Australian energy giant Origin Energy (ASX: ORG) announced in early October that it would abandon its hydrogen project, causing a stir in the industry. Previously, the Australian Treasury had conducted multiple research analyses on the development of Australia's hydrogen industry. Hydrogen, a decarbonization route favored by the Labor government, accounts for the largest proportion of the budget in Australia's future manufacturing plan. However, the reality is that the technological maturity of hydrogen is much earlier compared to other routes such as solar and wind energy.
The government hopes that hydrogen can eventually replace natural gas and has provided the hydrogen industry with more than 6 billion Australian dollars in production tax credits in the subsidy plan. As the top energy giant in Australia, Origin began researching the possibility of this technological route as early as 2022 and established a joint venture with Australian explosives manufacturer Orica in 2023 to supply hydrogen to the Newcastle industrial area.
Origin's original plan was to build a 55-megawatt electrolyzer by 2026 to help Orica achieve decarbonization goals on Kooragang Island, and then gradually increase its capacity to 1 gigawatt to serve the export market. However, after the front-end engineering design was ready and the New South Wales government approved the plan, Origin itself backed out. Many people have great doubts about why a project strongly endorsed by large factories and the government is no longer attractive?
Core reason: Affordability on the demand side and doubts about renewable energy generation capacity
Even with so many favorable conditions attached, the risks that Origin has to bear are still too great, mainly coming from the selling price and cost.
Firstly, the development speed of the green hydrogen market is not as fast as the company hoped. After thorough research, Origin has no confidence in the customer demand in the local and export markets, especially worrying about whether customers are willing to pay the premium needed to improve the economic benefits of the factory. Large manufacturing enterprises with a long history like Orica are also inevitably still experiencing fierce industry competition. As shown in the figure below, in recent fiscal years, Orica has been fluctuating around the break-even point.
At the beginning of the hydrogen project, even if small companies have obtained government subsidies, their costs will still be far higher than the price of natural gas. When large enterprises are struggling on the edge of profitability, the profits of other small manufacturing companies naturally cannot afford the expenditure of hydrogen energy.
If the selling price is to be reduced, solar and wind power generation must keep up with the pace and be combined with battery energy storage to increase stability. Although Origin has invested a lot in new energy power plants, the company has already started 2.6GW of solar and wind energy projects and 1.5GW scale energy storage projects. However, the company still expects natural gas to play an important role in the energy market for a long time, used to adjust the instability of new energy power generation.
Andrew Forrest, the executive chairman of Australian mining giant Fortescue (ASX: FMG), also expressed concerns about the above issues in July this year. At that time, he also decided to shelve Fortescue's goal of producing 15 million tons of green hydrogen by 2030 and reduced the priority of several green hydrogen projects that his own company is preparing.International capital has not yet given up, Europe and Japan are still making efforts
Although Australian companies are relatively pessimistic about the prospects of hydrogen energy development, a significant part of the reason is related to the domestic market demand. The backward and small number of manufacturing industries in the country, as well as the domestic trucking industry, cannot support the rapid expansion of the hydrogen energy industry and achieve economies of scale.
Japan is currently the country with the most explicit attitude and the most thorough investment in hydrogen energy projects. The Japanese government has established a fund of 1 trillion US dollars (1.4 trillion Australian dollars) to provide funding for large new energy infrastructure projects, including hydrogen energy.
Tatsuya Terazawa, Chairman and CEO of the Japan Institute of Energy Economics, said: "The biggest attraction of Australian hydrogen energy lies in its predictable policies and respect for the legitimate interests of investors."
Now, with the retreat of Australian local energy giants, Japanese investors have also begun to consider reducing their investment in Australian hydrogen energy. At the same time, compared to the uneconomic green hydrogen projects, they have started to consider the possibility of developing more blue hydrogen (hydrogen produced from fossil fuels) projects.
By mixing with natural gas, the mixed gas of hydrogen and natural gas can be directly used as fuel for steam turbines in power stations, supplementing the intermittency of renewable energy generation, and helping to maintain the long-term stable operation of the power grid. Australia has also started pilot projects in this regard, but the progress and scale are currently small.
The Tallawarra B power station in New South Wales is the first dual-fuel power plant in Australia, which began operation in February this year, but the current hydrogen mixing ratio is only 5%.
In Queensland, the Brigalow Peaking power station is expected to be put into use in 2026, which is the first hydrogen-natural gas mixed power station in Queensland. The initial plan is for the volume ratio of hydrogen to be 35%, and gradually approach 100%.
Considering that the development plan for hydrogen energy in Australia's future manufacturing plan is very vague, the Australian financial investment research team holds a relatively pessimistic attitude towards the investment and implementation of larger-scale local hydrogen energy projects in the future.
The current situation in Europe seems good on the surface. Seven EU countries will provide a subsidy of 6.9 billion euros for the "IPCEL Hy2Infra" hydrogen energy plan, which is expected to drive more than 5.4 billion euros of private investment. In this plan, 32 companies will participate in 33 hydrogen-related projects, including the construction of large electrolyzers for the production of renewable hydrogen, the construction and renovation of about 2700 kilometers of hydrogen transmission and distribution pipelines, and the construction of large hydrogen storage facilities.Nora Han, Global Hydrogen Product Group Manager at Swiss engineering company ABB, stated in an interview with AFR: "Many large-scale projects are very close to final investment decisions, within six months to a year."
Vincent Meunier, Head of Green Hydrogen Sales and Development at Belgian materials manufacturer Syensqo, has witnessed a continuous increase in potential demand for the company's hydrogen-related products. He describes his team as "overwhelmed." Potential customers, especially from the heavy vehicle industry, are knocking on his door in unprecedented numbers, requesting to review Syensqo's production processes.
Currently, the London-based asset management firm Foresight Group has announced but not yet submitted the final investment decision for hydrogen projects requiring funds amounting to €268 billion (AUD 432 billion). To determine which projects are more likely to be implemented, the Australian Financial Investment Research team believes that comparing and studying the development of China's hydrogen market would be quite instructive.
In the first half of 2024, China's fuel cell heavy-duty truck market is the most eye-catching hydrogen market, experiencing a significant growth with tenders exceeding 2,000 units, increasing from 38% in 2023 to over 90% of the fuel cell vehicle tenders. According to research by Huaxin Securities, currently, the mass delivery and operation of hydrogen-powered heavy trucks are accelerating. For instance, the Hanyi Hydrogen Demonstration Line, jointly created by Dongfeng Commercial Vehicles and Hubei Provincial Transportation Investment Group, is the first large-scale application of hydrogen-powered heavy-duty trucks for high-speed transportation in China, connecting several important economic areas within Hubei Province and building a complete hydrogen ecosystem. Hydrogen fuel cell heavy trucks have the advantages of fast refueling and high efficiency, with broad application prospects in fixed transportation lines such as mines, coal, and ports. At the same time, hydrogen-powered heavy trucks have also made new breakthroughs in driving range, achieving longer distance transportation tests.
China is technologically advanced in hydrogen and, with continuous government support policies, such as the "Action Plan for Carbon Peak Before 2030," which explicitly promotes hydrogen fuel heavy freight vehicles, China has surpassed South Korea to become the top seller of fuel cell vehicles worldwide.
In conclusion, the cost control issue of hydrogen technology (especially green hydrogen) still needs to be addressed, and the commercialization risks are significant, making final investment decisions difficult to implement. The feasibility of projects largely depends on the strength of national subsidy policies. Internationally, hydrogen energy policies are aimed at renewable energy investment funds in countries like Japan. The withdrawal of companies like Origin has caused Australia to fall behind in the most potential hydrogen energy industry, and the Australian Financial Investment Research team is pessimistic about whether the Australian government will take other actions to restore international capital's confidence in Australia's hydrogen energy.
In the international market, Europe's heavy-duty truck market will be an area where hydrogen energy development is faster and more likely to be implemented in the future, with a vast market for hydrogen-powered heavy trucks and numerous hydrogen technology companies in Europe. With the current local stimulus policies in place by the European Union and the potential influx of Japanese investment funds in the future, it is likely that a relatively large-scale hydrogen infrastructure will be implemented, further stimulating local sales of hydrogen-powered heavy trucks and forming a virtuous cycle of industrial development.
When making any investment, please consider the applicability of the information contained in this article based on your personal investment objectives, financial situation, or personal needs, make decisions cautiously, and bear the risks yourself.