Proposed New Australian Hydrogen Production Incentives and Support

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

While a number of key details remain to be announced/confirmed, below is an overview of these proposed new measures. They go hand in hand with increased global competition to establish 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 Reduction Act. of US Inflation (see, for example, our previous alerts here and here).

This update is intended to complement the Australian chapter of K&L Gates. The H2 manualwhich can be accessed here – we have organized the following to align with the chapters in The H2 manual.

Government support

In your Federal Budget for 2024-2025¹ Published on May 14, 2024, the Australian Government announced the following package of measures to support Australian hydrogen production using renewable energy:

• The headline is a tax incentive for hydrogen production (discussed below) from 1 July 2027, equivalent to A$2 per kilogram of hydrogen produced using renewable energy and worth an estimated $14.4 billion Australians between 2027-2028 and 2040-2041;
• A$1.3 billion over 10 years from 2024-2025 for an additional round of the Hydrogen Headstart Programme, which allows hydrogen projects to bid for revenue support equal to the difference between production cost and price market; the first round was closed in 2023. with six shortlisted projects;
• A$1.7 billion over 20 years from 2024-2025 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 spent by the Australian Government over five years from 2024-2025 to implement the National Hydrogen Strategy to be updated, including hydrogen infrastructure planning; and
• 10 million Australian dollars to establish and operate a National Hydrogen Technology Skills Training Center in Victoria, Australia, to promote hydrogen workforce development.

Federal Tax – Tax Incentive for Hydrogen Production

The main measure announced is the introduction of a new Tax Incentive for Hydrogen Production, with the following key details:

• Tax compensation equivalent to A$2 per kilogram of hydrogen produced using renewable energy will be available (no limit);
• Starts from 1 July 2027 for hydrogen produced in Australia using renewable energy after that date and will extend until 30 June 2041 (subject to the following point);
• The tax offset will be available for a maximum of 10 years for each eligible project;
• For a project to be eligible, it must reach a final investment decision by June 30, 2030 (this could also apply to existing projects); and
• In the last update, it has been indicated that the tax compensation is refundablemeaning that after offsetting any taxes payable on the project, any excess credit will be paid in cash (although, see below).²

Several key details remain uncertain (and will be subject to consultation at some point):

• Any structure or entity requirements (for example, refundable research and development (R&D) tax compensation is only available to companies (and not, for example, trusts or partnerships);
• Fundamentally, the extent to which tax compensation is refundable – While no restrictions have been announced and the Australian Taxation Office (but not the Federal Budget documents themselves) have said it will be refundable, this may be subject to additional requirements. Again, as an example, refundable R&D tax offset is generally only available to R&D entities with a turnover of less than A$20 million per year (taking into account the turnover of any other entities that has control or a participation greater than 40% in) the R&D entity); and
• The exact requirements for hydrogen to have been produced from renewable energy; If consistent with the requirements of the Hydrogen Headstart Programme, this would require the hydrogen produced (including the rest of the plant, e.g. support and auxiliary systems) to be powered by 100% renewable energy. for which there is a renewable energy certificate (or which comes from behind-the-meter audited renewable energy generation).

The measure is also subject to approval by the Australian Federal Parliament, where it has faced some opposition from non-governmental parties and for which elections will be held before its start (which could be changed before its start).