Hydrogen auctions could help advance the 2024 National Hydrogen Strategy

In late 2024, the Australian Government secured passage of key components of the Future Made in Australia legislative package, which in part implement key actions under the 2024 National Hydrogen Strategy. Following this, the Albanese Government, in its re-election commitments, indicated it would further enhance the Future Made in Australia economic plan by unlocking an additional $8 billion of investment in renewable energy and low emissions technologies through a $2 billion expansion of the Clean Energy Finance Corporation.

Notwithstanding these favourable advancements, the growth of the Australian hydrogen industry continues to face challenges in progressing project development activities, retaining long-term investment commitments and identifying suitable and reliable near-term product markets at commercial prices.

Forms of public hydrogen auctions could offer a useful support framework for Australia. In this article, we outline what auctions are, how they could help implement the Strategy, where and when they should be focused, and how Australia can utilise them.

What are hydrogen auctions?

Hydrogen auctions are a policy tool used by governments to accelerate the development of clean hydrogen markets. They are a form of competitive public procurement, in which governments award financial support or contracts to hydrogen market participants through a structured, competitive bidding process.

In October 2024, the International Renewable Energy Agency (IREA) published Green Hydrogen Auctions: A Guide to Design, and provided a useful summary of the objectives of an auction process:

"Auctions &nash; like all tariff-based support schemes – offer long-term revenue certainty, allow for long-term budgetary planning and enable moving forward on the technology learning curve….

[T]he competitive nature of auctions can enable true price discovery …for the producers and the willingness to pay of the consumers, thereby minimising the overall cost of public support.

However, auctions are successful in bringing down prices only if there is sufficient competition. In addition, the price pressure resulting from auctions can lead to projects not being realised, the sector being compressed, and potentially an inability to invest in innovation and technological improvement."

The IREA explains that auctions can be national, regional (particularly within trade zones) or international, and divides them into four categories (of which the first is the focus of the IREA's Guide to Design).

Supply-side auctions

• Hydrogen producers compete to offer hydrogen products at the lowest cost or to meet key quality or production criteria to receive funds to purchase or upgrade electrolysers / production equipment.

• These auctions are most suitable where good renewable energy resources and logistical capabilities exist.
  
  

Demand-side auctions

• Hydrogen consumers – such as heavy industry or transport operators – compete for government support to provide purchase price certainty without direct reference to any project's production price.

• These help to bridge the gap between the actual cost of getting hydrogen to market (generally referred to as the standardised levelised cost of hydrogen) and what consumers are willing and able to pay for hydrogen.

• Contracts for difference are one example of a demand-side support mechanism that are already used in some jurisdictions, notably Germany's Carbon Contracts for Difference program. End-user companies compete on the basis of projected emissions reductions for long-term subsidies of up to 15 years to switch from fossil fuel to green, low-carbon technologies.

Demand-side processes can promote decarbonisation, including for specifically targeted end-use sectors (such as green steel or aluminium). However, they may also create incentives for hydrogen imports, as competing purchasers may opt to import hydrogen / derivatives from overseas producers(for cheaper) rather than from domestic producers.

Double-sided auctions

• This auction method involves matchmaking hydrogen producers with consumers.

• By competitively selecting suppliers offering green hydrogen at the lowest price, as well as those off-takers with the highest willingness to pay for the product, the price difference between supply and demand that needs to be covered through public funds is minimised, further stabilising the market.

H2Global, established in Germany in 2021, is a successful example of double-sided auctions. H2Global's subsidiary, Hintco, purchases long-term contracts (eg. 10 years) to buy green hydrogen derivatives like ammonia, methanol, or e-fuels from producers. It then sells those products under short-term contracts (eg. 1 year) to buyers in Europe. The difference in price between what Hintco pays and what it earns is covered by government grants.

A diagram of the economic impact clearly identifies the double-sided nature of this commercial role:

Image source: H2Global

Joint supply- and demand-side auctions

• In this simplified subset of the double-sided auction, bids must include hydrogen supply and off-take.

• The auction selects the bid that requires the least amount of public support to reduce the cost to the auctioneer.

• This type of auction typically requires on-site hydrogen production and demand consortia which are often physically co-located or include the necessary transport infrastructure. An example of this is the Hunter Valley Hydrogen Project that just received $432 million from the Australian Renewable Energy Agency (ARENA) under its Hydrogen Headstart Program. That project seeks to offtake the green hydrogen produced to Orica's Kooragang Island ammonia facility located 550m north of the Hub.

• This model helps grow both supply and demand at the same time – especially in places where hydrogen transport infrastructure doesn't yet exist.

