Are hydrogen targets the answer?

Hydrogen continues to enjoy extraordinary political and business interest, with a spread of policies, plans and projects being announced to support commercial development of the industry.

Western Australia is leading the charge with the State Government exploring options to establish targets to support hydrogen blending in gas networks and introducing an obligation on electricity retailers to buy an amount of electricity sourced from renewable hydrogen – a Renewable Hydrogen Target. Below we take a look at what is currently being proposed and some of the challenges that need to be considered.

Background

WA released its Renewable Hydrogen Strategy in 2019 and updated it two years later. This laid out an ambition for the state to be a significant producer, exporter and user of renewable hydrogen. The state sees local advantages from its renewable energy resources, land availability, existing infrastructure and access to markets, particularly export markets. Amongst the goals of the strategy is approval of a project to export renewable hydrogen from WA and to blend up to 10 per cent renewable hydrogen into the gas network by 2030.

A key challenge to achieving these goals is the limited domestic demand for hydrogen and its high cost, which means it is not currently financially viable.

To deal with these challenges WA’s Department of Jobs, Tourism, Science and Innovation (JTSI) and Energy Policy WA (EPWA) have been asked to consider two separate ways to stimulate renewable hydrogen demand. These are:

1. Explore policy options for hydrogen blending the gas network (JTSI).

2. Investigate an obligation on electricity retailers in WA’s main grid, the South-West Interconnected System (SWIS), to buy a percentage of electricity fuelled by renewable hydrogen.

Hydrogen Blending Target

Earlier in the year, JTSI began considering options for achieving a hydrogen blending target, the implications of the target and how it could contribute to decarbonisation efforts. Options that are emerging include:

• Requiring government to buy a certain amount of hydrogen,
• requiring gas pipeline operators to procure a certain amount of hydrogen
• Creating certificates which liable entities are required to procure and then surrender to the regulator. Those liable entities could include gas retailers, gas generators, wholesale gas users, electricity retailers and electricity wholesale users.

The next step is expected to be development of a policy framework.

Market participants have widely supported the Energy Transformation Strategy (“ETS”) and incurred costs and used substantial resources to implement the reforms. In this context, proper consideration should be given to the appropriateness of the electricity sector now being required to support the development of another sector and whether it is sensible for market participants to switch focus away from implementing the WEM reforms and being ready for the new market, to instead address the considerable challenges that the Renewable Hydrogen Target brings. 

The AEC notes that JTSI & Energy Policy WA’s consultation did not expressly consider whether gas blending is technically feasible, the impact of gas blending on gas generators or how much hydrogen can safely and cost-effectively be put through a gas turbine.

Renewable Hydrogen Target

In May, the WA Government announced its intention to investigate a Renewable Hydrogen Target, the first of its kind in Australia, to help “drive local demand and assist emerging hydrogen production projects, which are essential to developing our hydrogen industry”.

The target would require energy retailers in the SWIS to buy a certain percentage of electricity from renewable hydrogen generation. EPWA has been tasked with undertaking the detailed design work for a target, “in consultation with industry and other stakeholders”. That work is expected to be finalised and taken to Cabinet late this year with the aim of having a target in place by 2024. This is a very ambitious timeline to design such a far-reaching policy and it seems unlikely that renewable projects would be operational to deliver hydrogen by the end of 2024 given the current timeframes to develop projects as well as existing transmission limitations.

The AEC believes WA’s approach would effectively see electricity retailers and, ultimately, their customers subsidise hydrogen projects that are unlikely to benefit them. These projects are more likely to be developed to service export markets.

Most significantly, the Renewable Hydrogen Target is being progressed at pace and without a detailed cost benefit analysis undertaken to consider whether the benefits outweigh the costs to consumers.

There needs to be merit for such a target and a cost benefit analysis should be undertaken to consider the supply chain costs, the costs of storing and transporting hydrogen, the cost of augmenting existing generators (that are not designed to operate with hydrogen as a fuel) as well as the costs to market participants.

Current Cost Assessments

As we have noted in a recent discussion paper on hydrogen it requires multiple processes: production, compression, storage, transport and use in generators and other industrial processes and each of these stages is challenging. 

Independent reviews of the cost of producing, compressing and storing hydrogen vary, as is common for an emerging technology. There is wide diversity in what is considered the most efficient technique for storage. Cost effective storage of pure hydrogen is technically challenging and energy intensive.

The subject of the actual versus potential costs of hydrogen production remains highly speculative, and estimates vary for current costs let alone future costs. The Australian Renewable Energy Agency has estimated the potential cost of hydrogen to be $18.70/kg, falling to $11.30/kg if batteries were integrated in the process.

It is important to note that the conversion rate when being blended into natural gas is $8/KG. Therefore, when determining the input cost for hydrogen in the gas market, these numbers must be multiplied by a factor of 8.

The new Hysata electrolyser design is claimed to operate at a much higher efficiency than other technologies (98 per cent compared to 64 per cent). If replicable at scale, then this offers scope for lower costs.

Analysis prepared for the International Council on Clean Transportation estimated the current and future cost of hydrogen production ranged from between $10/kg and $32/kg now and $7/kg to $19/kg by 2050².

The International Renewable Energy Agency (IRENA) produced a report in 2020 suggesting the cost to make green hydrogen could currently be between $4.50 and $9/kg³, but these costs could fall further. The International Energy Agency has also assessed the costs for production of green hydrogen.

Cost to Consumers

The Renewable Hydrogen Target would impose additional costs on electricity consumers at a time when they are facing higher costs from Western Power’s Access Arrangements proposal and big increases in the market operator’s fees. In fact the WA Economic Regulation Authority has already flagged that the pass through of these increases “will be particularly acute, given current cost of living pressures experienced by consumers”.

The use of hydrogen in generation is still an area for development. While hydrogen generation projects have been proposed since 2018, to date they have so far tended to stall between announcement and delivery. Solutions to the technical challenges of using hydrogen in generation continue to be explored.

While manufacturers have developed turbines that can withstand a blend of hydrogen and natural gas for generation, the level of hydrogen in the mix remains relatively low.

According to a Hydrogen Council report, baseload supply hydrogen will only be relevant in “regions constrained in renewables potential and situations where alternatives like fossil fuels with direct CCS or biomass … are not an option”.

To refit existing gas generators, if achievable, would involve considerable reconfiguration of many elements of a plant.

Support mechanisms

There is widespread support for the hydrogen to succeed as it has the potential to play an important role in decarbonisation. Progress on hydrogen technologies is being made, but there is still uncertainty in key parts of the supply chain over optimal technology (for electrolysers), costs and applications.

There is a role for government to support emerging technologies and there are a number of mechanisms by which this can be achieved, rather than via a subsidy from the electricity sector and end users to another industry.

The best, most cost-effective way to support hydrogen needs to be carefully considered. The AEC has long argued the best way to encourage the entry of new technology into the SWIS is through market mechanisms in the WEM, such as its reserve capacity mechanism, essential system service markets and the energy market, instead of subsidies from the energy sector that are passed on to consumers who are unlikely to directly benefit.

Additionally, it is unclear why hydrogen is preferred for subsidisation over other emerging and required technologies, such as dispatchable long duration battery storage, which will be needed to support the energy transition and are not commercially viable based on the existing revenue streams in the WEM.

The AEC encourages Energy Policy WA to undertake a thorough review of the merits of a Renewable Hydrogen Target and assess if there is sufficient cost benefit to warrant it being progressed further.