Australia's green hydrogen sector is integral to the nation's strategy for long-term decarbonisation and aims to position the country as a global leader in renewable energy. With abundant solar and wind resources and strong government support, Australia has set ambitious plans to become one of the largest producers and exporters of green hydrogen. However, recent developments have revealed that significant obstacles remain to achieving a commercially competitive green hydrogen industry,
These issues have led key players like Fortescue Future Industries to scale back their hydrogen initiatives prior to Origin Energy's similar announcement that it was withdrawing from its hydrogen project. This has raised concerns about the sector’s growth trajectory.
Hydrogen’s Role in Australia’s Energy Transition
Green hydrogen is considered a cornerstone of the renewable energy transition due to its ability to decarbonise hard-to-abate sectors such as heavy industry and long-distance transport. Unlike grey or blue hydrogen, which rely on fossil fuels for production, green hydrogen is produced through electrolysis—using renewable electricity to split water into hydrogen and oxygen—resulting in a zero-emissions fuel suitable for various applications.
Australia's National Hydrogen Strategy, released in 2019 and updated in 2024, envisions the country as a global leader in hydrogen production. The strategy outlines plans to reduce production costs, create hydrogen hubs, and establish a thriving domestic market while positioning Australia as a major exporter to regions such as Asia and Europe[i]. Government funding initiatives like the Hydrogen Headstart Initiative, which allocates AUD $2 billion to accelerate large-scale hydrogen projects, underscore the political commitment to making green hydrogen a key pillar of the nation’s energy transition[ii].
Recent Setbacks
While Australia's hydrogen future appears promising, recent corporate decisions have exposed significant challenges that need addressing.
In July 2024, Fortescue Future Industries (FFI) announced it would scale back its investment in green hydrogen, abandoning plans to produce 15Mt of green hydrogen by 2030. FFI had positioned itself as a global leader in this space but faced difficulties in achieving cost reductions necessary for competing with fossil fuels and recognised that scaling the industry would take far longer than initially expected.
Andrew Forrest, Fortescue’s founder and executive chairman, said the wars in Ukraine and the Middle East had driven up global energy prices, making large-scale green hydrogen production unviable[iii] FFI also faced delays in developing infrastructure required for transporting and storing hydrogen. Although exploring ammonia as a potential carrier could facilitate the long-distance transport of hydrogen, the necessary infrastructure is still underdeveloped and more costly than anticipated. Additionally, while global interest in green hydrogen is growing, market demand has not yet reached levels sufficient to support FFI's original investment plans.
In October 2024, Origin Energy announced its withdrawal from the Hunter Valley Hydrogen Hub (HVHH), a flagship project intended to be one of Australia’s leading centres for green hydrogen production. Origin cited economic concerns as well as slower than expected technological advancements as the primary reason for its exit[iv]. Current production costs of green hydrogen are estimated between AUD $5 and $6 per kilogram—significantly higher than the AUD $2/kg target set by the government for competitiveness[v]. This discrepancy stems from high electrolyser costs and a lack of economies of scale in the emerging industry.
Additionally, Origin pointed out a slower than anticipated development of the green hydrogen market as another factor behind its decision.[vi]
Key Challenges Facing Australia’s Hydrogen Sector
High Production Costs
One of the primary obstacles to the widespread adoption of green hydrogen is its high cost of production. Currently, green hydrogen produced via electrolysis—the process of splitting water into hydrogen and oxygen using electricity—costs between AUD $5-6 per kilogram. For hydrogen to be commercially viable and compete with fossil fuels, this cost needs to fall below AUD $2 per kilogram. Despite recent advancements in electrolyser technology, the costs of renewable energy inputs and the energy-intensive nature of electrolysis keep prices high.
Australia’s abundant solar and wind resources could eventually drive down production costs, but this is only one piece of the puzzle that is needed for hydrogen to achieve economies of scale.
Infrastructure Bottlenecks
Another significant barrier is the lack of infrastructure to support hydrogen production, transport, and storage. Hydrogen, being a highly reactive and low-density molecule makes it highly flammable, requiring specialised infrastructure to handle its unique properties. This includes retrofitting natural gas pipelines to accommodate hydrogen or building entirely new pipelines, as well as developing hydrogen refuelling stations for transport.
In Australia, infrastructure development has been slower than expected, limiting the potential for hydrogen to scale up quickly. For example, converting natural gas pipelines to transport hydrogen has proven more challenging than initially anticipated, with concerns about hydrogen embrittlement and leakage. Some state governments, such as Victoria, have also committed to electrification to decarbonise residential gas use, which has arguably reduced incentives for gas pipelines to invest in hydrogen retrofitting due to uncertainty over its long-term uses.
The limited number of hydrogen refuelling stations also hampers the adoption of hydrogen-powered vehicles and equipment. Promisingly, some companies like Ampol have made investments in this area, which should prove helpful in cutting emissions from heavy transport.
