The Australian Renewable Energy Agency (ARENA) has recently announced that it has shortlisted seven applicants (with a total hydrogen project value of A$500 million) to submit full applications for the next stage of the A$70 million Renewable Hydrogen Deployment Funding Round.
This is a positive announcement that demonstrates the significant public and private interest in hydrogen. It also coincides with policy and regulatory work (following stakeholder feedback) that the Department of Industry, Science, Energy and Resources is undertaking to establish a hydrogen certification and guarantee of origin scheme in Australia, which was identified as a critical item in the National Hydrogen Strategy if Australia wishes to establish itself as a leading producer and consumer of hydrogen.
What are certification and guarantee of origin schemes?
Certification schemes are not a new idea. They have been accepted across many industries and sectors (in some form or another) to provide comfort to the purchaser and the public at large that the product is and does what it says it does.
While not new internationally, the guarantee of origin component of a certification scheme – which tracks a product through its supply chain – is new in Australia. The range of factors it can track through varies greatly. In a hydrogen context, the factors to be certified will likely include the scope 1 and 2 emissions produced by each unit of hydrogen.
Why does hydrogen need to be certified?
Technically there is no need to certify hydrogen as the end product is always the same. However, as social and environmental concerns grow, particularly around emissions, investors, lenders and consumers increasingly seek to avoid supply chains which are considered to be ‘tainted’, in order to meet their own sustainability targets. This translates into a requirement for hydrogen to include certification for its emissions and other social and environmental impacts.
While certification increases compliance costs, it allows for price differentiation to occur between hydrogen that is produced by different methods of production. This encourages market interest in renewable hydrogen projects as, in theory, hydrogen produced from these projects should receive a price premium or increased demand.
Are there any existing domestic or international schemes that could be applied in Australia?
While there are a number of existing schemes that have the potential to be applied to hydrogen, many lack the sophistication a global hydrogen market requires. For example, the Australian Government’s Carbon Neutral certification program, which applies across a range of products and services, allows products to be certified as carbon neutral once they have achieved carbon neutrality across their lifecycle. This scheme is unlikely to be entirely suitable for hydrogen.
A more suitable scheme might be based on key aspects of Europe’s CertifHy Scheme, which is currently in a pilot phase. The CertifHy Scheme has been designed to allow European consumers to compare the lifecycle emissions of hydrogen fuel with other alternative transport fuels, and is expected to have strong industry buy-in across Europe from industry, investors and lenders.
While the CertifHy Scheme could be a good ‘base’ from which an Australian scheme might be developed, it is not without flaws, which place doubt on its suitability for Australia and other hydrogen markets outside of Europe. For example, the CertifyHy Scheme:
- applies only to the use of hydrogen as a transportation fuel and does not apply for broader hydrogen applications, of which there are many;
- is privately owned, which raises questions around its governance; and
- does not allow for adequate price differentiation between different types of hydrogen (e.g. green versus brown hydrogen), which investors, lenders and consumers will likely expect as the hydrogen sectors develops and increases in sophistication.
What should Australia’s scheme look like?
In our view, to maximise the international opportunity that hydrogen presents for Australia, any Australian hydrogen certification and guarantee of origin scheme should be based on the following key principles:
- Clear and simple labelling for scheme participants on what falls within a relevant certification category. As a starting point, labels should state the carbon emissions associated with each unit of hydrogen produced, the country in which each unit of hydrogen was produced and the type of technology that was used in production (e.g. electrolysis versus brown coal with carbon capture and storage offset).
- Certification limited to scope 1 and 2 emissions. Scope 3 emissions should not be included in the initial scheme design as it will add unnecessary costs (and potentially prohibitive costs) for early stage projects. Instead, conversations should be started with hydrogen sector participants along the entire supply chain now, including Australia’s target international customer base, Japan and South Korea, to confirm the design, method and timing for the later inclusion of scope 3 emissions in Australia’s certification and guarantee of origin scheme.
- Exclude water consumption. As water scarcity is not necessarily an issue confronted by Australia’s international competitors, water consumption should not form part of any certification scheme because this will place Australian producers at a disadvantage when competing in global markets. Water consumption concerns can be (and always are) dealt with on a localised level through the project planning and environmental approval stages.
- Enforcement by parties relying on the scheme or, where no agreement can be reached, a prescribed government regulator. In order to obtain customer and end-user buy-in, which is critical to the success and validity of any certification scheme, the body regulating the scheme must have strong industry support. In our view, the Clean Energy Regulator is an appropriate body as hydrogen certification would overlap with its existing regulatory mandates, expertise and industry engagement.
- ‘Green’ finance principles and criteria. As hydrogen projects will require significant capital investment to achieve the necessary scale to make it cost-competitive with other technologies and fuels, projects will acquire significant infusions of equity and debt. Consequently, any certification scheme design should consider green finance principles to open up access to the emerging and fast growing pool of global funds that are reserved solely for ‘green’ projects.
To this effect, with respect to green loans, the focus should be on how the Asia Pacific Loan Market Association (APLMA) accepted Green Loan Principles can be reflected in a certification scheme. With respect to green bonds, the Climate Bond Taxonomy should be the reference point. How the Taxonomy will apply in practice is not yet clear as further work is underway to allow the Taxonomy to recognise the varying ‘greenness’ of hydrogen projects and not just automatically exclude certain projects because they rely on fossil fuels as an input.
As the old saying goes, timing is everything. It is critical that a certification and guarantee of origin scheme be established by 1 January 2021, as it will allow the first wave of Australian hydrogen projects, which are coming to market in 2021, to plan appropriately. This timing also aligns with ARENA’s own funding timeline, which will require the successful applicants to reach financial close by mid-2021 and commence construction in 2022.
This publication is introductory in nature. Its content is current at the date of publication. It does not constitute legal advice and should not be relied upon as such. You should always obtain legal advice based on your specific circumstances before taking any action relating to matters covered by this publication. Some information may have been obtained from external sources, and we cannot guarantee the accuracy or currency of any such information.