Hydrogen headstart, or headache?

It's a public holiday in much of the country today, but for the rest of you I wanted to share a little something I wrote back in May 2023 (archived on Github), well before Aussienomics officially launched. It's about hydrogen, specifically the government's multi-billion-dollar green 'Hydrogen Headstart' program, which is suddenly very relevant again after Origin became the latest potential producer to throw in the towel:

"It has become clear that the hydrogen market is developing more slowly than anticipated, and there remain risks and both input cost and technology advancements to overcome," said Origin chief executive Frank Calabria.

Fortescue, the iron ore miner with hopes of becoming a clean energy giant, backed away from its own targets for green hydrogen production in July.
...
"The announcement shows how green hydrogen economics are so uncompetitive that even with generous government subsidies, and a captive buyer, it still struggles to work", Mr Kavonic [senior energy analyst at MST Marquee] said.

"Green hydrogen costs are several times the cost of gas, so even very generous government support struggles to close the gap."

It's staggering to think that the $4 billion committed by the federal government – plus billions more by state governments – is still not enough to get these projects up. The good news is that if none of them get started, the federal government won't have to pay any of it out (such is the nature of production credits).

If that's the case, it will probably raise both economic efficiency (the dollars can be more effectively used elsewhere) and productivity (green hydrogen looks to be deeply unprofitable, i.e. wasteful).

Anyway, now that you know how it's going, here's the essay on how it started and what I thought at the time, unedited from the original. I'll only add that in the ~16 months since I wrote this, I've become even less convinced in the prospects of green hydrogen for anything other than niche industrial uses.

The recent federal Budget included $2 billion worth of funding for a 'Hydrogen Headstart' program. Tim Ayres, Assistant Minister for Trade and Assistant Minister for Manufacturing, provided some details on the government's reasoning for the program:

"This Budget was a great budget for Australian manufacturing. Two billion dollars in the Hydrogen Headstart program, which will be there to create a market for hydrogen production in Australia to make sure hydrogen production is onshore in Australia with Australian technology and an Australian workforce. The Albanese Government is determined to make sure that we reindustrialise the Australian economy, that we meet the global challenge in terms of climate, that we make Australia a renewable energy superpower and that we meet the competitive challenge for Australian manufacturing."

That's code for industrial policy, which is currently all the rage in the western world following the passing of the US Inflation Reduction Act, a big spending stimulus with a strong green tinge that many expect will actually increase inflation, thanks to its scope, buy-local requirements and labour requirements during a period of full employment:

"We're pouring a lot of money into getting these firms to come to the US, expanding in the US, and there aren't workers for that, and it's not like you're going to pull workers from McDonald's," said Gary Hufbauer, senior fellow at the Peterson Institute for International Economics.

Hufbauer estimates the tight labour market and sourcing requirements will add 10 per cent to project costs.

The US will need an additional 546,000 construction workers on top of the normal hiring pace to meet increased demand for projects pushed along by the IRA and other bills, estimates Associated Builders and Contractors. Consultants at McKinsey warn the US semiconductor push will exacerbate the existing shortfall of engineers and technicians, with companies across industries expected to need an additional 300,000 engineers and 90,000 technicians by 2030."

Since coming to office last year, Australia's Labor government has followed hot on the heels of the previous Coalition government in its thirst for industrial policy, first with the $15 billion National Reconstruction Fund and now with the Hydrogen Headstart program. But while their previous venture into industrial policy was less targeted – the National Reconstruction Fund is at least somewhat independent of government, and can invest in anything that falls under seven broad "priority areas" – it's quite clear that the Hydrogen Headstart program is all about picking winners. Here's the AFR:

"Asked why heavily capitalised and cashed-up businesses such as Fortescue, Shell and BP needed government support to develop hydrogen, Mr Bowen [Australia's Energy Minister] told The Australian Financial Review on Wednesday that it was because they were in the process of 'deciding which country to do this in'.

'We weren't going to compete with the United States in particular without a level of support,' he said.

Billionaire Andrew Forrest, who stands to be one of the biggest winners from the scheme, urged the government to make sure it put the 'risk back on investors' and above all, that it happens quickly.

'It's a race to win this race,' Mr Forrest told the Financial Review. 'I recommend that they keep it simple, and they do it immediately.

'Remember, I'm an industrialist. I've done this before. I see the potential in our country of an industry at least the size of Aramco, a multi-trillion-dollar company that underpins the entire economy of Saudi Arabia and that high standard of living which 34 million people have in their country.

'We have the potential of creating an industry at least that size, and having economic growth for decades, full employment for decades. That is the power of this opportunity. The $2 billion gets that ball rolling'."

Industrial policy is music to the ears of billionaire industrialists – it allows them to take risky punts without having to bear the full cost of failure – and Forrest's siren song of 'growth and full employment for decades' is irresistible to a politician.

To his credit, Forrest asked the government to put the "risk back on investors"; but the government hasn't indicated that it plans to do anything of the sort. Indeed, the Hydrogen Headstart could very well wind up as nothing more than a slush fund for privatised gains and socialised losses for a few large, wealthy industrialists. According to Bowen, the program isn't even open to smaller competitors:

"We envisage that this is for big projects… which means you don't need many. You need a few big ones."

But the type of industrial policy where winners are selected and supported via subsidy, such as the Hydrogen Headstart, has a poor track record, and it's not clear that taxpayers should be involved in getting the hydrogen "ball rolling" at all. Based on what Ayres and Bowen have described, along with the euphoric response it has received from its likely recipients, the Hydrogen Headstart sounds ripe for capture by vested interests, a scenario that would lead to very poor outcomes.

The fact of the matter is I don't know whether green hydrogen should be a winner or a loser in the clean energy transition. Ayres and Bowen have no idea, either, and stand to lose nothing personally if it blows up like the Hindenburg.

Despite his considerable advocacy, Forrest is also in the dark – if he weren't, he'd be investing a lot more of his considerable personal wealth into it, not just his 36.5% share of the $A1 billion that Fortescue Future Industries (FFI) might invest in green hydrogen (Forrest has a 36.5% stake in FFI's parent, FMG).

But this is a "race" we, the taxpayer, shouldn't even be running. If the government was serious about meeting its carbon reduction commitments, it should whack a price on it. As carbon prices rise, those with the lowest substitution costs will find alternatives (perhaps even green hydrogen!), or go out of business. Any proceeds from the carbon tax (or whatever pricing mechanism is selected) could then be sent back to households as the Canadians do, compensating them for the higher cost of goods and services.

While they're at it, lift the moratorium on nuclear energy – Bowen's attempt at dismissing it was so bad even Twitter's fact checkers flagged it – and just generally let incentives and market prices, rather than political discretion, determine the winners, losers, and the types of fuel that should play key roles in Australia's clean energy future. If they did that, we'd all be much better off – except for a handful of politically connected industrialists and politicians looking for a photo op.