Uncertain Market Demand
While there is significant international interest in green hydrogen, particularly from countries like Japan, South Korea, and Germany, the demand landscape remains uncertain. Many potential buyers are still developing their own hydrogen strategies, and the global hydrogen market is in its infancy. This creates uncertainty for Australian producers who are relying on export markets to justify large-scale hydrogen investments.
Fortescue’s decision to scale back its hydrogen projects reflects concerns about the pace of international market development. Although countries such as Japan have expressed interest in importing green hydrogen, the infrastructure required to transport and receive hydrogen is still being built. Additionally, competition from other hydrogen-producing nations, such as Chile and Saudi Arabia, could further complicate Australia’s export ambitions.[vii]
Regulatory and Policy Challenges
Despite strong government support, there are still regulatory hurdles that must be addressed to enable the hydrogen sector to flourish. The lack of clear regulations around hydrogen blending in natural gas pipelines (along with uncertainty as to its long-term future uses), as well as safety standards for hydrogen storage and transportation, creates uncertainty for investors and project developers.
Additionally, while the Australian government has set ambitious targets for hydrogen production and export, there is a need for more detailed policies that address the practicalities of scaling up hydrogen production and developing domestic markets for its use. Without clear regulatory frameworks, the sector may struggle to attract the large-scale investments needed to meet its goals.
Australia’s Hydrogen Ambitions and Government Support
Despite these setbacks, Australia remains committed to developing a green hydrogen economy and recent modelling of Australia’s net-zero trajectory has a heavy reliance on the commercial availability of it. The graph on the left models a net-zero by 2050 scenario, while on the right is a net-zero-by 2040 scenario.
Figure 1: Hydrogen consumption by sector
Source: CSIRO, p15.
To realise this, the Federal Government’s 2024 National Hydrogen Strategy sets out ambitious goals for the sector, including reducing the cost of hydrogen production, establishing hydrogen hubs across the country, and building a domestic market for hydrogen use. The strategy includes significant financial incentives, aims for substantial production increases by 2030 and 2050, and sets the foundation for Australia to capitalise on its hydrogen export potential.
The May Federal Budget laid out significant funding, approximately $8 billion over ten years, to meet these ambitious goals. This includes:
These hydrogen hubs are central to the government’s strategy. By concentrating hydrogen production, storage, and distribution in specific regions, the hubs aim to achieve the economies of scale necessary to drive down production costs. While some hubs, such as the Hunter Valley Hydrogen Hub, have faced setbacks, other projects in Western Australia and South Australia are progressing, supported by both federal and state governments[viii].
The Road Ahead: Opportunities for Hydrogen in Australia
Despite the challenges, Australia’s hydrogen sector still holds significant potential. The country’s vast renewable energy resources and proximity to key hydrogen markets in Asia makes it well-positioned to become a major player in the global hydrogen economy. As technology improves and costs decline, hydrogen could play a critical role in decarbonising heavy industries such as steelmaking, chemicals, and transport.
Additionally, hydrogen has the potential to serve as a long-term energy storage solution, balancing the intermittency of renewable energy sources like wind and solar. As Australia continues to expand its renewable energy capacity, green hydrogen could provide a way to store excess energy and use it when demand is high.
It is important to remember, however, that hydrogen is only one of many renewable fuels and gases Australia can leverage to decarbonise its hard-to-abate sectors. Other fuels, such as biomethane, have already shown good potential to decarbonise target areas like industrial processing and heating. These fuels deserve similar policy attention to mitigate any risks that might emerge if hydrogen cannot commercially mature quick enough.
Conclusion
The recent decisions by Fortescue Future Industries and Origin Energy underscore significant hurdles facing Australia's hydrogen sector: high production costs, infrastructure limitations, and uncertain market demand must be addressed if the nation is to realize its ambitious goals in this field. Nevertheless, with ongoing government support and technological advancements on the horizon, there remains considerable potential for hydrogen and other renewable fuels to play an essential role in Australia's energy future as it seeks to establish itself as a leader in global green hydrogen production.
[i] https://www.dcceew.gov.au/sites/default/files/documents/national-hydrogen-strategy-2024.pdf
[ii] https://www.energy.gov.au/government-priorities/hydrogen/hydrogen-headstart
[iii] https://www.afr.com/companies/mining/fortescue-puts-hydrogen-on-backburner-with-700-jobs-cut-20240717-p5jufj
[iv] https://www.originenergy.com.au/about/investors-media/update-on-hunter-valley-hydrogen-hub/
[v] https://www.abc.net.au/news/2024-04-09/green-hydrogen-electrolyser-climate-change-fossil-fuels/103682064
[vi] https://www.originenergy.com.au/about/investors-media/update-on-hunter-valley-hydrogen-hub/
[vii] https://www.dcceew.gov.au/sites/default/files/documents/state-of-hydrogen-2022.pdf
[viii] https://www.hydrogenpowersa.sa.gov.au/home/news/big-players-sign-on-to-south-australias-clean-hydrogen-future
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