Simpson Grierson - MBIE consults on New Zealand’s energy system #2: Interim Hydrogen Roadmap

31/08/2023

MBIE consults on New Zealand’s energy system #2: Interim Hydrogen Roadmap

As part of its wider five part consultation on New Zealand’s Energy Strategy, the Ministry of Business, Innovation and Employment (MBIE) has released its Interim Hydrogen Roadmap, which sets out the Government’s initial position on the role that hydrogen can play to help New Zealand achieve its net zero emissions targets and the opportunities and challenges facing the development of a hydrogen economy in New Zealand.

In this second article in our series, we analyse the Roadmap and what it means for participants in the hydrogen industry.

The outcome of this consultation is the publication by MBIE of the Hydrogen Roadmap. This will set out the future role of hydrogen in New Zealand and form part of the New Zealand Energy Strategy that is targeted for release by the end of 2024.

Simpson Grierson is providing analysis on all five consultation documents, available (when published) on our website, see the links at the bottom of this page.

Submissions on the consultation close on 2 November 2023, with full details and documents available at MBIE’s website.

Key takeaways from the Roadmap:

The Government sees a significant role for green hydrogen (hydrogen produced from renewable energy sources) in reducing emissions in New Zealand and has a desire to develop a green hydrogen economy in New Zealand. The Roadmap does not currently envisage a role for blue hydrogen (hydrogen produced from gas but with accompanying carbon capture, storage and utilisation technology).
While the principal focus of the Roadmap is on the emissions reduction potential of hydrogen, it is clear that the Government sees the broader potential benefits available to New Zealand from developing domestic hydrogen production and use cases, including benefits for the economy and New Zealand’s energy security.
Significant renewable electricity development is required to support the production of green hydrogen, and the ability for green hydrogen to develop in New Zealand is contingent on New Zealand’s ability to build out significant domestic renewable energy capacity.
The Government has identified a number of potential use cases for green hydrogen. These include its use in hard-to-abate industrial processes, in transportation, and as part of New Zealand’s electricity network. There are commercial and technological challenges that will need to be overcome by industry in order for green hydrogen to be produced at scale and at a price that is commercially viable in New Zealand.
The Government considers that it can play a significant part in accelerating the development of New Zealand’s green hydrogen economy.

The Roadmap at a glance

New Zealand is currently grappling with a major energy transition in order to meet our domestic and international emissions reduction commitments. While electrification will play a huge role in reducing New Zealand’s emissions, there are still some “hard-to-abate” activities (such as aviation, heavy transportation and large-scale industrial processes) that will require clean and efficient alternatives. Natural gas also plays a key role as a fast start fuel in New Zealand’s electricity sector (see our analysis of MBIE’s Gas Transition Plan here).

Green hydrogen, which is produced using electrolysis and powered by renewable electricity, has been identified as a fuel that can form a key part of New Zealand’s decarbonisation strategies in these hard-to-abate sectors, and potentially as a replacement fuel in New Zealand’s electricity system.

To this end, the Government has prepared the Roadmap to “optimise the potential for hydrogen to contribute to New Zealand’s emissions reductions, economic development and energy security and resilience in line with our broader electrification goals”.

This aim is supported by four key objectives:

Hydrogen production will need to be matched in equal parts by sufficient renewable electricity generation and transmission.
Steps will need to be implemented to ensure the safe use of hydrogen in New Zealand and to facilitate early hydrogen projects.
The Government will need to support early demand for hydrogen by supporting viable use cases.
Progress and outcomes will need to be monitored over time.

Importantly, the hydrogen strategy set out in the Roadmap is wider than emissions abatement alone. It focuses on the potential benefits to New Zealand’s economy (including regions that may be hardest hit by the reduction in oil and gas production) and the benefits from developing domestic hydrogen production for New Zealand’s energy security. In preparing a hydrogen strategy, New Zealand joins the 32 countries that had hydrogen strategies in place as at the end of 2022.^[1]

Use cases and the role of hydrogen

The Roadmap sets out a variety of use cases that the Government considers are most relevant for New Zealand as we transition our energy system away from fossil fuels as a generation source. These fall into the following categories:

Hard-to-abate and hard-to-electrify applications in industry, including as an industrial feedstock, fertiliser/urea and ammonia;
Heavy and speciality transport, including heavy land transport and speciality vehicles, and as a marine and aviation fuel;
Electricity services and power backup, including fast-start peaking generation and power backup;
Developing an export market, provided that New Zealand is able to produce green hydrogen at a cost of production that would be internationally competitive (and presumably, in a quantity that exceeds domestic demand); and
Hydrogen in the gas network, including exploring blending of hydrogen with gas and the use of the existing pipeline network infrastructure itself to transport hydrogen.

We recommend that all interested participants review these use cases and provide comments as to their viability and the applications that they consider are likely to be most beneficial in the New Zealand economy (from a cost, use and emissions reduction perspective).

