Federal Government kicks off consultation on design of Hydrogen Headstart Competitive Tender process

Ben Cansdale, Pat Cranley, Eric Jeffery and Kirijana Petreski
24 Jul 2023
Time to read: 4.5 minutes

Consultation on the design of the Federal Government's competitive EOI process for up to $2B investment in Australia's hydrogen industry closes 3 August 2023.

What is the Hydrogen Headstart?

In May 2023, the Federal Government announced in its second budget a $2 billion investment initiative in Australia's green hydrogen industry, dubbed the Hydrogen Headstart Program. Funding under the Program is aimed to not only accelerate development of Australia's hydrogen industry, but to also connect that industry to new global supply chains, and motivate clean energy industries to do the heavy lifting to make Australia a "green hydrogen superpower".

The Program intends to bridge the commercial gap for early Hydrogen projects and put Australia on course for up to a gigawatt of electrolyser capacity by 2030 through at least two large-scale projects. This process will prioritise factors such as cost-effectiveness and deliverability when selecting suitable large-scale projects based in Australia producing either hydrogen or derivative products made from hydrogen. The successful projects will receive a production credit over a 10-year period to cover the commercial gap between the cost of hydrogen produced from renewables and the sales prices of that hydrogen.

It is also hoped that the introduction of the Program will help Australia's green hydrogen industry keep pace with hydrogen industries in other regions, in particular the US following its introduction of the Inflation Reduction Act that will also provide a new hydrogen production tax credit for green hydrogen projects being developed there.

What do I need to do by 3 August?

The Federal Government has released a Consultation Paper calling for submissions on the design of the competitive selection process (Competitive Round) under which investment recipients will be chosen. Hydrogen stakeholders (including potential hydrogen proponents) are encouraged to submit responses to several questions listed in the Consultation Paper, including those that go to the proposed:

  • eligibility requirements and merit criteria;
  • funding mechanism;
  • upside sharing regime;
  • volume risk support;
  • payment frequency and term;
  • assessment process; and
  • timetable and other Expression of Interest (EOI) design mechanics.

What are some of the key criteria proposed for the Competitive Round?

Competitive Round – Expressions of Interest (EOIs)

The Competitive Round will be run as an EOI process. The proposed EOI assessment criteria (of which comment is sought) is:

  • Projects to be ranked against the Merit Criteria (detailed below) as specified under the Program Guidelines.
  • Projects with high "merit status" will be invited to submit a Full Application.
  • Applicants are required to provide various documents, models (including a dynamic financial model), evidence of the applicant's capability and readiness to implement the project and plans for the project (limited to a 30 page short form project plan).

Successful EOI proponents will be invited to submit a Full Application. The Full Application is proposed to require:

  • Further detailed documentation relevant to the project.
  • A long-form project plan document updated following the EOI submission and Departmental feedback.
  • A financial model and further relevant attachments such as a detailed risk management plan.
Assessment Criteria

The proposed Assessment Criteria require the proponent to have Competitive Round Objectives such as producing renewable hydrogen at scale in Australia, supporting domestic decarbonization, reducing barriers for future developments through private sector capital, developing and retaining investment and skilled labour in Australia, providing price discovery and the willingness to facilitate knowledge sharing.

Eligibility Criteria

The current draft of the proposed eligibility requirements include:

  • Technological requirements (ie., the project must involve a new deployment of electrolysis / renewable hydrogen production facilities. Such production may utilise existing energy generation and infrastructure but must be 100% powered by a combination of renewable sources (e.g., behind the meter renewables, electricity from a renewable-generation power purchase agreement, etc.);
  • While all end uses of hydrogen or hydrogen derivatives are proposed to be eligible, there will be consideration of the balance between domestic and export hydrogen use.
  • Minimum electrolysis development (50MW);
  • The maximum project size is to be unrestricted.
  • The project must be located within Australia (but do not need to be located in any designated hydrogen hub).
  • The Project must be a single site development and must involve a valid commercial case for the end use of hydrogen (including a commercialisation and cost reduction pathway analysis).
Proposed funding mechanism

