Australia is rolling out an A$8 billion renewable hydrogen source

The Australian Government recently announced proposed measures to support hydrogen production in Australia using renewable energy. These include a new tax incentive for hydrogen production with an estimated support amount of A$8 billion over 10 years.

While many key details remain to be announced/consulted, we provide an overview of the proposed new measures below. They come amid increased global competition to launch domestic hydrogen production and are intended to respond to incentives offered by other jurisdictions – including, in particular, the hydrogen production tax credit offered under the US Inflation Control Act (see, for example, our previous alerts here and here ).

GOVERNMENT SUPPORT

In the 2024–2025 federal budget¹ issued on 14 May 2024, the Australian Government announced the following package of measures to support Australian hydrogen production using renewable energy:

• It is headlined by the Hydrogen Production Tax Incentive (discussed below), effective from 1 July 2027, at A$2 per kilogram of hydrogen produced using renewable energy, with an estimated value of A$14.4 billion over 2027-2028 to 2040-2041 ;
• A$1.3 billion over 10 years from 2024-2025 for an additional round of the Hydrogen Headstart program, which allows hydrogen projects to apply for revenue support equal to the difference between production costs and the market price – the first round will end in 2023. with six projects shortlisted;
• A$1.7 billion over 20 years from 2024-25 in grants to support innovation, commercialization, pilot and demonstration projects and early stage development in priority sectors, including renewable hydrogen production;
• A$19.6 million Australian Government spending over five years from 2024-25 to deliver the updated National Hydrogen Strategy, including hydrogen infrastructure planning; AND
• A$10 million to establish and operate a National Hydrogen Technology Skills Training Center in Victoria, Australia, to promote the development of the hydrogen technology workforce.

FEDERAL TAX – TAXES ON HYDROGEN PRODUCTION

The main measure announced is the introduction of a new tax incentive on hydrogen production, including the following key details:

• A tax credit of A$2 per kilogram of hydrogen produced using renewable energy will be available (unlimited);
• Starts from 1 July 2027 for hydrogen produced in Australia using renewable energy after that date and continues until 30 June 2041 (subject to the next section);
• The tax credit will be available for a maximum of 10 years for each eligible project;
• For a project to be eligible, it must obtain a final investment decision by June 30, 2030 (this may also apply to existing projects); AND
• The latest update indicates that the tax credit is is refundablemeaning that after any tax due on the project has been deducted, any excess will be repaid in cash (see below, however).²

A number of key details remain uncertain (and will be subject to consultation at some stage):

• Any structure or entity requirements – for example, refundable research and development (R&D) tax credit is only available to companies (and not, for example, trusts or partnerships);
• Most importantly, the extent to which tax relief exists is refundable – although no restrictions have been announced and the Australian Taxation Office (but not the federal budget documents themselves) have stated that it will be refundable, this may be subject to additional requirements. Again, as an example, refundable R&D tax credit is generally only available to R&D entities with a turnover of less than A$20 million per annum (taking into account the turnover of any other entities that control or have an interest in the company over 40% of shares). research and development entity); AND
• Exact requirements for hydrogen produced from renewable energy – if compliant with the requirements of the Hydrogen Headstart program, this would require that the hydrogen produced (including the rest of the installation – e.g. support and ancillary systems) be powered by 100% renewable energy for which there is a certificate renewable energy (or that comes from co-located, off-meter controlled renewable energy production).

This measure is also subject to adoption by the Australian Federal Parliament, which has faced opposition from non-governmental parties and which has an election scheduled before its commencement (which may be subject to changes before it begins).