What is the current status of ENEOS' proposed Australian hydrogen projects, and their expected outcomes for ENEOS’ business?
ENEOS' Australian hydrogen projects are located in Gladstone, Queensland, and Port Bonython, South Australia. We have been conducting feasibility studies since August last year and are considering the transition to the front-end engineering design (FEED) stage. The goal is to commence production in the late 2020s with a planned production capacity of 40,000 tons of hydrogen per annum for each project and a focus on producing green hydrogen. The primary drivers behind ENEOS' green hydrogen projects in Australia are the abundant availability of competitive renewable energy resources and well-established infrastructure here.
In January 2023, ENEOS constructed a mid-sized D-MCH demonstration plant in Brisbane, Queensland, with the support of the Japanese Government's Green Innovation Fund. This demonstration plant involved the production and transport of MCH to Japan using drums, followed by the extraction of hydrogen from MCH and refuelling at a hydrogen refuelling station. The plant primarily consists of a 250 kW solar panel, a 150 kW electrolyser, and other equipment and will be capable of producing 20 kg of hydrogen per day. ENEOS has ambitious plans to commercialise this technology by 2030, including installing a larger-scale demonstration plant in Queensland in 2025 that will feature megawatt-scale electrolysis.
What is ENEOS' approach to financing its Australian hydrogen projects and why?
As the hydrogen sector is still in its early days, and establishing a hydrogen supply chain represents an unprecedented business model, there is not a lot of demand at the moment from project financiers, although they are monitoring the sector closely as it develops. Since ENEOS' projects are in the early stages of development, it will take some time for project financiers to become comfortable with the value and risks of our projects. For this reason, ENEOS has engaged in discussions on project financing, including equity arrangements, with government export credit agencies, relevant authorities, and private financiers. This underscores the critical role that both the Australian and Japanese governments will play in supporting hydrogen projects, particularly in their initial stages.
How has Australian and Japanese government funding supported or will support the financing of ENEOS' hydrogen projects?
ENEOS aims to leverage government funding in coordination with our joint venture partners to enhance the competitiveness and predictability of investments. This approach is possible because both the Australian and Japanese governments have robust national hydrogen strategies, along with specific production cost targets for hydrogen including:
- In Japan, the government has set volume targets for hydrogen supply, aiming for 3 million tons per annum in 2030, 12 million tons in 2040, and 20 million tons in 2050. The Japanese government has launched A$220 billion in Green Transformation Bonds, with an expected allocation of A$80 billion to the hydrogen and ammonia (NH3) sector. The Ministry of Economy, Trade, and Industry (METI) is also proposing a hydrogen price gap support mechanism, which will assist hydrogen projects through a Contract for Difference model. Projects targeting operation by March 2031 are regarded as the first movers to receive priority for the funding. The funding scheme is set to be legislated by the end of March 2024, with the tender process potentially opening around June 2024 at the earliest.
- In Australia, the government has established the Hydrogen Headstart program, allocating approximately A$2 billion to support the commissioning of two to three green hydrogen projects in the coming years, with an Expression of Interest (EOI) process already in place.
"The sources of finance for hydrogen projects are likely to evolve over time:
In the short term, reliance on government R&D grants will be key to kick start projects. There is also the added factor in Australia of each State's differing and evolving policy and approach and regimes for access to funding.
In the medium term, we expect project financiers to focus initially on small scale projects or projects where the company producing the hydrogen is also the consumer. This approach would enable the banks to lend against the balance sheet of the company, effectively bank on the quality and reputation of the developer rather than the specific project and its technology."
Geread Dooley, Partner and Japan Practice Leader
How can effective collaboration be achieved through joint ventures or consortiums in hydrogen projects?
There are a number of Australia / Japan consortiums where several Japanese companies are part of the same consortium. This reflects the ambitious scale of the hydrogen industry's growth, where it would be challenging for a single Japanese company to deploy the required capacity to realise a whole supply chain in a short timeframe in Australia. The longevity and track record of Australian-Japanese collaboration across the mining sector has set a strong foundation for collaboration in the hydrogen sector. These well established relationships, and well understood roles, from the mining sector are able to be replicated across the hydrogen sector.
