html>4IbidExhibit2:Theenergy-industrialcomplexExhibit2Resources&CriticalMineralsServicesCleanManufacturingRecycling,EndofLife,&RegenerationRenewableEnergyExhibit1:Australia’senergymixto20704ElectricityBio-energyHydrogenGasOilandpetroleumproductsCoal100%80604020020252035204020502070Page9Page8Australia’shydrogentippingpoint:TheurgentcasetosupportrenewablehydrogenproductionIfAustralia’senergy-industrialcomplexisaligned,acceleratingdeploymentofrenewablesandrenewablehydrogenwillputdownwardpressureoninputpricesandincreaseAustralia’smanufacturingcompetitivenessandattractiveness.Inturn,thissupportsinvestmentandjobcreationinAustralia’sindustrialregions.However,thisvirtuouscycleisnotpreordained.ComplacencyandoverrelianceonourcomparativeadvantagescouldseeAustraliafailtotriggerthisvirtuouscycle.Thiscouldleavetheeconomywithhigherinputpricesthanwouldotherwisebethecaseandnarrowourpathwaytodevelopsignificantandgloballycompetitivecleanmanufacturingcapabilities.RenewablehydrogenhasakeyroletoplayinAustralia’sdecarbonisationjourneyHydrogenhasreceivedconsiderableinterestinrecentyears,asitsroleindecarbonisationhasbecomeclearer.Forecastsofhydrogen’srolevarywidely,withdifferentusecasesconsideredcommerciallyviable.Somestudiessuggesthydrogenislikelytobea500-600Mtp.a.marketby2050.5Othersaremorepessimistic,seeingdemandaroundhalftheselevelsbutmaynotreflectaParis-alignedpathway.6Ineitherscenario,hydrogenproductionwillgrowsubstantiallyfromthe95milliontonnesproducedtoday.Crucially,virtuallyallhydrogentodayisproducedfromfossilfuels.Thequestionishowfastwilltheexistingsupplyofhydrogenitselfdecarbonise,howquicklywillindustrialsectorsoftheeconomyturntorenewablehydrogentospeedtheiremissionsreduction;andhowquicklycannewrenewablehydrogensupplybebroughtonlineatscale?Demand,andtimingofdemandforrenewablehydrogen,willvarybyspecificenduse(Exhibit3).71.Hydrogen’sroleinAustralia’sfutureExhibit3:UsesofrenewablehydrogenExhibit3SectorsRoleofCleanHydrogenTiming2030+2040+CommentsIndustrySteelHReductionagentforDRIorBF-BOFandforhightemperatures✓✓Voluntarydemand,butlongassetreplacementtimesAmmoniaHFeedstocktoproduceammonia✓✓Easeofassetreplacement,asH2isalreadyusedMethanolHFeedstocktoproducemethanol✓✓RefiningHFeedstockforhydro-crackingand–treating✓✓OtherchemicalsMFeedstockand/orfuelforsteamcracking――Dependingoneconomics(vse-cracking)CementMBoosterfueltoincreasecalorificvalue✗―Unfavourableshort-termeconomics(vsbiomassused)OtherindustryLMostcanbedirectlyelectrified/nicheapplications✗―DependingoneconomicsMobilityRoadfreightHFuelinheavy-dutylong-haultransport✓✓VoluntarydemandandfavourableeconomicsShippingHFuelininternationalshippingintheformofH2,ammoniaormethanol―✓LackoftechnologyalignmentandmaturityAviationHDirectuseorasfeedstocktoproduceSustainableAviationFuel✓✓Regulatorypressure(EU)andnoassetchangesneededCarsLElectrificationpossibleandmoreeconomic✗✗TrainsMFueltoreplacedieselenginetrainsinlong-haultransport✗―BuildResidentialLHeatingalternativeincaseofeconomiclimitationsofelectrification(e.g.highcosttoelectrifybuildingswithpoorinsulation)✗―ExpectedtofirststartinareaswhereelectrificationisnoteconomicCommercialL✗―PowerMBalanceintermittencyfromrenewablesthroughstorage✗―Requiredwhenrenewablesreachhighshareinenergymix5SeeforexampleBloomberg‘NewEnergyOutlook2022’(2022)<https://about.bnef.com/new-energy-outlook/>.6SeeforexampleDNV‘HydrogenForecastto2050’(2022)<https://www.dnv.com/focus-areas/hydrogen/forecast-to-2050.html>7Deloitte“Hydrogen:MakingitHappen”(2023)<https://www2.deloitte.com/nl/nl/pages/energy-resources-industrials/articles/hydrogen-report.html>IndustryMobilityBuildPage11Page10Australia’shydrogentippingpoint:TheurgentcasetosupportrenewablehydrogenproductionForAustralia,hydrogenwillplayanessentialroleindecarbonisinghard-to-abatesectorssuchaschemicalandfertiliserproduction,aluminarefining,steel,cementandheavytransport.Australia’shard-to-abatesectorsarethosewhereouremissionsarewhereouremissionsarehigh,andwherecarbon-linkedimportpoliciessuchasEurope’scarbonborderadjustmentmechanism(CBAM)willbegintobite,eitherdirectlyorthroughintermediaries,suchasSouthKoreanmanufacturerssellingintoEurope.Again,itisshapinguptobeaquestionoftiming.WhilemanyAustralianindustrialoperatorshavemadedecarbonisationcommitments,howtheywilldeliveremissionsreductionisstillbeingdetermined.Recentmarketdevelopmentssuggestthatintheshortterm,industrialplayersarelikelytopurchasecarbonoffsetsandcreditsratherthanchoosingtoswitchtorenewablehydrogen.8Thisisprincipallydrivenbytherelativelyhighcostsofrenewablehydrogenattoday’sprices–aspricesdecline,hydrogenwillbreakevenwithcarboncreditsandabsoluteemissionsreductionswillberealised.TheeconomicsofrenewablehydrogenwillgetstrongerasregulatorsbegintofocusonParis-aligneddecarbonisationandasinstrumentssuchasCBAMsarecontemplatedandimplementedinmoremarkets.Earlydeploymentofcost-competitiverenewablehydrogenwouldacceleratedecarbonisationinAustralia.Forexample:•SwitchingtogreenammoniainAustralia’sfertiliserproductionindustrywouldsave4.25MtCO2eeachyear.9•Switchingtorenewablehydrogencalcinationinaluminarefiningwouldsave3.5MtCO2ep.a.10•Together,thiswouldaccountfor23.7%ofAustralia’semissionsfromindustrialprocessesandproductuse11ortheequivalentoftaking1.6millioncarsoffAustralia’sroadseachyear.128DepartmentofClimateChange,Energy,Environment,andWater‘SafeguardMechanismReforms’(2023)9Assumes8.5kgCO2eperkghydrogen;5.4MtoffertiliserproducedinAustraliaeachyearbasedondatafromtheFertilizerAustralia10ARENA,‘ARoadmapforDecarbonisingAustralianAluminaRefining’(2022)<https://arena.gov.au/knowledge-bank/a-roadmap-for-decarbonising-australian-alumina-refining/>11DepartmentofIndustry,Science,EnergyandResources(2022)‘NationalInventoryReport’<https://www.dcceew.gov.au/sites/default/files/documents/national-inventory-report-2020-volume-1.pdf>12CalculatedusingtheUnitedStatesEnvironmentalProtectionAgencyGreenhouseGasEquivalenciesCalculator<https://www.epa.gov/energy/greenhouse-gas-equivalencies-calculator>1.Hydrogen’sroleinAustralia’sfuturePage13Page12Australia’shydrogentippingpoint:TheurgentcasetosupportrenewablehydrogenproductionRenewablehydrogencouldbecomeanenablerofAustralia’scleanmanufacturingaspirationsAustraliahaspubliclystatedambitionsto‘beacountrythatmakesthingsagain’13andtoinvestin‘greenmetals,steel,alumina,aluminium;cleanenergycomponentmanufacturing;hydrogenelectrolysersandfuelswitching’.14Eachoftheseambitionsisgroundedinestablishedindustriesandcomparativeadvantages–ourexistingfootprintinminingandrefining,ourrapidlygrowingdemandforrenewablesandrenewablehydrogen.Butdeliveringagainsttheseambitionsisnon-trivialandrequiresdeliberateeffortsacrossvaluechainstosecureandlinkinputsandoutputsacrossstagesofproduction.Seenfromthisperspective,renewablehydrogenoffersmorepotentialthanjustdecarbonisation.ItisakeyingredientforAustralia’scleanmanufacturingaspirations.15Renewablehydrogenproducedviaelectrolysisrequiressignificantvolumesofrenewableenergytoproduce.Forexample,amilliontonnesofrenewablehydrogencouldrequireasmuchas27GWofcombinedsolarandwindgenerationcapacitytoproduceeachyear.16Thisdemandforlowcarbontechnologieswillbematerialsintensive–arecentstudyfromtheWorldBankandtheHydrogenCouncilsuggeststhatanumberofmineralsthatAustraliacurrentlyproduceswillbeinsignificantdemand,including:aluminium,zinc,copper,nickel,manganese,titaniumandplatinumgroupmetals.17AnintegratedapproachtodevelopingdomesticcleanmanufacturingcapabilitieswouldthereforeconsiderhowtoleveragethisdemandwhichAustraliaisuniquelysuitedtomeet.DeploymentofthescaleofrenewablesrequiredtobuildoutagloballysignificanthydrogenindustryoffersfourrelatedopportunitiesforAustraliatobuildeconomiccomplexityandmovedownvaluechainsfromourcurrentlyresourceintensivemodelto:1.Localiseandcirculatethevalueofessentialandcriticalmineralsnecessarytobuildanddeployrenewablesandelectrolysersforhydrogen2.Deploytherenewablesnecessarytoenablelarge-scaleandlow-carbonmetalsprocessinginAustralia,suchasgreenironandsteel3.Leveragelargeandgrowingdomesticdemandandpotentialsupplychainconstraintstomoveintosubcomponentmanufacturinginkeyrenewablesupplychains4.Combinescaledrenewablesandhydrogentoproducevalue-addedgreenmetalssuchasiron,steel,alumina,andaluminium.13HonEdHusicMP,MinisterforIndustryandScience,29November2022,‘NationalPressClubAddress’<https://www.minister.industry.gov.au/ministers/husic/speeches/national-press-club-address-building-economy-future>14HonEdHusicMP,MinisterforIndustryandScience,10October2022,‘AddresstotheAustralianSteelConvention’<https://www.minister.industry.gov.au/ministers/husic/speeches/address-australian-steel-convention>15RossGarnaut‘TheSuperpowerTransformation:MakingAustralia’sZeroCarbonFuture’(2022),LaTrobeUniversityPress16BasedonDeloittemodelling;notethatthisassumesnobatteryutilisationinrenewablehydrogenproduction17WorldBank‘Sufficiency,sustainabilityandcircularityofcriticalmaterialsforrenewablehydrogen’(2022)<https://www.worldbank.org/en/topic/energy/publication/sufficiency-sustainability-and-circularity-of-critical-materials-for-clean-hydrogen>1.Hydrogen’sroleinAustralia’sfuturePage15Australia’shydrogentippingpoint:TheurgentcasetosupportrenewablehydrogenproductionPage14Capturingtheseopportunitiesisfarfromeasy.Itwillrequirepolicymakersandindustryaliketoshiftawayfromconsiderationoflinearsupplychainstointegratedvaluechainsandproductionecosystems.18Together,theseeffortswillbuildoutAustralia’senergy-industrialcomplex.ThetimingofAustralia’sdevelopmentofrenewablehydrogenmattersTheshifttonetzerohasmaterialimplicationsforregionalAustraliawherefossilfueldependentjobsareheavilyconcentrated.19Todate,transitionplansandannouncementsfortheseregionshaverelieduponforecastsofjobcreationfromcleanmanufacturingsectors.20Renewablehydrogenproductioniscentraltothesetransitionplans–bothasanenablerofindustrialdecarbonisationandafoundationforcleanmanufacturingdevelopment.However,thisimpliesthatAustraliacanscalerenewablehydrogendevelopmenttocoincidewiththedeclineofexistingindustriessuchasthermalcoal.ThesamechallengeswillbebornebyStateandFederalGovernmentswhorespectivelycollectfossilfuelroyaltiesandcompanytaxrevenues.ThissuggeststhatAustralia’smedium-tolong-termtermfiscaloutlookisalsolinkedtothissequencingchallenge.Forexample,previousmodellingsuggeststhatAustralia’seconomywillsufferoverthelongrunbecauseofthephysicaldamagesofclimatechangeifnomeaningfulactionistaken,thusreducingeconomicactivitybyA$3.4trillionby2070.21TheReserveBankofAustraliahasmodelledtheimpactofanetzeroby2050scenarioonAustralianexportsofcoalandLNG,findingsignificantdeclinesby2030.22Thissuggeststhatthedeclineoffossilfuelintensiveexportswillbegintoerodeashareofthetaxbasewhilemarketpressuresonproducersexpeditetheirtransitionplansorconsignthemtostrandedassetstatus.Meaningfulactiononclimatechangewillresultinagrowingnotslowingeconomy.Anexport-scalehydrogensectorprovidesanopportunitytoprovideanewtaxbaseandreplacethefossilfuelrevenuesthatwillerodeaspartoftheglobalenergytransition.However,threequestionsremainunanswered:1.Whatistheappropriateformoftaxationforthehydrogeneconomy?2.Whatmagnitudeofcontributioncouldhydrogen,directlyandindirectly,maketogovernmentrevenues?3.Whenishydrogenrevenuelikelytobegintoentergovernmentcoffers?AnnouncedprojectsareyettotranslateintoscaledproductionThreeyearsonfromthepublicationofAustralia’sNationalHydrogenStrategy,muchhaschanged.CSIRO’shydrogenprojecttrackerlists111prospectiveprojects,26ofwhichareexportscale.23YetdespitepublicfundingroundsfromARENAandseveralstategovernments,onlytwoprojects–both10MWfacilitiesinWesternAustralia24–havereachedfinancialclose.Manyprojectsaretrappedinabankabilitygapbetweenofftakenegotiations,persistentlyhighelectricityprices,andconstrainedsupplychains.Overthesameperiod,therestoftheworldhasquicklycaughtup–particularlyregionswithhighrenewablepotential.SignificantprojectsareprogressingintheUS25andtheGulfStates.26Theseregionsareseeinglargerprojectsreachingfinancialclose,significantpublicinvestments,andtheyaredrawingattentionandeffortfromprojectdevelopers.ThispaperseekstoreenergisethedebateinAustraliaaboutrenewablehydrogen.Itdoessobyoutliningthecontoursofaninevitablepublicdebateaboutthesizeofthefutureindustry,appropriatepolicysupportmeasures,andhowtheindustrycoulddeliverpublicvalueforAustralians.1.Hydrogen’sroleinAustralia’sfuture18Seeforexamplethefourfundamentalsfordevelopinginnovativeproductionecosystems–Breznitz,D.(2021)‘InnovationinRealPlaces:StrategiesforProsperityinanUnforgivingWorld’19Smith,W.Philips,T‘Who’sbuying?TheimpactofglobaldecarbonisationonAustralia’sregions’(2022)<https://cpd.org.au/wp-content/uploads/2022/01/Whos-Buying-Report.pdf>20SeeforexampleAustralianEnergyTransitionsInitiative‘Settingupindustrialregionsfornetzero’(2022)<https://energytransitionsinitiative.org/wp-content/uploads/2022/06/Setting-up-industrial-regions-for-netzero-Australian-Industry-ETI-report-JUNE-2022.pdf>21BusinessCouncilofAustralia(2021)‘Achievinganetzeroeconomy’<https://www.bca.com.au/achieving_net_zero_with_more_jobs_and_stronger_regions>22ReserveBankofAustralia,‘TowardsNetZero:ImplicationsforAustraliaofEnergyPoliciesinEastAsia(September2021)<https://www.rba.gov.au/publications/bulletin/2021/sep/towards-netzero-implications-for-australia-of-energy-policies-in-east-asia.html>23CSIRO,‘HydrogenMap’,November2022.24ARENA‘Australia’sfirstlargescalehydrogenplanttobebuiltinPilbara’,16September2022andReneweconomy‘Firstsolarhydrogenprojectstrikesofftakedeal,tonearlydoublesolarfarm’2February2023.25SeeforexampleTrammo‘’TrammoandReMoEnergysignMoU–Developmentofalow-carbonNH3&exclusiveofftakeofgreenNH3’(17October2022)<https://www.trammo.com/post/trammo-and-remo-energy-sign-mou-development-of-a-low-carbon-nh3-exclusive-offtake-of-green-nh3>26SeeforexampleHydrogenInsight,3October2022,‘Greenhydrogen’snewhotspot?’