The Federal Government proposes that successful applicants will receive a Hydrogen Production Credit (HPC) for each kilogram of renewable hydrogen produced (subject of course to certain criteria being met). Applicants are asked to nominate a HPC value in their submission, together with a total volume cap for hydrogen expected to be delivered over the 10-year period (to determine the maximum support available from the Federal Government by multiplying the HPC value by the maximum volume). Once the HPC is set, it is not expected to be adjusted over the term.

Notably, funding is not proposed to be provided to support the upfront capital cost of projects. Funding is limited to essentially subsidising the cost of each kilogram of renewable hydrogen produced to encourage uptake and the development of a renewable hydrogen industry.

If a proponent's project includes the production of hydrogen derivative products, it is also proposed that they nominate the HPC value and total volume cap with respect to that product (eg., the $/tonne of renewable ammonia).

Proposed upside sharing or reduction in funding

The Federal Government proposes an upside sharing mechanism. It is proposed that potential upside arising from decreased operating costs or increased sales price over the contract term will be shared on a 50/50 basis. Upside sharing will only commence if realised upside exceeds a certain value (materiality threshold to be determined).

In addition, should realised sales prices materially exceed the level of support provided, the successful applicants may be required to pay back an amount received in previous years.

Volume risk support

Similar to some international programs, the Federal Government is seeking submissions as to whether the program should include volume risk support. A volume risk support mechanism will generally reduce the proponent's risk that their customer suddenly or unexpectedly reduces demand (ie., hydrogen sales falling below fixed or ongoing costs like operation costs or the cost of capital).

Proposed payment frequency and term

It is proposed that HPC payments will be made quarterly in arrears with funding available from FY27. The Federal Government is interested in the industry's input as to the frequency of payment.

Proposed Merit Criteria

The consultation paper notes that the proposed Merit Criteria is currently under development. However it does anticipate that there will be a focus on:

  • The Project's alignment to Competitive Round Objectives.
  • The proponent's demonstrated level of capability and capacity (which can be read on a consortium basis) to deliver such a hydrogen project;
  • Scope, methodology, deliverability and risk of the project. The consultation paper notes that this will consider matters such as "current development work completed to date and pathway to complete the front-end engineering and design phase (FEED) including process flow diagrams, utility flow diagrams, preliminary piping and instrument diagrams, plot plan, developed layout drawings and engineered process and utility equipment lists."
  • The proponent's financial capability.
  • Willingness for knowledge sharing both with government and publicly.

Consultation is sought on how the merit criteria should be structured, whether the applicant should have at least a conditional offtake arrangement in place before applying, additional outcomes to be incorporated into the formal Merit Criteria for the Program to deliver broader benefits, other aspects of an export-orientated proposal to be assessed and how should emissions abatement calculations consider the different end uses of hydrogen.

Proposed timetable

The proposed timetable outlines that the EOI open date will commence in Q4 CY23 / Q1 CY24, with a due date to be determined (although an estimated minimum 8 weeks from EOI Open Date is proposed).

The assessment of EOIs and notification to applicants will occur within 45 business days of the EOI Due Date. The Full Application is anticipated to be due Q3 CY24 (subject to change following EOI) with an estimated minimum of 12 weeks from Invitation to Full Application.

The decision outcome is to be determined in Q4 CY24, dependent on the EOI stage.

Where to for prospective green hydrogen proponents?

Interested proponents are encouraged to comment on the details and questions provided in the Consultation Paper by close of business Thursday 3 August 2023.

In concert with the above, proponents are also encouraged to make submissions to the Federal Government's consultation paper for its review of the National Hydrogen Strategy which was released on 7 July 2023. Responses to that consultation are due by close of business on 18 August 2023.

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