Can WA make hydrogen happen?

LEGEND has it Peter Coleman called it the gift that keeps on taking.

The ‘it’ was the North West Shelf Venture’s huge LNG deal with China, signed in 2002.

Long before Mr Coleman took the reins as chief executive at Woodside Petroleum, the company and its NWS Venture partners signed an estimated $25 billion deal to export LNG to Guangdong province, with 3 million tonnes of gas shipped annually in what was one of the earliest LNG contracts into China.

It was feted by politicians, with former prime minister John Howard and premier Richard Court leading a diplomatic charge to edge out competitors in Indonesia and Qatar.

But there was one drawback.

Because of the way the deal was structured, with ceiling and floor prices linked to a very low oil price with no revisions, the partners consistently earned less revenue from Guangdong than if they had sold gas on the open market. It is one example of where being first, in this case into the Chinese LNG market, can be as much a burden as a benefit.

The deal might serve to inform the debate about the potential for a Western Australian green hydrogen industry.

While industry and political leaders are keen for WA to move fast and gain a first-mover advantage as a hydrogen producer, there’s no guarantee leading the race will deliver the best economic outcome.

However, there’s a counter argument for rapid action. WA’s $30 billion a year LNG export industry could start to run low on customers in the decades ahead as countries cut carbon emissions, leaving a big hole in the state’s economy.

But there will be a host of challenges if the state decides to develop a hydrogen industry to replace LNG.

Producing renewable hydrogen requires phenomenal amounts of land for solar and wind assets, which will have an environmental impact; it needs water; and production from these renewables can be intermittent, meaning low capital utilisation.

Another obstacle will be cost: its at least five times more expensive to produce green hydrogen than LNG.

LNG is made by chilling natural gas to -160 degrees celsius, where it shrinks dramatically and can more easily be shipped.

It emits carbon dioxide when it is used as a fuel.

Blue hydrogen production splits the natural gas molecule to extract carbon dioxide, which can be stored underground, making a low carbon hydrogen product.

That is less expensive than green hydrogen, although there are concerns about the need for mass sequestration of carbon.

Green hydrogen uses power from solar, wind or hydropower to run electrolysers to split water molecules into hydrogen and oxygen, with the hydrogen then transported to users. 

As an example of the challenge, solar power can only produce electricity during part of the day, meaning its capacity utilisation is low. 

The electrolyser powered by solar would then also have low utilisation. 

First-mover advantage? 

Being the world’s biggest producer of solar panels in the mid-1990s didn’t mean the US was the biggest beneficiary of the boom in demand since that time.

“In 2003, China had a 2 per cent share of global solar manufacturing,” the protectionist Coalition for a Prosperous America said in March. 

“By 2011, that share was more than 60 per cent.”

The lobby group claimed 100 US solar companies finished bankrupt, with $US10 billion of investment lost.

US solar manufacturing was rapidly eclipsed by China, as panel costs were reduced by growing scale of output.

A 2001 study in the Harvard Business Review found return on investment was more than 4 per cent lower for first movers in the industrial sector, with extra revenue surpassed by higher costs.

“Although pioneers do enjoy sustained revenue advantages, they also suffer from persistently high costs, which eventually overwhelm the sales gains,” the study said.

There are examples of moving early securing a benefit, however.

Ford earned a return from mass producing motor vehicles: within less than two decades in the early 20th century, the company had manufactured half the world’s registered cars.

Karratha was one of the first places in the world with an LNG plant; the industry has since grown substantially and supported the state’s economy as the second biggest export.

Research on the first-mover advantage suggests a few factors will be key.

For WA’s green hydrogen industry, changes to the cost of wind turbines, solar panels, and electrolysers during the next two decades will be important. 

Investing early locks in capital costs, which will need to be covered for the life of the project, and locks in technology that may be surpassed.

It’s like a consumer’s choice of buying the latest smartphone or waiting a year until the price comes down.

Analysts differ on how it could play out.

CSIRO’s Gencost report predicts capital costs for wind will fall less than 10 per cent in the next decade, while large-scale solar could reduce about 40 per cent.

The International Renewable Energy Agency’s ‘Future of wind’ report in October 2019 predicted construction costs would continue to decline for onshore wind, from about $US1,500 per kilowatt built in 2018 to between $US800/KW and $US1,350/KW in 2030.

Construction is one factor.

The state government’s early assessment of a green hydrogen project at Oakajee promised an average cost of electricity less than 10 cents per kilowatt hour. Competitors could be even cheaper. 

The Inga Dam project, where Fortescue Future Industries has recently taken an interest, would reportedly have a 3 cents/KWh energy cost. 

That project in Africa’s Democratic Republic of Congo will likely export hydrogen to European markets, while Australia focuses on Asia. 