ENEOS has collaborated with partners in both the public and private sector. ENEOS is collaborating with business partners for the supply of renewables, and with state governments for the development of critical infrastructure, including ports, power grids, and water supply. In terms of private sector collaborations, its partnerships with Origin Energy in the Gladstone project and with NEOEN in the Port Bonython project serve as excellent examples. In terms of public sector collaboration, ENEOS collaborated with the Queensland University of Technology during the research and development phase of Direct MCH (D-MCH) and the Queensland government has provided ongoing support for this project from its early stages.
How do advancements in hydrogen technologies influence the financing strategies and decision-making process for hydrogen projects?
The choice of technology is a critical element in project financing, as it significantly impacts the economics of hydrogen projects. Additionally, safety, stability, and environmental impact are also heavily reliant on the chosen technology. The hydrogen supply chain is undergoing significant technological development, with expectations of further technical innovation. At this stage, although different technologies and methodologies have their advantages and disadvantages, ENEOS anticipates overcoming these challenges as we scale up and increase production volume through innovation.
One of ENEOS' proprietary technologies is Direct MCH (D-MCH), which enables it to produce MCH directly through electrolysis, eliminating the need for intermediate facilities such as hydrogen tanks and MCH plants. MCH is an organic hydride produced through a chemical reaction between hydrogen and toluene. This choice allows for transportation of MCH at ambient temperatures using existing chemical tankers and for its storage in existing oil tanks, thereby leveraging existing transportation and refinery assets. This reliability of transport, and the ability to rely on existing shipping and shipping infrastructure, will be a key factor for financiers and increase the likelihood of a project's bankability. However, the disadvantages of MCH include the need for a dehydrogenation plant to extract hydrogen and the circulation of toluene between loading ports and discharging ports.
"Technology around electrolysers will also be very important for financing, particularly in relation to the longevity and durability of the process given the limited track record of their use around the globe. Financiers will need time to assess their track record against the performance warranties provided by manufacturers. In the short term, financiers are likely to take a conservative approach and may look to structure their financing packages to address the early stage nature of the projects they are banking by:
- shorter debt tenors;
- front-end repayment profiles;
- more cash sweep mechanisms;
- lower gearing and oversized contingency;
- maintaining reserve packages; and
- requiring performance guarantees."
Geread Dooley, Partner and Japan Practice Leader
How is the role of hydrogen evolving and what does that mean for the financing of hydrogen projects in Australia and Japan?
Hydrogen will play a key role in the decarbonization efforts of Australia and Japan, both of which have already set targets for achieving net-zero emissions by 2050. The long-standing and mutually beneficial business relationship established between Australia and Japan in the energy and resources sectors provides a common foundation and shared value in realising the hydrogen business and industry in both nations. Specifically, Australia has been a reliable supplier, while Japan has been a major offtaker. This history has paved the way for successful business practices and a wealth of knowledge, which are essential for jointly creating new business opportunities and obtaining financial support for new projects.
Similar business practices and solutions are being applied to the creation of a new hydrogen industry between the two countries. This includes collaborative projects involving companies from both nations, and financial support from governments, including state governments, to ease the burden of significant capital expenditure and off-take concerns. Financial institutions are also considering project financing and equity involvement to mitigate developers' risks and improve the probability and predictability of investments.
"Revenue risk will be high early on and projects that are able to secure long term offtakes will very much be the banked projects in the short term. Among projects that secure these offtakes, bankability will depend on the offtaker's credibility, the offtake structure (e.g. take or pay arrangements), and whether back stop models will be required where the State will agree to acquire unsold products."
Geread Dooley, Partner and Japan Practice Leader
What are the top insights for those considering investing in, or seeking financing for, hydrogen projects in Australia?
Key insights include:
- It is taking longer than anticipated to establish the new hydrogen supply chain, resulting in extended study durations that expose developers to changes in the business environment including global economic conditions.
- Australian projects operate within a competitive global landscape, and must distinguish themselves from projects outside of Australia. For instance, projects in the United States offer significant flexibility to investors, with a focus on both the domestic market and export opportunities and an openness to both green and blue hydrogen.
"While the regulatory framework is changing for the better, it will be complex as it will be informed by both domestic legislation across Australia as well as international laws governing origin and the ability to market the products as green. So far, debt has not yet been deployed into a hydrogen project in Australia. The first projects would be expected to use a combination of government funding and debt, and this will pave the way for more mainstream debt. There will be a conservative approach taken to credit approval, and much will hinge on offtake and the strength of the project developer."