Australia’s hydrogen success is tied to energy market policies

According to South Australia’s Hydrogen Power Plant study, the global demand for hydrogen is projected to reach 650 megatons in 2050, with a potential export market of $300b per year. In this market, Australia is well placed for renewable hydrogen production with a considerable penetration of variable renewable energy (VRE). Although VRE penetration is considered an important part of the green hydrogen equation, the cost of electricity is still the main factor in the viability of this production. With a closer look, we can realise that Australia’s success in hydrogen production and export is not only dependent on governments’ hydrogen-related strategies but also relies on the policies that can lead us to cheaper electricity (such as those resulting in the development of AEMO’s Integrated System Planning (ISP)).

In this Chart of the Week, we look at the future of state-wise levelized cost of hydrogen (LCOH) produced with polymer electrolyte membrane (PEM) electrolyser in Australia. The projected LCOH is based on the electrolyser’s installation and maintenance cost, our Benchmark Power Curve forecast to 2052, and a 15-year electrolyser lifetime.

As expected, the value of LCOH depends on the electrolyser exposure to electricity prices. As seen in the figure, installing an electrolyser between 2024 to 2027 results in the lowest LCOH ($8.5-9/kg) but is still way higher than the so-called $2/kg target. The reason for this lower LCOH during 2024-27 is the forecasted reduction in electricity prices in the NEM after 2024, which is due to the VRE and battery developments in the NEM (this is still subject to uncertainty). This shows that sometimes delaying a project is more efficient than rushing it, at least in this case. After 2027 it is expected to have high electricity prices due to coal retirements, especially in QLD and NSW, due to which the increase of LCOH is more dramatic in QLD and NSW compared to SA and VIC.

Let’s take a look at the 70% capacity factor as a reference point to compare LCOH in states (a line shows the 70% range in the figure). As shown in the figure, SA has the lowest LCOH, while QLD shows the highest LCOH overall. VIC and NSW are placed in the middle of SA and QLD. As indicated in our quarterly Energy Market Perspective, SA and VIC typically have higher negative-priced intervals amongst other states, respectively, due to the VRE penetration level in these states. Therefore, it is no wonder if we see lower LCOH in these states compared to QLD and NSW, which are way behind SA and VIC in terms of the VRE share of their generation. This also shows which states should put more money into incentivising hydrogen producers to kickstart the industry.

This comparison shows that VRE penetration, coal retirement-related policies, and anything energy market-related will affect LCOH in Australia’s future. So next time you want to see how hydrogen production is doing, it wouldn’t hurt to look at AEMO’s ISP first to understand how the energy transition is going forward. This, in turn, enables price forecasts such as Cornwall Insight’s Benchmark Power Curve.

In this Chart of the Week, we benefited from our Benchmark Power Curve, a comprehensive market and asset-level electricity modelling service that provides a high-resolution price forecast of the NEM. Please contact us for more information. 

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