Snapshot: The clean hydrogen economy in the United States

The United States is seeking to position itself as the world leader in the nascent clean hydrogen sector. It has adopted the “U.S National Clean Hydrogen Strategy and Roadmap”^[2], which sets out an ambitious strategy that seeks to “ensure that clean hydrogen is developed and adopted as an effective decarbonisation tool for maximum benefit to the United States”. The strategy has three key focus areas - the application of hydrogen for high-impact uses, reducing the cost of clean hydrogen, and developing regional networks to enable large-scale production. This strategy has been underpinned by significant financial investment from the US Government in the following forms:

USD$9.5 billion of clean hydrogen initiatives passed via the Bipartisan Infrastructure Law. This includes up to USD$8 billion to develop regional clean hydrogen hubs, with the aim of creating regional networks of hydrogen producers, consumers, and shared local connective infrastructure.
The U.S. Government introduced a tax credit for hydrogen as part of the Inflation Reduction Act 2022, which awards a tax credit of up to $3 per kilogram of hydrogen produced - providing a major economic incentive for clean hydrogen production. Given the estimates of potential opportunities for clean hydrogen production in the U.S. Clean Hydrogen Strategy and Roadmap (10 million metric tonnes annually by 2030), this represents a significant financial commitment by the US Government, and a major economic incentive for the production of clean hydrogen in the United States. (The total cost will depend on the final tax credit design, which remains ongoing.)

The challenges

The development of a sophisticated green hydrogen sector in New Zealand is likely to raise a number of challenges, and the Government has provided its view on the key challenges that the sector will face.

Three of the most significant challenges identified in the Roadmap are as follows:

Renewable electricity demand: Green hydrogen production relies on renewable electricity sources. The Government estimates that under its base case scenario for hydrogen production^[3], green hydrogen production could result in renewable electricity demand that exceeds the Climate Change Commission’s Demonstration Path forecasts by 22 per cent in 2035 and 48 per cent in 2050. Meeting this demand will require significant additional renewable electricity beyond that required for New Zealand’s electrification of existing sectors. As well as the physical constraints of developing this additional infrastructure (including the transmission grid and distribution lines), green hydrogen demand is likely to put pressure on electricity prices, which will ultimately be a key factor on the price of green hydrogen that is produced in New Zealand.
Water security: Hydrogen production relies on significant water supply. With water supply already of growing concern in New Zealand, the Government will need to think carefully about how it balances the complexities associated with water consumption in hydrogen production. The challenges are likely to be specific to the regions in which hydrogen production occurs. Māori are also likely to have important perspectives on the use of water that will need to be taken into account.
High upfront capital cost and the need for a demand pathway: There will be a high capital cost associated with developing the infrastructure to advance a green hydrogen economy in New Zealand (both in production of green hydrogen, and the adaptation of existing industries for the use of green hydrogen). Hydrogen producers will need a clear demand trajectory in order to undertake the necessary capital investment required to produce green hydrogen. The Government sees a role for itself in supporting the early development of a green hydrogen sector through financial support. The Government has raised the possibility of a green hydrogen export market being developed, which may help to provide a demand pathway as domestic demand develops.

The Government’s proposed role

The Government has set out its desire for hydrogen deployment to happen at pace. It is clear from the Roadmap that the Government sees a key role for itself in developing New Zealand’s hydrogen economy, having identified a number of key actions it is proposing to undertake to support the hydrogen rollout. These include the following:

Establishment of industry body: The Government proposes to establish a government and industry coordination body to facilitate and support ongoing action to deploy hydrogen in New Zealand. Its role will be to come together and help to shape priorities for the hydrogen sector in New Zealand, guided by the direction and issues in the Roadmap.
Development of regulatory regime: The Government has made it a priority to develop the regulatory framework for hydrogen to facilitate its uptake, beginning with changes required to enable safe use of hydrogen in near-term use cases such as domestic production, storage and the application of hydrogen to heavy road transportation. We look forward to seeing further detail of the proposed regulatory regime for hydrogen in New Zealand once available.
Supporting price and long term certainty of hydrogen: The Government has identified the need for it to intervene to help close the price gap between green hydrogen and fossil fuels during the transition phase. The financial package made available currently by the Government is a $100 million Regional Hydrogen Transition consumption rebate scheme over ten years ($10 million per year), which involves a rebate for early adopters of green hydrogen in hard-to-abate sectors. The rebate will be structured as a contract for difference between the price of the relevant fossil fuel (eg diesel) and the hydrogen price agreed between the relevant participant and the Crown. MBIE is separately consulting (see here) on a draft technical design document to seek feedback on the key elements of contract design for the initiative, including how the rebate will work in practice given different usage factors between hydrogen and other fossil fuel alternatives. Submissions close on 10 September 2023.
Supporting capital investment and research funding for hydrogen: The Government has already supported key hydrogen projects in New Zealand that are expected to support the development of the wider hydrogen market (as outlined in the Roadmap). It has set aside a further $30 million in Budget 2023 to support the adoption of zero emissions vehicles in heavy industry (such as trucks and heavy vans), which includes hydrogen fuel cell heavy vehicles. