Demand from Japan, South Korea, prime Australia’s green hydrogen pump

Inside Infra 7 March

Demand from Japan, South Korea, prime Australia’s green hydrogen pump

Growing foreign interest and investment is expected to boost the development of green hydrogen projects down under.

By Erina Chan

Rising demand for green hydrogen in the economic powerhouses of Japan and South Korea — where development opportunities are limited — has investors in those nations turning down under to source the renewable fuel. That export demand will prove to be a boon for the sector in Australia, which is in the midst of its own push to boost green hydrogen production, according to several sources.

The demand is being driven in part by government subsidies, such as a Japanese scheme set to start by 2030 that will help bridge the price gap between hydrogen and conventional fuel. Similarly, spending on green hydrogen projects by South Korea’s government has jumped in recent years.

But land constraints in Japan and Korea are likely to restrict widespread domestic production of “green” versions of the fuel there. Green hydrogen is defined as such by the use of renewable power to develop it. Enter Australia, whose government is itself boosting funding of hydrogen projects — and which has plentiful space for the power sources key to making hydrogen green.

“Australia has large, sparsely populated areas and many regions which are suitable for solar and wind generation,” said Jackson Allen, counsel at Allen & Overy in Perth. “It also has expertise in oil and gas and energy, which can be leveraged for hydrogen development, and maintains a strong research and innovation sector.”

Support from Canberra

Development of hydrogen projects has surged in Australia in recent years. At the moment, there are 16 live hydrogen greenfield projects in the country according to Infralogic data:

Australia’s government has introduced several initiatives to support the hydrogen industry with a goal of becoming a world leader in the market. For instance, the Australian Renewable Energy Agency (ARENA) has provided funding of AUD 170.35m (USD 115.31m) to 44 hydrogen projects over the past 10 years, according to ARENA. The government’s goal is for hydrogen to be priced at less than AUD 2 per kg, well below the current price of AUD 4-6 per kg, and to develop an export supply chain based on green hydrogen.

In September, ARENA conditionally approved USD 47.5m of funding to build Australia’s first large scale renewable hydrogen plants. The USD 87m Yuri project, led by a joint venture between Engie and Mitsui & Co., involves building a 10 MW electrolyser and 18 MW solar PV portfolio on the Burrup Peninsula in the Pilbara region of Western Australia. Once operational in 2024, green hydrogen produced there will supply the adjacent Yara Pilbara Fertiliser facility.

The funding is part of the AUD 103.3m Renewable Hydrogen Development Round, which is also supporting two other 10 MW hydrogen electrolyser plants — ATCO’s Clean Energy Innovation Park in Warradarge, Western Australia and AGIG’s Murray Valley Hydrogen Park in Wodonga, Victoria.

Why Australia?

Australia’s available land, high quality renewable energy resources and fossil energy resources located close to potential carbon sequestration sites well position the country to become a key exporter in the global hydrogen market, according to Allen & Overy’s Allen and firm partner Goran Galic.

For ‘blue’ or ‘brown’ varieties of hydrogen, which are not produced using renewable power, Australia also has a competitive advantage due to its access to depleted hydrocarbon reservoirs suitable for carbon capture and storage (CCS) — as well as its expertise in dealing with these decommissioned geological formations, said Galic.

Incentives in the sector — such as recent rounds of funding for electrolyzer development from ARENA and for development of CCS hubs from the Commonwealth — have had a positive impact on its development, Galic said. Regulation has also been developed to enable CCS projects to qualify for Australian Carbon Credit Units, although more is needed to encourage long-term investment, he said.

Japan, Korea look south

Australia’s push to develop a green hydrogen export market gels nicely with similar initiatives in Japan and South Korea to incentivize development of the sector. While the countries want to develop their own green hydrogen production capabilities, they are unlikely to scale up production sufficiently to meet future domestic demand.

