A proposed hydrogen facility in South Australia would be good for the energy market but a questionable investment, without substantial government support.
The Labor Party’s proposed hydrogen facility in South Australia would have made a $2.3 million profit last summer, if it had been running at 20% capacity. But its prospects are far from predictable. A year earlier, a rare “islanding” event in the state would have seen a profit 20 times higher. A year before that, it would have lost about $2.3 million.
These estimates from Cornwall Insight Australia illustrate the tentative outlook for the much-anticipated hydrogen sector, where gigawatt-scale projects are being pursued in the hope of a clean energy export boom.
A far more modest 250MW plant in South Australia has big potential as an important servant to the local grid, but its economic prospects are so marginal it would need to rely on a government’s largesse.
The $2.3 million profit estimate for the recent summer is based on 20% plant utilisation and includes a quarterly repayment on the $593 million of government debt with interest, operating costs and the net cost of energy.
Assuming power to run the plant is purchased from the grid, Cornwall Insight senior storage consultant Benjamin Macey says a positive cost of energy for scenarios where the facility is run at low capacity (see chart) reflects the fact that electricity prices are often negative in South Australia around midday. “On average in South Australia the price was negative from 10am to 3pm,” he says. “That’s literally one of the only reasons it made money – you got paid to make the hydrogen in the middle of the day.”
It’s a great opportunity to run an electrolyser, he says, but the sweet spot is achieved when running at a low-looking 20% capacity. “You’d think it should be running 100% of the time but if you do that you lose money,” Macey says.
The South Australian Labor party has committed to building a hydrogen production, storage and electricity generation facility if elected at the next state election. The proposal includes a $220 million 250MW electrolyser, $31 million for 3,600 tonnes of liquefied hydrogen storage and $342 million for a 200MW CCGT power station to run on hydrogen.
Labor’s proposal is vague about location and how a facility would be run. If hydrogen were produced simply to feed into a generator so that electricity can be sold, a 70% loss in round-trip efficiency would result. “You’ve got lots of losses in there,” he says.
Macey assumed the electrolyser would offer “conservative” levels of services to the grid to earn FCAS revenue, such as lowering capacity when demand was high and increasing capacity when demand was falling to very low levels.
“I didn’t want to overstate what you can do in the FCAS market,” he tells EcoGeneration. “I assumed the whole facility wouldn’t be turning itself down, because that would be too impractical … unlike a battery, which would be doing a lot more.”
In addition to the 20% utilisation, he estimates about 1,517 tonnes of hydrogen would have been effectively produced.
A hydrogen-powered gas turbine will earn fairly steady revenue for the owners at all capacity levels (assuming it only turns on above $300/MWh), the modelling shows, but revenue earned from hydrogen sales is eclipsed by increased costs of creating large-scale generation certificates and fast-rising energy costs as capacity is increased to 100%.
“If you’re going to use hydrogen to create electricity you would do it at very high prices, like $300/MWh or higher,” Macey says. “I feel hydrogen is going to be a very expensive way to generate and create electricity.”
Dominated as it is by three reigning generator-retailers, South Australia badly needs more energy “cap contracts”, he says, where suppliers sell output at a strike price. The most common contract is for $300/MWh.
“New retailers can’t actually get hedging products to hedge their retail books, so I thought the government would probably sell a retail hedging contract – and that would probably be set at $300/MWh.”
Masey’s model showed that the plant may have made a bumper profit of $47 million in the summer of 2020, when a two-week separation event saw high energy and FCAS prices. “Any facility made a lot of money that summer,” he says. “But a commercial company would not be able to rely on those [rare] events.”
A loss for the three months between January and March in 2019 is put down to lower levels of solar in the grid and higher energy prices. Today, there is so much rooftop solar pushing down daytime demand that the need for additional load is almost critical. On that criteria, an electrolyser is needed, Masey says.
“By putting in an electrolyser you’re getting really cheap prices and creating a more stable grid because you’re adding load exactly when it’s needed,” he says. With 250MW on call, Labor’s hydrogen proposal would be a significant booster to load in the state, which can drop to 300MW around noon.
If the generator is switched on to supply during peak periods, less hydrogen is available to sell to make ammonia or green steel and replace diesel in the outback. A selling price of $2/kg is assumed, in line with the federal government’s Technology Investment Road Map goal.
Overall, Macey says hydrogen is a “very marginal” prospect. “I don’t think a hydrogen plant is commercial,” he says. “A commercial organisation would expect a higher return on investment than the 1.75% I assume the government would be borrowing at.”
South Australia needs a hydrogen facility, that’s quite plain, and if any government wants to build it then that would be much appreciated. “The government needs to support the hydrogen industry in South Australia as a first mover,” he says. “If the government has social objectives in doing this – creating the industry, creating the jobs, decarbonisation – then it makes a lot of sense to build it themselves and sell it themselves. It would reduce the risk for everyone involved, while sharing all the knowledge.”
Similarities can be made to the support government has given to battery storage, he says, where on Cornwall Insight’s estimate there is more than 1GW of battery projects proposed in South Australia with at least seven virtual power plants in operation.