Grattan Institute energy program director Tony Wood, who is broadly optimistic about hydrogen’s potential for the Australian economy, said the first-mover effect would be unclear.

“It depends,” Mr Wood told Business News.

“If it’s an area where the technology can be developed quickly and costs come down dramatically, there’s no first-mover advantage. 

“There’s a first-mover disadvantage if you’re the one who takes all the risk.” 

Solar panel production was an example, he said, while by contrast, fertiliser manufacturing advances in the 1960s had conferred advantage on early movers in that space. 

WA and Australia will need to consider where they are positioned in the supply chain. 

Electrolysers will probably be mass produced elsewhere. 

“We’re not going to be the tech leader,” Mr Wood said. 

“What we could do is adapt those technologies first. 

“We could be a world leader in the adoption of renewable hydrogen in manufacturing.” 

That’s where Fortescue Future Industries appears to be heading, with the company filing trademarks for brands of green ammonia and green iron. 

The federal government has chipped in $39 million for the Heavy Industry Low-carbon Transition Cooperative Research Centre in June, with Curtin University to be a partner. 

The centre will develop technology for green steel, cement, and alumina production. 

Adding value 

The allure of jobs and economic diversification through manufacturing makes plenty of political leaders hot under the collar if the state’s history is anything to go by. 

The story is replete with dead ends and excessive ambitions, particularly in iron and steelmaking. 

But there have been successes, with 65 years of BP Kwinana and many decades of Alcoa alumina refining. 

More recent iterations have included local rail car manufacturing, which was more expensive per carriage than the previous deal to buy units from overseas. 

Nonetheless, the state’s two biggest industries face threats. 

LNG exports equate to about 10 cents of every dollar of income generated in the state and could have substantial demand reductions as buyers cut emissions.

Iron ore prices have hit record highs in the past year, but there’s no guarantee it won’t suffer in trade tensions with China. 

Therefore, it may be more important than ever to ensure the numbers stack up when it comes to local manufacturing using hydrogen.

The business case for the use of hydrogen in basic manufacturing might be stronger than the economics for shipping the fuel to other countries, for reasons explained below. 

Transporting hydrogen will be challenging. It needs to be chilled to -253 degrees Celsius to become a liquid, is lighter than air, and is hard to keep contained given its particle size.

Hydrogen can also make pipes through which it is transported brittle. 

Those differences are technological and may well be overcome. 

However, one problem that can’t be overcome is that hydrogen is much more abundant than natural gas, with green hydrogen production possible anywhere that has water and electricity. 

Natural gas needs to be extracted from a reservoir, and WA has been one of the locations blessed with the resource. 

The state can’t rely on that natural barrier to entry in hydrogen. 

Falling costs for offshore wind farms may lead a country like Japan to produce its own hydrogen in its own territorial waters, rather than importing hydrogen or LNG from WA.

Business News wrote in June that WA’s Department of Jobs Tourism Science and Innovation deputy director general, Chris Clark, said other states would be pressing the case to become Australia’s hydrogen producers. 

Mr Clark said it would be a more competitive playing field than other natural resources. 

In some respects, WA will have an edge against other jurisdictions. 

It has been estimated the Mid West will have a lower cost of electricity from wind and solar power than almost anywhere in the world, while there is huge water and land supply nearby. 

In that case, hydrogen could be produced locally at a price cheaper than most competitors. 

The economics then suggest hydrogen might be used in WA. It could be used in direct reduction to turn iron ore into iron for steelmaking, or in place of natural gas for calcination of bauxite into alumina.

Mr Wood said these may be serious options for WA, although historically Australia had not been successful as a manufacturer. 

“One of the things we’ve never done well is to add value to raw materials,” he said. 

“We’re really good at [natural resources], we play to our natural advantage. 

“When people say, ‘Wouldn’t it be nice to make stuff’, well, it might be nice but it’s not necessarily in our economic self-interest.” 

The fundamental foundation would be there for use of green hydrogen in industry, Mr Wood said, but it would depend on wage differentials between countries and potential transport costs. 

Grattan’s research has indicated a green manufacturing industry might be better suited to the east coast, given the higher availability of labour. 

To make it work, Mr Wood said, Australia would need to embrace industry policy and collaboration between business and government in a way that would be uncommon for the country. 

An example of this would be mandating a 10 per cent blend of green hydrogen in the gas network, which the WA government has considered. 

Hydrogen might be used on remote mine sites to reduce emissions from processing, in place of expensive diesel fuel. 

That would be particularly useful for battery minerals, where there is pressure for a low emissions supply chain.

The WA government has said it was considering options to aggregate demand around Geraldton to underpin an Oakajee hydrogen development.

Action 

One person on the frontline of making hydrogen a reality is Future Energy Exports Cooperative Research Centre chief executive Eric May. 

The centre’s hydrogen projects include studying combustion of ammonia for power generation, and the use of ammonia for direct reduction of iron ore into iron. 