<https://www.hydrogeninsight.com/production/green-hydrogens-new-hotspot-developers-pledge-42bn-spend-on-flood-of-egyptian-projects/2-1-1325823>Page17Page16Australia’shydrogentippingpoint:Theurgentcasetosupportrenewablehydrogenproduction2.Australia’sroleintheglobalhydrogenmarketRenewablehydrogenwillbeaglobalmarketandmorecompetitivethanAustraliamayexpect.Renewablehydrogenwillbeaglobalmarketfromdayone.Climatechangeisaglobalconcernthatrequireseverycountrytodecarbonise,entailingaglobalneedforrenewablehydrogen.Whiledemandwillstartinindustrialisedeconomies,thehydrogeneconomyisalsoamajorsustainablegrowthopportunityfordevelopingcountries.Thelattercantakeadvantageoftheirnaturalresourcestodeveloptheirownecosystems,addressagrowinglocaldemanddrivenbythenetzerotransition,andintegrateintotheglobalvaluechainbyexportingpartoftheirhydrogenproductiontootherregions.ItiswellunderstoodthatregionslikeAustralia,withhighqualityrenewableenergyendowmentswillbewellplacedtobegloballysignificantrenewablehydrogensuppliers.ThismeansthatsupplywillbeespeciallylargeintheMiddleEast,Africa,LatinAmerica,USA,ChinaandAustralia.Butwemustalsorecognisethatunlikepreviouscommoditybooms,renewablehydrogencanbeproducedvirtuallyanywhere.Thissuggestscompetitionwillbestrongerintherenewable27IRENA‘Globalhydrogentradetomeetthe1.5Cclimategoal:Part1–Tradeoutlookto2050andwayforward’(2022)hydrogenmarketthanintheexistingoilandgasormineralmarkets.Putsimply,scarcityisnolongerenoughtoguaranteeasizeableindustry.Afurtherconsiderationisthatonlyasubsetofhydrogenwillbetradedacrossinternationalborders.Itiswidelyexpectedthatinmanycases,renewablehydrogenwillbeproducedandconsumedinsituinindustrialhubs.27Acrossintermediatedistances–suchasacrossEurope,orfromNorthAfricatoEurope–pipelinesmaybefeasibleandlowercostthanshipping.Finally,therewillberegionswhereseabornerenewablehydrogenistheonlyviablepathway–suchasbetweenAustraliaandAsia.Feasibilityofseabornehydrogenisstillbeingundertakenandtransportviaammoniaisakeycomponentofmanyproponentplanstoday.Page19Australia’shydrogentippingpoint:TheurgentcasetosupportrenewablehydrogenproductionPage182.Australia’sroleintheglobalhydrogenmarketOvercomingthecommercialisationgapisthethresholdissueAtpresent,renewablehydrogenfacescostdisadvantagescomparedtomoreemissions-intensivealternatives–acommercialisationgap.Forinstance,iftherelativecostsofmovingtoacleanermanufacturingprocessarehighandthereremainsuncertaintyaboutthebenefitsofcleanerproducts–suchasagreenpremiumornoimminentthreatoflostmarkets–anAustralianfertilisercompanymaydelayitsswitchtorenewablehydrogen.Thecommercialisationgapisnotuniquetorenewablehydrogen–itisafeatureofearly-stageindustriesandnascentmarkets.Thepresenceofunpricedcarbonexternalitiescanexacerbatethecommercialisationgap,butthisisincreasinglybeingrectifiedbytheintroductionofcarbonpricingglobally.28SeeforexampleSystemiq,UniversityofExeter,SimonSharpe,andBezosEarthFund‘TheBreakthroughEffect’(2023)29DeloitteanalysisbasedonAustralia’sproductionpotential.GreyhydrogenpricesaredevelopedusingAdvisian‘AustralianHydrogenMarketStudy’(2021).TheupperboundofgreyhydrogenpricesincludesanequivalentA$/kgcarbonpricealignedtothereformedSafeguardMechanismpricecap.Basedontoday’spricesandthereformstoAustralia’sSafeguardMechanism,renewablehydrogeninAustraliaislikelytocloseitscommercialisationgapintheearly2030s(Exhibit4).Thiscouldbebroughtforwardbyscaledproductionwhichdrivestechnologycostslower,earlier.Thereareseveralenablersofcost-competitiverenewablehydrogenincludingeconomiesofscaleachievedbylarge-scaleproduction,reductionsinelectrolysercostsastechnologiesimprove,reductionsinrenewablepowerprices,andarangeofefficiencygains.Whiletheinnovationliteratureandexperiencesuggestthatthesegainswilldiffuseacrossallproducers,itislikelythattherewillbemedium-termdiscontinuitieswheresomeproducers28andregionsgaincompetitiveadvantagesoverothers.Itseemsreasonabletoassumetheseadvantageswouldcorrelatewiththelengthofofftakeagreements.Exhibit4:Renewablehydrogencostcompetitivenessovertime2920230RenewableHydrogenGreyHydrogen202620292032203520382041204420472050$12.00$9.00$6.00$3.00$-LCOH(A$/kg)CommercialisationgapXPage21Page20Australia’shydrogentippingpoint:TheurgentcasetosupportrenewablehydrogenproductionSpeedandscalemayoutweighcomparativeadvantagebefore2030Thenextdecadeislikelytobecomearacetosecurecontracts(offtake)forrenewablehydrogenproducers.Akeycharacteristicoftheemerginghydrogenmarketisthelong-termnatureofcontracts.Thismeansthatlockingincontractscanlockothersoutofthemarketforconsiderableperiodsoftime.Inaneconomicsense,itmeansthatthedemandcurveislumpyandnon-continuous.Exhibit5:Potentialdevelopmenttrajectoryforrenewablehydrogenmarketstructure30Thehydrogenmarketisexpectedtofollowthetrajectoryofsimilarindustriesandbedominatedbylong-termofftakeagreements(seeExhibit5)whichwillberequiredtounderwritethefinancerequiredforrenewableproduction.Supplycontractswilllockinmarketshareforfirstmoversandprovidecapital,trackrecord,andintellectualpropertyforfollow-onproduction.Bythetimethemarketmatures,itmaybedominatedbylarge,verticallyintegratedplayerswithproductivityandscaleadvantagesuntilfurthertechnologybreakthroughsdisruptthemarketequilibrium.30DeloitteanalysisbasedonhistoricdevelopmentoftheLNGindustry.Thisconservativelyassumes80%ofhydrogendemandiscapturedin15-yearofftakecontractseachyear.From2035itassumes60%ofdemandisrecapturedbylong-termofftake.DemandisadaptedfromDNV‘HydrogenForecastto2050’(2022)<https://www.dnv.com/focus-areas/hydrogen/forecast-to-2050.html>Exhibit5AnnualNewH2Demand(Mt)0751502253002023202620292032203520382041204420472050Pre2030OﬀtakePost2030OﬀtakeSpotOﬀtakeShareofMarketFirstmoverscastalongshadowOfftakeshareofmarketPre2030OfftakePost2030OfftakeSpotOfftakeshareofmarketOfftakeShareofMarketAnnualNewH2Demand(Mt)FirstmoverscastalongshadowPage23Page22Australia’shydrogentippingpoint:TheurgentcasetosupportrenewablehydrogenproductionTherearesixreasonsfirstmoversarelikelytolockinsignificantadvantageswithelementsofpersistence:1.TrajectoryofsimilarindustriessuchasAustralianLNG(NorthwestShelf),31China’sdominanceofthesolarPVandlithium-ionvaluechains,32Europe’soutsizedroleinoffshorewindmanufacturing,33andtheUK’sshipbuildingindustryintheearly20thcentury34allshowthepersistenceofproductionadvantagesevenasfavourablepolicysettingsarewithdrawnandcompetitiveforcesintensify.2.Intellectualpropertydevelopmentearlymoversarelikelytodevelopintellectualpropertyaroundoptimisationofat-scalerenewablehydrogenproduction(e.g.controlprocesses,optimisationofvariablerenewableenergyinputs).Researchshowscatchingupinintellectualpropertyremainsthemostdifficultforlatermarketentrants.35Earlyinnovationisalsolikelytofacilitatecurrentlyundiscoveredupsides,uncoveredthroughentrepreneurshipandcommercialisation.3.Transactioncostadvantagescouldberealisedbyproducerswhoreachscaleearly.Thiswouldseetheseplayersstrengthentheirclientrelationships,buildabrandandtrackrecordofdelivery,andcredibilitywithinvestors.4.Regionalagglomerationeffectsaremostlikelywherescaleisachievedearly,asthiswilllowerthecostsofco-locatingotherpartsofthehydrogenvaluechain.Inturn,thiscoulddrivefurtherinnovationandintellectualpropertygains.5.Regionallabourproductivitygainsappearcommoninearlystageindustriesandcanspillovertogeographicallyproximateindustries,deliveringaregionaldividend.366.Workforceconstraintsdrivenbyademandforaspecialisedhydrogenworkforcehasthepotentialforprojectstooutstripsupplyintheshortrun.Earlymoverswillbebestpositionedtoacquire,train,andretaintherequisiteworkforce.31Gardner,R(1989),TheNorthWestShelfNaturalGasProject:AnAnalysisofCriticalEvents32Binz,C,Tang,T,Huenteler,J.‘Spatiallifecyclesofcleantechindustries–theglobaldevelopmenthistoryofsolarphotovoltaics’(2017)EnergyPolicy.33Afeweki,S.andSteen,M‘Gainingleadfirmpositioninanemergingindustry:AglobalproductionnetworksanalysisoftwoScandinavianenergyfirmsinoffshorewindpower’(2022)Competition&Change34Hanlon,W,‘Thepersistenteffectoftemporaryinputcostadvantagesinshipbuilding,1850-1911’,NBERWorkingPaper(2019)35Binz,C,Tang,T,Huenteler,J.‘Spatiallifecyclesofcleantechindustries–Theglobaldevelopmenthistoryofsolarphotovoltaics’(2017)EnergyPolicy.36SeeforexamplePillai,S,‘LearningtoScaleorScalingtoLearn?AnEmpiricalExplorationofProductionScalingintheEarlyAmericanAutomotiveIndustry.’BocconiUniversity(25June2019)andGreenstone,Metal,‘Identifyingagglomerationspillovers:evidencefrommilliondollarplants’(2008)NBERWorkingPaper13833Takentogether,thesefactorssuggestthatfirstmoverscouldunlockavirtuouscycleofsupplyagreementsenablingthemtobuildcompetitiveadvantages,andthenusingthesecompetitiveadvantagestoretainmarketshareastheindustrymatures.Anumberofthesefactorsarelikelytobepersistentandsomearelikelytoberegion-specific.Whencombinedwiththelackofcomparativeadvantageintheshortrun,itappearsthattherenewablehydrogenmarketcouldbedominatedinthemediumtermbyearlyplayerswhoreachsignificantscale.Thisisnottosaythatotherproducerscouldnotemergeandcompete.Globalinvestmentinrenewablehydrogenwillcertainlydrivedowntechnologycostsandenablecheaperproductioninfutureyearsandcomparativeadvantageswillremainrelevant.Itsimplysuggeststhatlaterentrantswillhaveasteephilltoclimbtodevelopdifferentiatedcapabilityandreachscale.2.Australia’sroleintheglobalhydrogenmarketPage25Page24Australia’shydrogentippingpoint:Theurgentcasetosupportrenewablehydrogenproduction3.Australia’scompetitivenessisatriskFivekeyelementsofrenewablehydrogencompetitivenessAustralia’sNationalHydrogenStrategyandmanyotherpolicydocumentsreferenceAustralia’scomparativeadvantageswhichwillgiveusanedgeasahydrogenproducer.Wehaveworld-classrenewableenergypotential,rankinginthetoptwogloballyforonshorewindcapacityandutility-scalesolarPVcapacity.37ProximitytoAsiaprovidesanaturaladvantageforexportingseabornerenewablehydrogentoAsiarelativetootherprospectiveexporters–effectively,lowershippingcosts.Seabornehydrogenstillhastoovercomesomechallengeswithcarriers-ammoniaiscurrentlyassumedtobeaviableshippingapproach.Australiaisnotaloneinpossessingcomparativeadvantagesinrenewablehydrogenproduction.TheUnitedStates,GulfStatesincludingSaudiArabiaandEgypt,andAfricancountriesincludingMoroccoandNamibiaallhavesignificantrenewablesendowments.Thesecountrieshavealsoannouncedsignificanthydrogenproductionandcleanmanufacturingambitionsandmultipleexport-scaleprojects.ThissuggestsAustralia’ssuccessisnotpreordained,andthecostsofcomplacencyarehigh.Infact,ouranalysissuggeststhattheeconomicsoftheIRAcouldhavetheunintendedconsequenceofunderminingAustralia’sexportmarketshare–namelyinJapanandSouthKorea.Inthenearterm,noproducingregionislikelytohavematerialcomparativeadvantageinrenewablehydrogenproduction–powerpricesarethekeydriverofcostvariability.Thisisbecauseoriginalequipmentmanufacturers(OEMs)sellelectrolysersonaglobalmarket,andcapacityfactorsareinequivalenceasdeveloperswilleachselectthebestsitesineachcountryfortheirfirstprojectsandeachaspirationalexportingmarkethassomesiteswithhighcapacityfactors.Instead,regionswillcompeteoncostintheshortruninaracetoscaleandcontracts.Wehaveidentifiedfivekeyelementsofrenewablehydrogencompetitiveness,setoutatExhibit6.Theseelementscoverprojecteconomics(powerprices,carbonprices,andpolicysupport)anddeploymentconstraints(enablingenvironment,workforce).Exhibit6:Elementsofrenewablehydrogenproductioncompetitiveness3837Chu,Cheng-TaandHawkes,Adam‘Ageographicinformationsystem-basedglobalvariablerenewablepotentialassessmentusingspatiallyresolvedsimulation’(2019)Energy:19338RenewablepowerpricesfromDeloitteinterviewsandPexapark;carbonpricedatafromWorldBank‘CarbonPricingDashboard’(2023)<https://carbonpricingdashboard.worldbank.org/>forAustraliatherangereflectsACCUpricesandtheSafeguardMechanismcreditcap;enablingenvironmentrankingbasedonBloomberg‘ClimateScopeResults2022’<https://global-climatescope.org/results/>;workforcedataarebasedondatafromIRENA‘Renewableenergyemploymentbytechnology’(2022)<https://www.irena.org/Data/View-data-by-topic/Benefits/Renewable-Energy-Employment-by-Country>;PolicysettingsarebasedonDeloitte’sassessmentofthequantumoffundingavailableandmarketreactionsRenewablePowerPrice(A$/MW)EffectiveCarbonPrice(A$/tCO2e)EnablingEnvironmentWorkforcePolicySupportforcleanhydrogenAU$70-80$37-75280.37%CapitalgrantsUS$30-40$43220.59%InflationReductionActEU$100-110$12360.78%GreenDealIndustrialPlanGulfStates$30-40-41SovereignWealthFunds&PublicInvestmentChile$40-45$790.41%CapitalgrantsSourcesBasedonDeloitteinterviewsregardingPPApricingBasedonWorldBankCarbonPricingDashboardBasedonrankinginBloombergClimateScope2022BasedonIRENAcleanenergyworkforceestimatesasshareoftotalemployedpersonsQualitativebasedonannouncedpolicysettingsPage27Page26Australia’shydrogentippingpoint:TheurgentcasetosupportrenewablehydrogenproductionAsExhibit6suggests,competitivenessasascaledhydrogenproducerdemandsdifferentiationandadvantagerelativetoprospectivecompetitors.AndAustraliarisksbeingoffthepace,particularlywithrespecttoourrenewablepowerprices,enablingenvironment,andpolicysupport.Forexample,renewablepowercontractscancurrentlybestruckintheUSorGulfStatesatlessthanhalfthepriceasthoseonAustralia’seastcoast.ThisposesasignificantchallengeforAustralia–improvingourcompetitivenessisessentialtounlockingfirstmoveradvantages.AggressiveindustrialpoliciesareundercuttingAustralia’sadvantagesInresponsetothetwinimperativesofdecarbonisationandeconomicdevelopmentfromthenetzerotransition,severalcountrieshaveannouncedorimplementedsignificantgreenindustrialpolicieswithimplicationsforAustralia.Exhibit7setsoutthedifferenttypesofpolicyleversaimedatincentivisingadditionalhydrogenproductionindifferentmarkets.AnumberoftheseleversareactivelybeingusedinAustralia,includingupfrontcapitalgrantsfromARENAandinfrastructurechargeexemptionssuchastheTUOS/DUOSreductionforNSWhydrogenproducers.WhileAustraliawasanearlymoverindeployingthesehydrogensupportpolicies,othermarketshavemovedfasterandharder.ThreerecentpolicyinterventionswarrantAustralia’sattention:TheInflationReductionAct(IRA)makesUS$369billion(A$520billion)incleanmanufacturingsupportavailableforUS-basedlowcarbonactivity.Inmanycasesthissupportisuncapped,suggestingthetotalcostmaybehigher.Creditscanalsobestacked.Forexample,ahydrogenproducercouldbenefitfromaUS$3/kghydrogenproductioncredit,39aUS$15/MWhcleanenergyproductioncredit,andlowerrenewablecapexcoststhroughcleanmanufacturinginvestmenttaxcredit.40StackedtogetherthesecreditscanreducethecostofhydrogenproductionbymorethanA$4.50perkgproducedandnowmakeUS-producedrenewablehydrogenthecheapestintheworld.TheEUGreenDealIndustrialPlanoffersnewinvestmentincentives,includingaproduction-linkedcreditforrenewablehydrogenviaanauctionprocess.Thefirstauctionwillbeheldlaterin2023andoffersmorethan€800million(A$1.2billion)insupportforhydrogenproducers.Italsoaimstosimplifytheregulatoryenvironmentandprojectapprovalsandspeeddevelopmentofacleanmanufacturingworkforce.41Exhibit7:Taxonomyofhydrogenproductionpolicylevers39Note,thisisforhydrogenproducedwith