Australian federal budget focuses on hydrogen and renewable energy

The Budget (74-page/5.29MB PDF) presents a much-needed response to the US Inflation Reduction Act (IRA), which was enacted in mid-2022 and invests US$369 billion (AUD$547bn) in new spending and tax incentives that aim to accelerate private investment in clean energy solutions, lower energy costs for small businesses and families and reduce the nation’s carbon emissions by around 40% by 2030. Australia’s Clean Energy Council (CEC), which represents the renewable energy industry, had called for a proportionate response from the government in order to remain competitive in the global clean energy industry, and the Budget appears to be that response.

The Budget reflects that Australia has made a strong commitment to decarbonisation and establishing itself as a key player in the global energy market. This Budget is a step in the right direction for a country where climate change has historically been ignored by government, despite the existential threat it poses. 

Hydrogen Headstart fund

The government has announced it will provide AU$2bn to accelerate the development of Australia’s hydrogen industry. This includes AU$2bn for the establishment of a new Hydrogen Headstart programme, which will provide revenue support for two to three flagship large scale renewable hydrogen projects. This support is intended to bridge the gap between the cost of green hydrogen production and its current market price through competitive production contracts. This includes funding for the Australian Renewable Energy Agency and the Department of Climate Change, Energy, the Environment and Water to help support this program.

The government will set aside AU$5.6 million to analyse the implications for Australia of intensifying global competition in the clean energy industry, and to identify actions before the end of 2023 to “further catalyse clean energy industries, ensure Australian manufacturing competitiveness and attract capital investment”, in what appears to be a direct response to the IRA.

The revenue support scheme being introduced in the Budget is a welcome, and much needed, structural reform that the market has been asking for to support the growth of the low carbon hydrogen sector. These measures will drive confidence, investment and exponential growth in a lucrative market where Australia is well positioned to become a global powerhouse.  It also puts Australian projects on a level playing field with other low carbon hydrogen projects around the world where we are seeing similar revenue support schemes being deployed.

According to the Budget, the government will also provide AU$2mn over two years from 2024-25 to establish a fund to support First Nations communities to engage with hydrogen project proponents and planning processes. 

This is a significant step that is needed to drive the growth of the Australian hydrogen market. Indigenous engagement and collaboration will drive more efficient and cost-effective project delivery, as well as support First Nations communities to build sustainable and flourishing local economies. Investing in time and money into ensuring projects are developed in the right way, taking into consideration all stakeholder concerns, will be of great benefit to everyone.

Guarantee of Origin

The Budget provides AU$38mn to establish the Guarantee of Origin scheme to track and verify emissions associated with hydrogen and low emissions products. This scheme will provide a mechanism to certify renewable electricity and should support international trade and the creation of domestic markets.

Creation of a Guarantee of Origin scheme has long been considered to be one of the missing pieces of the puzzle to kick-start the global hydrogen trading market, and in turn, the industry in Australia.

Capacity Investment Scheme

The Budget confirmed the establishment of the Capacity Investment Scheme to underwrite new investment in clean energy, with the aim of accelerating the transformation to a renewable-based grid. Funding for this scheme was not fully disclosed as it is commercially sensitive due to being subject to public tenders, but the Budget states that these tenders are the first step towards unlocking at least AU$10bn of new investments aimed at achieving an 82% renewables grid and retiring the current thermal power stations.

The funding will include AU$9.9mn over five years from 2022-23 for the Australian Energy Market Operator to deliver auctions in South Australia (SA) and Victoria and undertake contract management activities for selected projects. It will also include AU$6.4mn in 2023-24 for the Department of Climate Change, Energy, the Environment and Water to design the auction process in late 2023 to operate in SA and Victoria and continue to work on a national rollout of the scheme.

National Net Zero Authority

The Budget will provide $83.2mn over four years from 2023-24 to fund the establishment of a national Net Zero Authority, which will be responsible for promoting the orderly and positive economic transformation associated with decarbonisation and achieving net zero emissions.

Powering Australia Industry Growth Centre

The government is also providing AU$14.8mn to establish the Powering Australia Industry Growth Centre, which is intended to support Australian businesses seeking to manufacture, commercialise and adopt renewable technologies. This is in addition to the AU$3bn allocated to investments in renewables and low emissions technologies under the National Reconstruction Fund in the October 2022 Budget review.

The Budget also finalised and confirmed funding previously reported in the October 2022-23 Budget, such as the AU$1.9bn Powering the Region fund, which will assist the implementation of the Safeguard Mechanism aimed at encouraging business to invest in the path to net zero.

Co-written by Leanne Olden and Jack Merlo of Pinsent Masons.