The combustion work will be important because, although it does not emit carbon, ammonia does produce environmentally problematic nitrous oxide compounds. 

Other projects will include improving efficiency of electrolysis by avoiding voltage conversions. 

“The technology is there from a technical perspective, it really is about cost,” Professor May said. 

“What’s needed is demonstration at scale of these technologies. 

“In the past 12 months there’s been quite an impressive ramp up of projects … to demonstrate at a scale that would be commercial. 

“But we’ve still got a long way to go.” 

Even hydrogen production at the federal government’s target price of $2 per kilogram would be equivalent to about $16 per gigajoule in gas. 

“All of the east coast of Australia got upset when they were asked to pay $8/ GJ,” Professor May said. 

“That’s one of the reasons blue hydrogen is so important; you need to use it to stimulate demand. 

“The niche where hydrogen is likely to take hold is diesel displacement.”

Costs would come down as scale was developed, which would require increasing demand to drive it, he said. 

“Once demand goes up, people are encouraged to invest at larger scale, and so the price comes down,” Professor May said. 

“In the long run, it’s going to be about getting scale of demand up.” 

A June report by consultancy Wood Mackenzie gives cause for optimism. 

“The ability to manufacture ever-larger electrolysers that can produce green hydrogen at scale is a key factor in enabling rapid expansion of the sector,” Wood Mackenzie lead analyst of emerging technologies, Ben Gallagher, said in the report. 

“This also has the usual benefits of scale in terms of bringing down costs. 

“Our own estimates are that green hydrogen will be competitive with fossil fuels by 2028 to 2033, assuming a $US30/MWh power price in 2030. 

“Until 2019, global estimated electrolyser manufacturing capacity was a mere 200MW. 

“That has since jumped to 6.3GW of current announced electrolyser capacity, with 1.3GW added in Q1 2021 alone. 

“This still represents only a small percentage of the almost 1,000GW of electrolyser capacity needed by 2050 to meet our demand forecasts. 

“However, the exponential rate of growth in manufacturing capacity is clear and likely to continue.” 

Land, water, environment 

A huge stretch of Pilbara coast about 1,600 kilometres north of Perth marks the place where the Great Sandy Desert and Indian Ocean meet. 

Along the strip known as Eighty Mile Beach, almost 500,000 shorebirds visit over summer, including 21 significant species, according to federal environmental documents. 

The vulnerable flatback turtle has habitats near the beach. 

All of that contributed to the beach being given an international Ramsar wetlands listing equal to that for Beeliar Wetlands. 

The environmental factors underpinned the decision by federal Environment Minister Sussan Ley to knock back a scaled-up proposal by InterContinental Energy to build the Asian Renewable Energy Hub (AREH) in the Pilbara. 

The hydrogen was to be manufactured into ammonia and pumped off the coast to a ship loader. 

One big risk was a spill, according to Ms Ley’s decision. 

Another ammonia producer, Yara Pilbara Fertilisers, had five spill events in 2016, with 8 tonnes of ammonia released, the documents said. 

“In the present circumstances, due to the remote location, the response time to address a spill would take too long in containing the catastrophic impact,” Ms Ley’s decision said. 

“In this type of event, it would result in the loss of most, if not all, of the ecological characteristics of the Ramsar site.” 

An earlier version of the project was approved by the state’s Environmental Protection Authority late last year, with a plan to instead export power into South-East Asia by a subsea cable. 

That proposed 0.2 hectares of clearing in the Ramsar-listed wetlands. 

The version submitted to the federal government would have cleared nearly 500ha at the site, including for pipelines to export ammonia, to pump seawater, and a pipe stringing yard. 

However, nearly 21,000ha were to be cleared in the beefed-up version of the project in a development envelope near 660,000ha. 

All that territory would use solar and wind generation to produce electricity, with a capacity of about 26GW. 

Hong Kong-based InterContinental has not yet developed a commercial hydrogen operation.

State government officials alleged the federal government had not given appropriate support to help the company revise its plans. 

The business recently floated another hydrogen project, a 50GW plan near Esperance, about equal in capacity to the east coast’s National Electricity Market. 

Other projects will face similar challenges, and there are plenty of them in the pipeline, with varying levels of credibility. 

Hydrogen Minister Alannah MacTiernan said she hoped to have 200GW of renewable hydrogen capacity in WA by 2040, with a spokesperson telling Business News in May that Andrew Forrest was planning a project of similar scale to AREH. 

The state government has been eager to set up a project at Oakajee, where it opened expressions of interest last year, while Infinite Blue Energy is planning a $423 million stage one development at Arrowsmith in the Mid West (see table). 

Green hydrogen projects in Karratha and the Mid West have received $71 million from the Australian Renewable Energy Agency in May, with production at Yara Pilbara likely in 2023.