Article by: Aaron Ross & Nick Easingwood Global Head of Project and Export Finance & Head of New Energy, ANZ
Hydrogen is getting hotter. The shift to net-zero carbon is driving rising interest in a range of innovative energy industries, and the hydrogen sector is at the forefront of activity.
The Australian economy is uniquely placed to play a key role in the rise of hydrogen, creating a big opportunity for local businesses. The opportunity lies not just on the direct export side - although that could be large as overseas demand grows - but also in utilising existing natural resources to produce green hydrogen and steel, for both domestic and export purposes.
What’s clear is Australia can’t afford to be complacent. Other economies are already moving to position themselves as hydrogen leaders, including in the US, where recent policy announcements have signalled an intention to grow their own hydrogen capability. In Saudi Arabia, NEOM Green Hydrogen Company has secured $US8.4 billion in funding for a green hydrogen production facility.
But Australia has a few tricks up its sleeve as well – including an existing $A127 billion pipeline of announced hydrogen investment, according to the DCCEEW. There’s little wonder why – some estimates put the size of the hydrogen export opportunity in Australia at $A10 billion by 2030.
In South Australia, the state government has been open about plans to construct what could be the world’s largest green electrolyser and hydrogen power plant. In Western Australia the Yuri Renewable Hydrogen to Ammonia Project is another large-scale investment.
The latter project highlights hydrogen’s versatility as a fuel, and why many see the commodity as a ‘Swiss army knife’ solution. In many ways the best application for hydrogen in the shift to net-zero has yet to be settled. That’s part of why the opportunity is so vast.
Banks and export credit agencies are really going to be key providers of capital in this opportunity. In 2022, ANZ put together the ANZ Hydrogen Handbook to help our customers better grasp the scale of what is happening in the space.
In another sign of ANZ’s commitment to the shift to net zero, the bank has added a fourth ‘arm’ to its project and export finance team, which previously consisted of infrastructure, renewable energy, and resources pillars. The new ‘new energy’ vertical will better support our customers in developing markets like hydrogen.
The bank is already having a lot of very detailed discussions with many clients, and these are expected to increase over time, particularly in Australia, where policy support is growing.
Various state governments have announced strategic approaches, while at a federal level, the Hydrogen Head Start program will provide revenue support for selected large-scale projects through production credits. The $A2 billion program is a fantastic proposal that will drive investment in projects, support bankability and galvanise support for hydrogen in Australia.
Globally, export credit agencies are focused on providing support to both buyer and supplier arrangements that benefit their country. Recent reforms to OECD guidelines increased the tenor for climate-friendly investments to 22 years in a bid to better support the transition to net zero. There will be considerable support provided by export credit agencies to develop the hydrogen industry.
Further competition will come from the US, after the implementation of the recent Inflation Reduction Act, which included a hydrogen production tax credit aimed at encouraging domestic production.
While the move may be a small step back for Australia in the hydrogen space, in the long term these are the type of policies new energy needs to move ahead, and the world needs to achieve long-term sustainability targets.
Some investment will move to the US through 2023, but technological innovation will increase as a result - a rising tide likely to lift all boats. A similar dynamic played out in solar energy in Germany, which has led to recent advancements for the whole sector.
Ultimately the US move will be positive for the transition and firm up the hydrogen industry globally.
ANZ is committed to helping finance the shift to net zero. In April, the bank launched a new target to fund and facilitate at least $A100 billion by the end of 2030 towards improving social and environmental outcomes for our customers, which includes initiatives that help lower carbon such as hydrogen projects.
While it is yet to fund any hydrogen projects directly, ANZ is already engaging with customers in the hydrogen space. Many clients have told the bank they want to take advantage of what they see as a large opportunity. As they develop these plans, the key questions they ask are around bankability and what issues lenders consider.
ANZ has already completed detailed analysis around green hydrogen project key risks and has begun developing potential measures for managing them. From a financing perspective, it’s clear the space will involve projects with long value chains and many component parts. The complexity of these chains is something banks will analyse closely.
It’s important for those seeking financing to explain the entire project value chain clearly and demonstrate to lenders that all material risks have been considered and will be managed appropriately. Technology risk, particularly in relation to electrolysers, will be a key focus of lenders. Project value chain optimisation is also a focus.
The environmental and social sustainability of the project is another key element, and something banks like ANZ are eager to understand early on.
The final component is the end buyer of the hydrogen, and the length of the revenue stream. Long-term offtake agreements with creditworthy buyers are ultimately what will unlock the availability of debt financing. The levelised cost of green hydrogen is currently significantly higher than grey hydrogen. Lenders will only leverage contracted revenues streams as a result.
There are a whole range of elements coming together in Australia which leave the economy well-placed to take advantage of the hydrogen opportunity.
It’s a country with strong existing renewable credentials and world-class wind and solar resources. It has an unrivalled history of delivering large natural resources projects, along with a broad skill base which can quickly transfer to new energy.
It has strong export relationships across the energy sector with a number of advanced economies in the region, including Japan and Korea. Australia will need to compete hard, but if all the pieces can come together, it has more than enough potential to come out on top.
Aaron Ross is Global Head of Project & Export Finance & Nick Easingwood is Head of New Energy at ANZ