Partly due to their domestic production constraints, the governments of Japan and South Korea are actively supporting projects based in Australia.

Japan has been a world leader in the development of hydrogen-related technologies. Its government is looking closely at industry needs and is expected to invest around JPY 7tn in the sector over the next 10 years. In December, Japan’s government revealed a plan to support first movers on hydrogen projects under which the government will make up the price difference between conventional fuel and hydrogen for about 15 years. The scheme is set to start by 2030.

Such subsidies will have a significant impact on the market in Japan, according to Hitomi Komachi, counsel at Allen & Overy in Tokyo. “The subsidy scheme will be what makes hydrogen projects investable and bankable in Japan, with certainty and sufficiency of return, and would trigger developers and financiers to take FIDs [final investment decisions],” Komachi said.

Since Japan will be a net importer of hydrogen, establishing a full-scale international hydrogen supply chain is one of the government’s main goals. Several Japanese companies are actively investing into hydrogen projects in Australia and many more are expected to follow in the future, according to several sources.

Last year, a consortium comprised predominantly of Japanese companies — including Kawasaki Heavy Industries subsidiary Hydrogen Engineering Australia, J-Power, Iwatani Corporation, Marubeni Corporation, Sumitomo Corporation and AGL — successfully completed an AUD 500m demonstration project which uses brown coal to make hydrogen. Called the Suiso Frontier, it is the world's first liquefied hydrogen cargo vessel capable of transporting liquefied hydrogen from Victoria in Australia to Kobe in Japan. The project is backed by both the Australian and Japanese governments.

Australia’s hydrogen market “draws huge interest from Japanese companies, as Australia has strong government support, and [due to] decent climate change strategies such as the Safeguard Mechanism,” said Hiroyuki Kano, partner at Clayton Utz. The safeguard mechanism requires Australia's largest greenhouse gas emitters to keep their net emissions below 100,000 tons of carbon dioxide equivalence per year. 

Likewise, South Korean firms are beginning to see the potential of Australia. South Korea hopes to establish more overseas production bases due to limited land in the country. During 2021, spending on hydrogen projects by the South Korean government totaled almost USD 702m.

In September 2022, Hanwha and SK Group joined Korea Zinc in a proposed green hydrogen project in Australia’s Queensland to unlock the state’s hydrogen potential and build a green energy export corridor connecting North Queensland to northeast Asia.

As far as his Korean clients are concerned, Allen expects to see more such projects going forward. Australia is definitely one jurisdiction that they are considering, he said. “With strong support from both the Korean and Australian (federal and state) governments, including funding commitments, we expect Korea will be a crucial trading partner for Australian green hydrogen,” Allen said.

Challenges and competition

While Australia has a lot of advantages favoring hydrogen production, it also faces challenges ranging from support for subsidies and other incentives to workforce training and the provision of land.

Land access for green hydrogen, significant development costs and regulatory uncertainty are challenges for the entire hydrogen market including in Australia, as it is still at an early stage of development. Particularly in Australia, relatively high costs for labor and material and lower local demand limit the ability to get initial projects funded, according to Allen.

“Incentivizing demand for green hydrogen in areas such as industry and transport will help create a strong domestic hydrogen market,” Allen said.

Development of a robust green hydrogen market will also require government support for the development of hubs, which will help facilitate land access and duplication of key shared infrastructure such as transmission and port facilities, he said.

Banks see the potential of the hydrogen market, which “promises to be a high-growth and lucrative commodity” that satisfies lenders’ ESG requirements, but they are also wary of its risks, Allen said. “The key risk is more related to the emerging nature of the green hydrogen market — especially regulatory and offtake risk,” he said.

And Australia is not the only market positioning itself to export green hydrogen. The Middle East is a key competitor, with many potential Asian developers looking to both markets, Allen said. For example, Korean steelmaker POSCO recently announced plans to expand investment in hydrogen production in both Australia and Saudi Arabia.

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