<0.45kglifecyclecarbonemissionsperkgofhydrogenproduced.Projectswithhigherlifecycleemissionswouldreceivealessercredit,downtoalevelofUS$0.60/kgforhydrogenproducedusing2.5-4kgofemissionsperkgofhydrogen.40Whitehouse‘InflationReductionActGuidebook’(2022)41EuropeanCommission‘AGreenDealIndustrialPlanfortheNetZeroAge’(2023)3.Australia’scompetitivenessisatriskAproductioncreditisissuedperunitofproductionandcaneitheroperateasadirectlyrefundablepaymentorasataxcreditwhereacompany’staxableincomeisreducedforeveryunitofhydrogenproduced.Adomesticusercreditwouldaccruetousersofrenewablehydrogen.ThiscouldeitheroperateasataxcreditoratradeablecertificatesuchasthatcontemplatedbytheNSWgreengascertificateproposalwhichfunctionslikealargegenerationcertificate.Acontractfordifferenceschemeaimstosupportinvestmentintohydrogenbygivingdeveloperscertaintyoverfuturepricesandrevenue.EuropeancountrieshavechampionedtheuseofaCfDmodelforhydrogenbuildingontheirsuccesseswithoffshorewind.ProductioncreditsUser/TradeableCertificatesContractsfordifferenceGovernmentcandirectlylowerinputcostsforhydrogenproductionbyreducinguserchargesandwearingthecost.Forexample,a90%TUOS/DUOSchargeexemptionisadoptedbyNSW.Aninvestmenttaxcreditallowsacompanytoreduceitstaxableincomebyafixedpercentageofthecostofeligibleinvestmentsoverthelifeoftheasset–namelycapitalexpenditureonhydrogenproductioninfrastructure.Capitalgrantsareawardedtofirmsorconsortiaonaproject-by-projectbasisafteranassessmentprocess.Forexample,ARENA’sRenewableHydrogenDeploymentFundingRound.GovernmentownedinfrastructurechargeexemptionsInvestmenttaxcreditsCapitalgrantsExhibit7Capitalgrantsareawardedtofirmsorconsortiaonaproject-by-projectbasisafteranassessmentprocess.Forexample,ARENA’sRenewableHydrogenDeploymentFundingRound.GovernmentownedinfrastructurechargeexemptionsGovernmentcandirectlylowerinputcostsforhydrogenproductionbyreducinguserchargesandwearingthecost.Forexample,a90%TUOS/DUOSchargeexemptionisadoptedbyNSW.User/TradeableCertificatesAdomesticusercreditwouldaccruetousersofrenewablehydrogen.ThiscouldeitheroperateasataxcreditoratradeablecertificatesuchasthatcontemplatedbytheNSWgreengascertificateproposalwhichfunctionslikealargegenerationcertificate.ContractsfordifferenceAcontractfordifferenceschemeaimstosupportinvestmentintohydrogenbygivingdeveloperscertaintyoverfuturepricesandrevenue.EuropeancountrieshavechampionedtheuseofaCfDmodelforhydrogenbuildingontheirsuccesseswithoffshorewind.ProductioncreditsAproductioncreditisissuedperunitofproductionandcaneitheroperateasadirectlyrefundablepaymentorasataxcreditwhereacompany’staxableincomeisreducedforeveryunitofhydrogenproduced.InvestmenttaxcreditsAninvestmenttaxcreditallowsacompanytoreduceitstaxableincomebyafixedpercentageofthecostofeligibleinvestmentsoverthelifeoftheasset–namelycapitalexpenditureonhydrogenproductioninfrastructure.CapitalgrantsPage29Page28Australia’shydrogentippingpoint:TheurgentcasetosupportrenewablehydrogenproductionProspectiveproducersinGulfStateslooksettobenefitfromsignificantinvestmentsfromsovereignwealthfundswithverylong-termreturnhorizonsandconcessionalaccesstogovernment-ownedinfrastructuresuchasports,pipelines,andtransmissionlines.Forexample,SaudiArabiahasrecentlyannounceda1trillion-SARpackage(approx.US$266billion)42tobecomeaverticallyintegratedhydrogenandmetalsmanufacturer.Targetedsectorsincluderenewablehydrogen-derivedgreensteel,greenaluminium,andgreenfertilisers.43Thesepolicychangesrepresentanewparadigmofindustrialpolicy.Countrieshaveshiftedfrommarket-enablingtomarket-shaping.44Thisinterventionistapproachhasseenashiftawayfrommorecomplicatedbutlowerrisktoolssuchascapitalgrantsandcontractsfordifferencetowardsdirectproduction-linkedincentivesandgreatergovernmentparticipationinenablingandcommon-userinfrastructureprojects.Exhibit8illustratesAustralia’schallengearisingfrompolicyinterventioninothermarkets.Basedonouranalysis,theInflationReductionActclosesAmerica’srenewablehydrogencommercialisationgap–thepricedifferencebetweenrenewablehydrogenandexisting,highercarbonalternatives.Thisenablessupplyagreementstobestruckontoday’sterms,inturnsupportingprojectstoreachfinalinvestmentdecision(FID)andconstruction.Incontrast,ifAustraliadoesnotcloseitscommercialisationgapuntilthe2030s,itwillbechallengingtogetsignificantprojectsdeployedandwewillbedelayedenteringtheglobalmarket.ThereisalreadyevidencethattheInflationReductionActishavinganeffectwithprojectssigningofftakeagreementsandreachingfinancialclose.45Incontrast,AustralianowfacesagrowingcompetitivenessgapwiththeUSandotherrenewablehydrogenproducers.Speedtomarketiscritical.Thelongerinvestmentdecisionsaredelayed,themorechallengingitwillbeforAustralianproducerstoenterthemarket.Inthemeantime,weneedtobemindfulthatAmericanproducersareactivelyinvesting,buildingandinnovatingtoenhancetheircompetitivepositioninthehydrogenmarket.Inturn,thiswillslowthedecarbonisationofAustralia’sindustrialbase,inhibitmomentumforregionaleconomicdiversificationandpostponethedevelopmentofanewtaxbase.Exhibit8:RenewablehydrogenCommercialisationGapinAustraliaandUSA4642AssuminganexchangerateofUSD1toSAR3.7543HydrogenInsight‘SaudiArabiaaimstobeworld’sleadinghydrogenexporterasitannouncesUS$266bncleanenergyplan’(31January2023)<https://www.hydrogeninsight.com/policy/saudi-arabia-aims-to-be-worlds-leading-hydrogen-exporter-as-it-announces-266bn-clean-energy-plan/2-1-139613444SeeforexampleOxfordSmithSchool&SwedishEnergyAgency‘TheroleofMinistriesofFinanceindrivingandshapingthelow-carbonenergytransition’(2023)45SeeforexampleFinancialTimes‘HowBiden’sclimatelawischargingUSgreenspendingandprovokingEurope’(26January2023)<https://www.ft.com/content/6d43e8be-9b93-4430-b4d7-fe74fafe2835>andTrammo‘’TrammoandReMoEnergysignMoU–Developmentofalow-carbonNH3&exclusiveofftakeofgreenNH3’(17October2022)<https://www.trammo.com/post/trammo-and-remo-energy-sign-mou-development-of-a-low-carbon-nh3-exclusive-offtake-of-green-nh3>46Deloitteanalysisbasedonbottom-upcostcurvesforhydrogenproduction.Thecommercialisationgapiscalculatedasthegapbetweenthelevelisedcostofrenewablehydrogenandtheproductioncostofgreyhydrogenincludingacarbonprice.3.Australia’scompetitivenessisatrisk202300.751.52.2532024AUSCommercialisationGapCommercialisationGapA$/kgUSCommercialisationGap202520262027202820292030Page31Page30Australia’shydrogentippingpoint:TheurgentcasetosupportrenewablehydrogenproductionWithoutaction,Australia’shydrogenindustrymayneverreplacedecliningfossilfuelsItisonethingtospeculateonthepotentialimpactofcompetitorpolicysettingsonAustralia’srenewablehydrogenproductionaspirations.Modellingisrequiredtounpackimpactsingreaterdepth.Toshedlightonthismatter,wehaveundertakenstylisedmodellingofglobalrenewablehydrogentradeunderdifferentpolicysettingstoanswerthreecorequestions:1.WhataretheimpactsoftheInflationReductionActonAustralia’shydrogenproductionpotential?2.WhataretheeconomicimplicationsforAustralia?3.Isapolicyresponserequired?Exhibit9showsthatintroductionoftheInflationReductionAct’shydrogenincentivescouldhavesignificantconsequencesforAustralia’shydrogenexportaspirations.ModellingshowsthatregardlessoftheIRA,Australiawillsupplyitsownhydrogenneedsforindustrialdecarbonisation.However,theeffectofIRAsupportpushesAustralian-producedhydrogenoutofAsianexportmarkets.Ourmodellingassumesthatanyhydrogendestinedforexportisshippedintheformofammonia.Theeffectisswiftandmaterial.By2050,Australiaproduces65%lesshydrogenforexport.Crucially,scaledproductionisdelayedadecadeuntilthemid-2030s.ThiswouldlikelyresultinAustraliaforgoingfirstmoveradvantagesandbeinglockedoutofearlyofftakecontracts.Exhibit9:AustralianhydrogenproductionbeforeandaftertheInflationReductionAct4747Deloitteanalysisbasedonamarketclearingmodelforhydrogentrade.3.Australia’scompetitivenessisatrisk202320262029203220352038204120442047205004.5913.518HydrogenExports(Mt)PreIRABy2030Australiaforgoes3.7MtofpotentialhydrogenproductionBy2050Australiaexports65%lesshydrogenannuallywiththeIRAineffectScaledproductionisdelayeduntilafter2030PostIRAPage33Page32Australia’shydrogentippingpoint:TheurgentcasetosupportrenewablehydrogenproductionExhibit10:Hydrogenexportrevenuescomparedtothermalcoal48Therearefurtherimplicationsforanorderlytransitionawayfromfossil-fuelintensiveexports.BeforetheintroductionoftheInflationReductionAct,Australia’shydrogenindustrywouldhavebeenwellplacedandwelltimedtooffsetdecliningfossilfuelexportssuchasthermalcoal,However,ascanbeseeninExhibit10,theIRAreducesAustralia’sproductionvolumeanddelaysdevelopmentofscaledhydrogenproduction.Thisleavesagrowingwedgeofunreplacedexportrevenues,increasingthelikelihoodofadisorderlytransitioninregionalcommunities.Withscaledproductiondelayeduntilafter2030,Australiaisunlikelytobeafirstmover.Therearefiveimplicationsforpolicymakers:1.Smallerscaleproductionwillmaketheeconomicsofco-locationofthehydrogenvaluechainlessattractivethaninotherregions.Thiscouldreduceagglomerationeffectsandthereforeregionalinnovationpotential2.Significantlysmalleranddelayedproductionremovesamaterialdemanddriverofrenewableenergysuperabundance.ThiscouldthereforelimitAustralia’sabilitytomovedownstreamintocleanmanufacturingopportunitiessuchasgreensteel,particularlyasothermarketsimprovetheircompetitivenessandindividualcompaniescommitprojectsandcapital3.Withoutgloballycompetitive,scaledregionalhydrogenhubs,Australiarisksleavingpotentialproductivitygainsforindustrialfacilitiesonthetable.Missingoutonthelearning-by-doingopportunitiesthataregainedbyotherindustrialregionsatapointwhenindustrialprocessesarebeingredevelopedcouldleavealastingimpact4.AnIRA-induceddelaytoscaledAustralianhydrogenproductionwillrequiredevelopmentofdifferentiatedcapabilitiestogainfuturemarketshare5.Theconsequencesofalackofscaleforanon-trivialpartofAustralia’sfutureenergymixsuggeststhatAustralia’sproductioncostsmaywellbehigherthantheyotherwiseneedbe.3.Australia’scompetitivenessisatrisk48Deloitteanalysisbasedonamarketclearingmodelforhydrogentrade.TheprojectionforthermalcoalrevenuesarefromDeloitteDecarbonisationSolutions™usingtheBelow2°CscenariofromNGFSGCAM5.3+2020H2PreIRAH2PostIRAThermalCoal202220242026202820302032203420362038204020422044204620482050$-$20,000$40,000$60,000$80,000ExportRevenue(A$m,undiscounted)Page35Page34Australia’shydrogentippingpoint:Theurgentcasetosupportrenewablehydrogenproduction4.ElementsofthenecessarypolicyresponseAustraliaisatacrossroadsThereisnodoubtthatAustraliahasthenatural,economic,institutionalandcommunityendowmentstobecomeagloballycompetitive,cleanmanufacturingpowerhouse.TheAustraliangovernmentsarealreadydoingmanyoftherightthings.TheFederalGovernment’sreformoftheSafeguardMechanism,formationoftheNationalEnergyTransformationPartnership,andfundssuchasRewiringtheNationandtheNationalReconstructionFundareambitiousandconsequential.StateGovernmentpoliciessuchasQueensland’sEnergyandJobsPlan,theNewSouthWaleshydrogenhubsinitiative,SouthAustralia’shydrogenpowerstation,andWesternAustralia’sRenewableHydrogenRoadmapareprovidinginvestorswithclarityandopportunity.Butwemustacceptthatthereisagrowinggapbetweenpolicyaspirationsandcommercialrealitiestoday.Australiafacesachoice.Achoiceaboutourroleintheglobaleconomy;achoicebetweenanorderlyanddisorderlytransition;achoicebetweenactingearlyandactinglate.Thechoicesarethese:•Thepaceofdomesticdecarbonisationandgreeningofourtradeprofile•Thespeedofrenewableenergydeployment•Thepaceatwhichwedevelopnewindustriestotakeadvantageofdemandforlowcarbonproducts•ThedegreetowhichregionalAustraliafaceseconomicdisruptionassociatedwithtransition•Theextenttowhichdecliningfossilfuelrevenuesimpactthebudgetbottomlinebeforenewrevenuelinesmaterialise.Shouldwechoosenottorespondtoaggressivegreenindustrialpoliciesadoptedbyothercountriesthenwearemakingaclearchoice.Inactionrisksanegativefeedbackloopwheredelayeddecarbonisationandaslowerpaceofrenewablesdeploymentruleouteconomicdiversification.Inturn,thisrisksAustralia’sabilitytoattractcapitalandworkers,tosecurethetechnologiesandcomponentsneededtotransition,andtomaintainstableandsustainablefiscalfootings.Putsimply,itmakesthetransitionharder,morecostly,andmorecontingent.Page37Page36Australia’shydrogentippingpoint:TheurgentcasetosupportrenewablehydrogenproductionDesignprinciplesgroundedinAustraliancontextshouldshapeapolicyresponseGivenourcomparativeadvantages,Australiadoesnotneedtoreplicatethepolicysolutionsadvancedbyourcompetitors.Butequallywecannotignoretheeffectstheyarehavingonourmarketdevelopmentandcompetitiveness.Weneedtodevelopourownguidingprinciplesforhowtorespond,whichreflectouruniquecomparativeadvantages,economicstructure,andpolicyobjectives.Wealsoneedtoacknowledgeareaswhereourcompetitivenessisbeingeroded.AsExhibit6demonstrated,areasofweaknessinclude:•Alackofcompetitivepolicysettings•Highinputcostssuchasrenewableenergycosts•Decarbonisationconstraintssuchaslow-costoffset-basedalternativesforpotentialhydrogenoff-takers•Deploymentconstraintsstemmingfromapprovalspathwaysandsupplychaindisruption.Sixprinciplesshouldshapeapolicyresponse:1.Timebound;surgicalinterventionfocusedoncriticalelementsofthevaluechain.Thissuggeststhatinterventionmustbetime-limitedtosupportindustryestablishmentwhilecarbonexternalitiesandthinmarketsdistortcompetition.Marketsegmentsmusthavepotentialtorealiseproductivitygainsnecessaryforcost-competitiveglobalproductionbytheendoftheinterventionperiod2.Leveragethebenefitsofcompetitiontoshapemarketsthatunambiguouslybenefitdomesticandexportobjectives.Interventionshoulddrivemarket-basedcompetitionandinnovationtodevelopcomparativeadvantagesintocompetitiveadvantageswithstronglocaltoglobalflowsofknowledge,demandandinputs.Competitionwillalsoensurethatthatresources(includingenergy)areallocatedtotheirmostproductiveuse,ensuringmaximumvalueisadded.Butcompetitionshouldoperatewithguardrailstoavoidunintendedconsequencesfordomestichydrogenusers3.Prioritiselong-termandsustainablevaluetodriveeconomicdevelopmentanddeliveraneconomicandsocialdividendforintervention.InterventionshoulddelivervaluefortaxpayersandtheAustraliancommunity.Thisshouldincludeseekingtomakeinterventioncost-neutralwherepossibleandidentifyingpotentialbudgetsavingsassociatedwithnewindustrydevelopment.Butitshouldalsoincludeawiderrecognitionofvaluecreatedbytheindustry,includingthevalueofexpediteddecarbonisationandmanagementoftransitionriskinregionalcommunities4.Governmentinterventionneedstobesimpleandefficienttoimplement.Interventionshouldbedeliveredattheleastpossiblecosttoeconomicefficiency,shouldonlyincentiviseproductivebehaviour,shouldhavethelowestadministrativeandcompliancecosts,andprioritiseeaseandspeedofimplementation5.Reinforcedynamicindustrialandserviceecosystems.InterventionshouldseektoenhanceAustralia’sinnovationandproductionecosystemsconsistentwithwhatworks.Thissuggestsafocusoneconomiccomplexityandco-locationofvaluechainelementsinplace-basedhubs.LeveragingAustralia’sendowmentofcriticalmineralstomaximisevaluechaindevelopmentappearsaclearpriority6.Enableplace-basedjusttransitions.InterventionshouldsupportjobsandprivateinvestmentinregionalareasaswellasthecontributionsoftheseregionstoAustralia’semissionreductiontargets.Butitmustalsointegratewithexistingplace-basedpolicysettingsandavoidcreatingcostsforotherplace-baseddeliverysystems.Appliedacrossthedimensionsofcompetitiveness,Australiacouldtriggeratangibleshiftinmarketrelevanceandcrossatippingpointtounlockavirtuousfeedbackloopofcleanenergymanufacturing,enabledbywidelyavailablerenewableenergyandhydrogen,whereregionalcommunitieswillbetheprimarybeneficiariesofvalue-addedeconomicactivity,jobs,andemissionsreduction.Butshouldgovernmentchoosetorespondtorapidlymanifestingriskstoourhydrogenandcleanmanufacturingpotential,adifferentquestionmanifests:whatisthemostefficientpolicyintervention?Australianeedstoselecttherightpolicyinstrumentstoincentivisehydrogenproduction.AscanbeseeninExhibit7,governmentsaroundtheworldhaveusedarangeofdifferentpolicyinstrumentstoincentiviserenewablehydrogenproduction.Butgiventheearlystagesofthemarket,thereislimitedrealworlddatatoevaluatethesedifferentpoliciestoinformpolicymakers.Thispaperaddressesthischallengeandprovidespolicymakerswithinsightsintotherelativeefficiencyofdifferenthydrogensupportmechanisms.PolicyefficiencyisameasureofhowgovernmentexpenditurecontributestoadditionalhydrogenproducedinAustralia,measuredin(A$/tonne).4.ElementsofthenecessarypolicyresponsePage39Page38Australia’shydrogentippingpoint:TheurgentcasetosupportrenewablehydrogenproductionExhibit11:PolicyefficiencycomparedacrosspolicyleversandmagnitudeExhibit11showsthreeclassesofpolicyintervention:capitalgrants,investmenttaxcredits,andproductioncreditsatdifferentmagnitudes.Thekeyinsightforpolicymakersisthatproductioncreditsaremateriallymoreefficientthanothermodelledinterventions,costinglessandincentivisingmoreproduction.Thisislikelybecausefutureproductioncreditpaymentsareamortisedintoneartermproductioncosts,providingareductioninlevelisedcostofhydrogenpriortothepolicytakingeffect.Bycomparison,acapitalgrantorinvestmenttaxcreditonlyimpactslevelisedcostofhydrogenintheinitialyearsofcashflowswhencapitalexpenditureisassumedtotakeplace.Havingidentifiedthataproductioncreditisarelativelyefficientformofinterventiontoincentiviserenewablehydrogenproduction,aquestionremainsabouttheoptimalmagnitudeofsuchacredit.Exhibit12showstheadditionalhydrogenproducedandcosttogovernmentinpresentvaluetermsofadoptinghydrogenproductioncreditsatdifferentlevels.Thisexhibitclearlyshowsthataproductioncreditdoesnothavealinearimpactonproduction;andthereisalikelyGoldilockszoneofpolicyintervention.Iftheinterventionistoosmall,marginalgovernmentsupportdoesnotincentiviseadditionalhydrogenproduction–ineffectAustralianproducersremainuncompetitivewiththeUS.Butinterventioncanalsobetoohigh–whereincentivisedAustralianproducersarecompetitive,butnotcompetitiveenoughtoreachadditionalmarkets.ThisisbecausedisplacementofcompetingproductioncomesatanincreasingmarginalcostaseachadditionalunitofAustralianproductionishigherupthecostcurvereplacingaunitofcompetingproductionlowerdownthecompetitor’scostcurve.Theimpactofpolicydurationonpolicyefficiencyisalsoconsidered.Thisanalysisidentifiedthatproductioncreditsarehighlysensitivetoduration,andashortercreditdurationwouldmateriallyreduceefficiency.ThisisbecausetheInflationReductionActsupportlastsfor10years.4.Elementsofthenecessarypolicyresponse$75,000$-$-$3,000$6,000$9,000$12,000$150,000$225,000$300,000TotalGovtCostA$m(real,PV)InvestmentTaxCreditProductionCreditCapitalGrantsPolicyEfficiency(A$/tonneH2)PTC$4/kgPTC$2/kgPTC$3/kgPTC$2.50/kgPage41Page40Australia’shydrogentippingpoint:TheurgentcasetosupportrenewablehydrogenproductionGettingpolicyinterventionrightofferstransitionupsideTheanalysissuggeststhataA$2/kghydrogenproductioncreditfor10yearswouldbethemostefficientwayforAustraliatoreversethenegativespilloversoftheIRAandchartapathwaytocleanmanufacturingforregionalcommunities.ThisisaroundhalftheleveloftheIRA’shydrogenproductioncredit,reflectingAustralia’spre-existingcomparativeadvantages.AsExhibit13shows,thisscaleofinterventionwouldrestoreAustralianproduction.ThiswouldrequireapublicinvestmentofA$15.5billionintoday’sterms(netpresentvalue),overthedecade.50Butaproductioncreditaloneisonlypartofthestory.Australiamustalsoensurethatwetacklechallengesofrenewableenergyprices,barrierstodeployingrenewablesatpaceandscale,andsupportSafeguardFacilitiestoaccelerateemissionsreductioneffortswhilemaintainingtradecompetitiveness.OuranalysisshowsthatifAustraliagetsitright,Australiacouldproduce15.94Mtofrenewablehydrogeneachyear,withexportsworthA$17.4billionayearintoday’sterms(A$47.3bnp.a.undiscounted).Crucially,thedeclineofourfossilfuelindustrieswouldbematchedbythegrowthofnewcleanindustries,minimisingtransitionchallengesforregionalAustralia.Ascaledhydrogenindustrycouldbringforward436GWofsolarandwindcapacityby2050.Thisdemandcouldunderwritemanufacturingcapabilitiesforthe48,500windturbinesand523millionsolarpanelsneededforthisalone.50Astandarddiscountrateof7%isapplied.Exhibit12:ProductioncreditimpactishighlysensitivetothemagnitudeofsupportinA$/kgtermsExhibit13:Australianhydrogenproductionafterpolicyintervention75,000150,000225,000300,00000147101316192225284.5913.51807.51522.53011.522.534TotalGovtCostA$m(real,PV)ChangeinIncrementalExports(Mt)ProductionCreditMagnitude(A$/kg)Goldilockszone2050AnnualIncrementalExports(RHS)TotalGovtCost(LHS)TotalHydrogenExports(Mt)PolicyinterventiondoublesAustralianexportproductionScaledproductionisbroughtforwardPreIRAPostIRAProductionCredit(A$2/kg)Page43Page42Australia’shydrogentippingpoint:TheurgentcasetosupportrenewablehydrogenproductionHydrogenpolicyinterventionmustdemonstratelong-termpublicvaluePolicysettingsforhydrogenwillneedtostrikeabalancebetweencompetitivenessandcommunityexpectations.Wecannotdevelopahydrogenandcleanmanufacturingeconomyinthewayofpreviousresourcebooms.Thismeansacknowledgingthetrade-offsupfrontandtakingaplace-basedandsystem-wideapproachtoindustrydevelopment.51Crucially,itmeansplacingpublicvalueatthecoreofaresponsetodecliningcompetitivenessinrenewablehydrogenandcleanmanufacturing.Inparallelwithminimisingthedirectcostofinterventiontotaxpayers,publicvaluewouldbeservedbyplacingconditionsonaccesstogovernmentsupport.Industrialpolicysettingsincompetitormarketsareincreasinglycomingwithadditionalconditionalities.52ForexampletheInflationReductionActhasconditionalitiesattachedtolocalcontentrequirements,emissionsintensity,wages,andplace.Australiashouldconsiderlinkinghydrogenproductionsupporttolifecycleemissions,aspertheIRA.Thiswouldensurealignmentwithdecarbonisationandthedesignprinciplesforcreatinglong-termsustainablevalue.InadditiontolessonsfromIRAconditionalities,developmentofAustralia-specificpolicysupportwouldbewellplacedtoconsiderconditionalitiesthat:•limitgovernmentexposuretofaster-thanexpectedmarketdevelopment(e.g.clawbackprovisions)•limitnegativeexternalitiesandperverseincentives(e.g.limitsonproductionwhentheenergygridreachescapacity)•incentiviseproactive,confidentialdatasharing(e.g.procurementinformation,capitalplanning,recruitment,environmentalimpacts)tosupportplace-basedtransitioncoordination•incentivisereinvestmentintolocalinnovation,valuechaindevelopmentandotherproductivityenhancingactivities.Theseconditionalitiescouldalsoprioritisetradecorridorsorpartnershipsforspecificvaluechainswithspecificmarkets–Australia-KoreaandAustralia-Japan.Forexample,thiscouldentaillinkingdevelopmentofagreensteelvaluechainwithSouthKoreanhydrogenconsumersandmanufacturers.ThiscouldallowkeymarketstoactivelyparticipateinthedevelopmentofAustralia’shydrogenindustryandreducetheirgeostrategicrisksofdependenceonsuppliers.TheimplicationsforagendassuchastheQuadaresignificantandreal.FurthertradeandsecurityconsiderationsarelaidoutinadditionalanalysisbyDeloitte.5351Deloitte(2021)‘AustraliaRemade:Acountryfitfortheageofdisruption’<https://www2.deloitte.com/au/en/pages/building-lucky-country/articles/australia-remade.html>52SeeforexampleOECD(2022)‘AssessingenvironmentalimpactofmeasuresintheOECDGreenRecoveryDatabase’<https://www.oecd.org/coronavirus/policy-responses/assessing-environmental-impact-of-measures-in-the-oecd-green-recovery-database-3f7e2670/>andMazzucato,M.‘Rethinkingthesocialcontractbetweenthestateandbusiness:anewapproachtoindustrialstrategywithconditionalities’Workingpaper18/22<https://www.ucl.ac.uk/bartlett/public-purpose/sites/bartlett_public_purpose/files/mazzucato_m._2022._rethinking_the_social_contract_between_the_state_and_business_a_new_approach_to_industrial_strategy_with_conditionalities.pdf>53Deloitte(2023)‘Asecuritypolicyfortheglobalhydrogeneconomy’<https://www2.deloitte.com/de/de/pages/sustainability-climate-dsc/studies/a-security-policy-for-the-global-hydrogen-economy.html>54RobHarris‘Europe’sEVfeudwithUSmuststop,saysAustralia’strademinister’(13December2022)<https://www.smh.com.au/world/europe/europe-s-ev-feud-with-us-must-stop-says-australia-s-trade-minister-20221213-p5c5y5.html>55Forexample5B,aNSW-basedsolartechnologymanufacturerisopeninganewUS-basedproductionfacility<https://5b.co/news/2022/5b-closes-aud55-million-series-b-funding-round-with-aud20-million-bp-ventures-investment>56Thornton,K.‘TheUShasstartedacleanenergyarmsrace’TheAustralian(6February2023)57DeloitteanalysisThewindowtoactisclosingfastTherehasbeenconsiderablecommentaryfollowingtheintroductionoftheInflationReductionActofa‘subsidyarmsrace’ora‘racetothebottom’.Othercountriesareraisingobjectionsininternationalforums.54YetcountriesarealsoexplicitlyreferencingtheInflationReductionActwhentheyimposetheirown,green-linkedindustrialpolicies.HowAustraliarespondswillbefundamentaltooureconomicfuture.Andwecannotriskdelay.Thepassageoftimerepresentsbandwidth,capital,andtalentlookingelsewheretofulfiltheircleanmanufacturingneeds.Threeemergingtrendsriskbecomingthemarketnorm:1.Australian-growncleanmanufacturinginnovatorsareincreasinglylookingtotheUSandelsewheretoscaleuptheirproduction552.Australiancompaniesarebeingoutbidforinternationaltalent,forgoingexpertiseandtime563.Anecdotalevidencesuggeststhatshortlistsarealreadybeingdrawnupforoptimalsitesforcleanmanufacturingofgreensteel,aluminium,andothermetals,withAustraliarelegatedasapotentialdevelopmentdestination.57ThereisashortwindowforAustraliatoactandensureitscompetitivenessandlaythefoundationsforasignificantnewindustry.Thecompetitionwillcontinuetoincrease,butwithoutintervention,Australiarisksasmallerrenewablehydrogenindustrythatdoesnotliveuptopublicpromises,failstodeliverforregionsintransition,andfailstooffsetdecliningfossilfuels.4.ElementsofthenecessarypolicyresponsePage45Australia’shydrogentippingpoint:TheurgentcasetosupportrenewablehydrogenproductionPage44AboutusAcknowledgementDeloittewishestoacknowledgethatimpetusforthisresearchoriginatedinanalysiscommissionedbyFortescueFutureIndustries.ThisreportisfullyfundedandpublishedbyDeloitteinitsownright,andisbasedonobjectiveanalysisundertakenbyDeloitteAccessEconomicsPtyLimited.TheviewexpressedinthereportrepresentsthatofDeloitte,notanyoneelse.OurDeloitteauthorsDrPradeepPhilipPartner,HeadofDeloitteAccessEconomicspphilip@deloitte.com.auMattJudkinsPartner,Lead,Energy&Climatemjudkins@deloitte.com.auJamesBoyleManager,Energy&Climatejaboyle@deloitte.com.auPage47Australia’shydrogentippingpoint:TheurgentcasetosupportrenewablehydrogenproductionPage46Thiscommunicationcontainsgeneralinformationonly,andnoneofDeloitteToucheTohmatsuLimited(“DTTL”),itsglobalnetworkofmemberfirmsortheirrelatedentities(collectively,the“Deloitteorganisation”)is,bymeansofthiscommunication,renderingprofessionaladviceorservices.Beforemakinganydecisionortakinganyactionthatmayaffectyourfinancesoryourbusiness,youshouldconsultaqualifiedprofessionaladviser.DeloittereferstooneormoreofDeloitteToucheTohmatsuLimited(“DTTL”),itsglobalnetworkofmemberfirms,andtheirrelatedentities(collectively,the“Deloitteorganisation”).DTTL(alsoreferredtoas“DeloitteGlobal”)andeachofitsmemberfirmsandrelatedentitiesarelegallyseparateandindependententities,whichcannotobligateorbindeachotherinrespectofthirdparties.DTTLandeachDTTLmemberfirmandrelatedentityisliableonlyforitsownactsandomissions,andnotthoseofeachother.DTTLdoesnotprovideservicestoclients.Pleaseseewww.deloitte.com/abouttolearnmore.AboutDeloitteDeloitteisaleadingglobalproviderofauditandassurance,consulting,financialadvisory,riskadvisory,taxandrelatedservices.Ourglobalnetworkofmemberfirmsandrelatedentitiesinmorethan150countriesandterritories(collectively,the“Deloitteorganisation”)servesfouroutoffiveFortuneGlobal500®companies.LearnhowDeloitte’sapproximately312,000peoplemakeanimpactthatmattersatwww.deloitte.com.AboutDeloitteAsiaPacificDeloitteAsiaPacificLimitedisacompanylimitedbyguaranteeandamemberfirmofDTTL.MembersofDeloitteAsiaPacificLimitedandtheirrelatedentities,eachofwhichareseparateandindependentlegalentities,provideservicesfrommorethan100citiesacrosstheregion,includingAuckland,Bangkok,Beijing,Hanoi,HongKong,Jakarta,KualaLumpur,Manila,Melbourne,Osaka,Seoul,Shanghai,Singapore,Sydney,TaipeiandTokyo.AboutDeloitteAustraliaTheAustralianpartnershipofDeloitteToucheTohmatsuisamemberofDeloitteAsiaPacificLimitedandtheDeloitteorganisation.AsoneofAustralia’sleadingprofessionalservicesfirms,DeloitteToucheTohmatsuanditsaffiliatesprovideaudit,tax,consulting,riskadvisory,andfinancialadvisoryservicesthroughapproximately8,000peopleacrossthecountry.Focusedonthecreationofvalueandgrowth,andknownasanemployerofchoiceforinnovativehumanresourcesprograms,wearededicatedtohelpingourclientsandourpeopleexcel.Formoreinformation,pleasevisitourwebsiteathttps://www2.deloitte.com/au/en.html.LiabilitylimitedbyaschemeapprovedunderProfessionalStandardsLegislation.MemberofDeloitteAsiaPacificLimitedandtheDeloitteorganisation.©2023DeloitteToucheTohmatsu

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