Auctions also offer flexibility for the timing of when public funding support is provided:

• For investment-based auctions, governments can provide upfront "capex" support, typically to cover major costs such as electrolysers.

• Production-based auctions can offer "opex" (or at least operations phase) support for qualifying units of hydrogen produced and delivered, creating direct incentives tied to actual production commencement, thereby incentivising project completion.

The ARENA-administered Hydrogen Headstart program has features of a supply side, production-based auction. It is a competitive process for access to incentives paid on production volumes (although due to the challenges of achieving competition at early stages the local industry's development, the support is currently provided as much on the basis of potential project eligibility, feasibility and merit as it is on levelised cost.)

Other examples noted by the IREA include Chile's $50 million auction in 2021; Denmark's ~€167.5 million auction in 2023; the €720 million EU Hydrogen Bank pilot auction for EU-wide projects and the UK's ~€2,3 billion HAR1 round.

Auctions vs. administrative support regimes

A key feature of all auction processes is the use of existing competition. This can be distinguished from administrative support regimes, such as conventional feed-in tariff regimes for renewable energy generation, which often provide a fixed level of support to encourage the development of new, clean energy generation technology projects, which would then compete with or succeed legal fossil-fuel generation facilities.

Administrative support regimes can also include other incentives that may be offered available to eligible producers or products who have achieved specified decarbonisation or other assurance targets. An example is Australia's legislated Hydrogen Production Tax Credit Incentive (HPTI). Eligibility for the HPTI is aligned with the Guarantee of Origin certification regime under the Future Made in Australia (Guarantee of Origin) Act 2024, which in turn leverages existing large-scale renewable energy targets and certification processes under the Renewable Energy Target (RET) regime for the generation source of renewable electricity used in the hydrogen electrolyser.

In some cases, auctions and administrative support can be blended. An example is the "reverse auction" process run by the ACT Government as part of its Next Generation Renewables program. Competition was generated for the fixed-price feed-in tariff by placing floors and ceilings on the generation capacity of participating renewable energy projects (in that case, between 20–100 MW), as well as other project requirements (like minimum battery storage components, local engagement and grid connections).

How auctions can support the National Hydrogen Strategy

Beyond delivering economic benefits, hydrogen auctions critically give governments a tool to strategically allocate public funding in line with broader national objectives.

For Australia, these objectives are organised within the Future Made in Australia economic plan. The link is very clear from the first line of Minister Chris Bowen's foreword to the Strategy:

"Hydrogen is central to the Australian Government’s vision for a Future Made in Australia."

This goal will not be delivered by local funding alone; under Action 29, Australia will "pursue opportunities to leverage investment from other countries who are willing to provide co-funding and make other efforts to build end-to-end global supply chains."

Those other countries are already using auctions:

"Some of our major trading partners are implementing financing mechanisms to kick start progress towards their domestic emission reduction targets. These include contract-for-difference schemes and auctions to be administered by the European Union and Japan."

Action 31 further states that "existing partnerships will be prioritised as vehicles for furthering our international hydrogen objectives. Australia will look for opportunities to grow global markets and build end-to-end supply chains." Those existing partnerships – bilateral agreements and multilateral treaties – are outlined in the Strategy.

Where and when hydrogen auctions should be focused

With these Actions under the Strategy in mind, and to achieve the ten-fold increase in production volumes by 2035 the Strategy aims for, there are three potential hydrogen auction frameworks that might be further considered.

Supply-side auctions: these would be useful for the sale of hydrogen or derivatives to customers in Singapore, particularly shipping and port terminal operators to support low-emissions fuel transition (particularly given the emerging IMO Regulations on GHG Emissions Framework, and Actions 9, 16, 17 of the Strategy).

Demand-side auctions: these would work for commodities in export-facing industries (especially green ammonia, iron and aluminium) produced using hydrogen to customers in countries such as Japan, South Korea, Germany and the United Kingdom (also Action 15 of the Strategy).

Double-sided auctions: if done in careful coordination with countries with more advanced or structured regulatory support frameworks such as the Netherlands, Germany and Japan, double-sided auctions could achieve the combined outcomes of Australian production incentivisation and EU decarbonisation outcomes, particularly in hard to decarbonise sectors such as shipping and aviation fuel, given the focus of those bilateral agreements on the development of the entire hydrogen supply chain (also Action 14 of the Strategy).

It is likely that Australia participates in double-sided auctions in the near future. In December 2024, Australia and Germany announced the signing of a $660 million Joint Declaration of Intent to establish a joint H2Global auction to export Australian green hydrogen to Germany. The deal remains in development but is intended to follow the H2Global model, enabling Australian hydrogen to be sold to European markets. It is likely that Hintco will act as the intermediary to support guaranteed offtake arrangements over a ten-year period. The initial hydrogen purchase auction is scheduled to begin in 2025, with the first annual sales auction targeted for 2027–2028.

