Origin Energy deals big blow to Australia’s hydrogen hopes

Origin Energy has abandoned its hydrogen venture in a major blow to a key element of the Labor government’s decarbonisation strategy, as the economics of clean hydrogen projects increasingly fail to stack up.

The ASX-listed electricity and gas giant said it would not proceed with its investment in the NSW Hunter Valley Hydrogen Hub, one of the most advanced clean hydrogen developments in the country and one that has been shortlisted for funding as part of Labor’s $2 billion Hydrogen Headstart scheme.

Clean hydrogen is made using renewable energy and has been touted by advocates and policymakers as a replacement for gas.

Origin Energy chief executive Frank Calabria said the company would focus its efforts on renewable energy generation rather than hydrogen. Dominic Lorrimer

“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 nature of hydrogen production means its returns are heavily dependent on low energy prices, making it a less attractive proposition in an environment of high oil and gas prices.

The Albanese government has committed to a $2-a-kilogram subsidy for hydrogen producers under its Hydrogen Headstart program, along with $6.7 billion in production tax credits. The government hopes hydrogen will help replace gas both as a fuel and as a feedstock in manufacturing, which is how it was destined to be used at the Hunter Valley Hydrogen Hub.

Origin declared its interest in the hydrogen project in 2022, hoping it could replace gas in nearby ammonia manufacturing and for other uses. It joined with Orica, the Australian explosives maker, in a shared venture last year to create a hydrogen supply for the Newcastle industrial area.

Project deemed too risky

But even with Orica’s Kooragang Island factory set to buy 80 per cent of the hydrogen output, and grants of around $115 million promised from the Commonwealth and NSW governments, the project was deemed too risky for Origin to justify a final investment decision.

“Ultimately, we believe investments focused on renewables and storage can best support the decarbonisation of energy supply and underpin energy security over the near term,” Mr Calabria said.

Saul Kavonic, senior energy analyst at MST Marquee, said Origin’s decision was another instance of what he predicted would be a long line of cancellations of green hydrogen projects in Australia. Santos is still exploring hydrogen among its growth bets.

Hydrogen is created through electrolysis by splitting water into hydrogen and oxygen. Blue hydrogen, which is cheaper than green hydrogen, is created when gas is used as the power source.

“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 said.

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

Woodside Energy has also battled to get a US hydrogen project signed off without enough customers willing to pay a premium for low-carbon fuels.

Climate Change and Energy Minister Chris Bowen said Origin’s withdrawal from the Hunter Valley Hydrogen Hub was ultimately a commercial decision.

“Government support in developing Australia’s hydrogen opportunity provides additional certainty for projects, however how they progress remains a commercial decision for the parties involved,” he said.

Mr Kavonic suggested that the federal government’s $2/kg subsidy may need to more than double for the government to achieve its target of stimulating $50 billion worth of private sector investment in hydrogen. However, that would mean Australia would end up paying more in subsidies than the hydrogen is worth to make the green variant viable.

Mr Kavonic said green hydrogen was suited to niche applications, but was unlikely to be practical for uses such as transportation.

Open to discussions

Origin had planned to begin green hydrogen production in 2026.

Orica’s Kooragang Island intended to buy the majority of the joint venture’s output to make ammonium nitrate. The project was expected to save the equivalent of more than 52,000 tonnes of greenhouse gas emissions per year. Orica must now find another source of green hydrogen or other ways to decarbonise its dynamite operation.

“We remain open to discussions with interested parties,” said Orica’s CEO Sanjeev Gandhi. He said the ASX-listed firm is still on track to achieve its 2030 and 2050 carbon reduction goals despite this setback.

Australia risks losing its spot as a preferred destination for international hydrogen investment as commitments to the hydrogen dream crumble. Japan’s government has established a $US1 trillion ($1.4 trillion) fund to finance large new-energy infrastructure projects, with a mandate for hydrogen.

But Japanese investors are wary. “The strongest appeal of Australian hydrogen will be its predictability of policy and its respect for the investor’s legitimate interest,” Tatsuya Terazawa, chairman and chief executive of The Institute of Energy Economics Japan, said.

“Many players in Japan are closely watching the results of how the Australian government is handling legitimate concerns about existing LNG projects. How these are handled will affect investment in future hydrogen projects.”

Mr Terazawa said environmental litigation facing companies like Santos in the Timor Sea have dampened Japanese enthusiasm for funding Australian projects.

Japanese investors have acknowledged that green hydrogen is currently uneconomic, and are willing to back blue hydrogen projects instead.

There is also a wave of hydrogen-centric incentives in places like the UAE, Canada and the United States competing for Japanese investment. Japan’s government is expected to announce the first recipients of the $US1 trillion fund in March.

Origin said it was still open to exploring commercial options for the Hunter Valley project, but it intends to cease work on all hydrogen-related development.

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