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Green hydrogen costs plummet, LNG prices soar

The ACCC currently calculates the LNG netback price as the price a gas exporter could receive for gas exports excluding the costs to convert and ship the gas. Asian cold weather and supply bottlenecks have driven the February LNG netback price to nearly $20 a gigajoule, more than double the previous month, which in itself is higher than any netback price we have seen since March 2019. If higher prices persist this could drive domestic gas prices higher and provide a catalyst for the development of hydrogen as an alternative cleaner fuel sooner than previously anticipated.

Renewable hydrogen can be created by an electrolyser using electricity to split water into hydrogen and oxygen, making electricity the major input cost. Electrolysers can be designed to respond dynamically to turn off during high electricity prices and to sell frequency control ancillary services (FCAS). On this basis the dynamic hydrogen cost (average wholesale electricity price, excluding peak prices and minus FCAS revenues) dropped by an average of 60% across the NEM from CY19 to CY20.

Renewable hydrogen is now a technical reality and is being produced to displace a small percentage of gas for a few customers in South Australia. The Australian Hydrogen Centre has been established to further extend this work and support the rise in Australian hydrogen investments.

We have assessed that a hydrogen production facility operating dynamically in CY20 could have achieved an 85% capacity factor with an average FCAS adjusted cost of $16.2/MWh in South Australia, $22.6/MWh in Tasmania and $26.1/MWh in Queensland. Potentially reducing the $/kg hydrogen production costs in South Australia by ~43% c.f. CY19. State Governments are supporting hydrogen investment through public export modelling tools, grants, and plans. Proposed regulatory and policy changes being driven in the market could improve opportunities further for hydrogen facilities by enabling additional revenues in a two-sided market or the installation of hydrogen production facilities behind the meter of renewable generators.

The cost to build a hydrogen facility is likely to reduce in the future as the manufacturing costs for electrolysers decrease due to economies of scale and a natural learning rate, this supports the drop in wholesale electricity costs which are likely to be driven further by the zero-marginal cost of renewable generation that continues to enter the market. Lower costs and additional revenue from FCAS markets could combine to unlock several hydrogen investments in Australia. Because FCAS revenues can be both lucrative and unreliable, we see the growing importance for loads to value and understand this market.

We have developed eight 30-minute ‘FCAS price curves’ by simulating the market with synergies from our ‘Benchmark power curve’. These price curves are used by leading international market participants daily in their decision-making and project approval processes. If you also want granular forward FCAS pricing then please get in touch to learn more at enquiries@cornwall-insight.com.au