A cautionary tale

Although hydrogen auctions can be utilised to assist the net-zero transition, they aren't without their risks. Recently, the Tokyo Metropolitan Government ran a green hydrogen auction based on H2Global's double-sided auction mechanism. Suppliers bid the lowest price for which they were prepared to sell hydrogen, while buyers bid the highest price for which they were willing to purchase hydrogen, with the government acting as the intermediary to fill the gap. According to the subscription service Hydrogen Insight, the two auctions held resulted in (figures in Yen-equivalent USD):

• for a tube trailer, the supply side bidder won with a bid of $23.32 / kg, whilst the demand side bidders won with a bid of $8.33 / kg; and

• for a gas cylinder, the supply side bidder won with a bid of $29.75 / kg, whilst the demand side bidders won with a bid of $23.32 / kg.

The Tokyo Metropolitan Government subsidises the difference between the supply side bidder and demand side bidders (being almost $15 / kg for the trailer, and around $6.25 for the cylinder). Although the auction was successful in that the matching occurred, this auction highlights two key factors:

• the hydrogen auction can be used as a way to artificially create a new hydrogen market, however it requires governments to take significant cost risk; and

• the cost to produce hydrogen is still significantly higher than the goal of $4–6 per kg.

Although this outcome resulted in the Tokyo Metropolitan Government undertaking significant cost risk, it was a successful hydrogen auction and provides great insight into how the government can use public funds to pursue climate goals.

Can Australia utilise hydrogen auctions?

Australia's hydrogen industry is still in an early development phase, and the capacity to generate export-level quantities of hydrogen, derivative products or value-added projects is still some years away. This is recognised by the Strategy, which says:

"the current expected development trajectory for the hydrogen industry to 2050 can be characterised according to the following stages:

• 2020–2030: Industry activation and initial scale production;

• 2030–2040: Increase scale production and export of hydrogen and derivatives; and

• 2040–2050: Scaling up of export and consolidation of domestic use".

Getting started on an auction strategy

The Strategy is due for its five-yearly review in 2029. However, an auction process, particularly any double-sided process, would have a lead time of several years. As a result, if auctions are to feature as an economic and policy tool for Australia in developing the national hydrogen industry from 2030, the identification, development and publication of requirements and timetables for any such auctions will need to start soon and be well on track before the 2029 Strategy review and any update.

Aligning any proposed auction process with related international or regional frameworks, including the IMO Regulations on GHG Emissions Framework or the EU Hydrogen Regulations, will be critical to ensuring such auctions help producers to develop new hydrogen producers, enable customers to decarbonise their businesses, and support the Future Made in Australia objectives to reduce fossil-fuel emissions and better enable Australia to utilise and benefit from its domestic clean energy advantages.

Progressing Australia's Guarantee of Origin scheme

More immediately, and consistent with Action 30, the Australian Government proposes to implement Australia's Guarantee of Origin scheme. The initial consultation period on Exposure Draft (Tranche 1) – Future Made in Australia (Guarantee of Origin) Rules 2025 covering:

• scheme registration;

• registration of scheme profiles;

• certification of products; and

• registration of renewable electricity generation facilities,

closed immediately before the Federal election was called in early 2025.

It may still be a few months before the result of this consultation are released, but further consultations are already underway or coming soon:

• the remaining rules under the GO scheme, including certification of renewable electricity;

• the Methodology Determination for Hydrogen Production from Electrolysis;

• the REGO Measurement Standard Instrument; and

• the Cost Recovery Impact Statement and related Cost Recovery Regulations.

However, the current legislation is due to come into effect in December 2025 (unless proclaimed sooner), so we are likely to see considerable regulatory activity on hydrogen for the balance of 2025.

Dealing with offtake uncertainty

One of the key issues preventing hydrogen projects from reaching Final Investment Decision is the lack of off-take certainty. It is likely that the Australian hydrogen industry participates in, at the very least, double-sided auctions under the H2Global mechanism. This would provide 10 year off-take certainty without the need for a specific buyer to commit to a long-term off-take contract. Shipping costs to Germany, however, would greatly increase the levelized cost of hydrogen.

Therefore, the Australian Government could consider using a domestic hydrogen auction to either:

1. increase electrolyser capacity and reduce the upfront cost of large scale hydrogen projects through supply side auctions;

2. increase green hydrogen uptake through demand-side auctions, reducing the current high price of green hydrogen; or

3. promote the market for green hydrogen through supported double-sided auctions until hydrogen production reaches a stage where price parity can be approached or achieved.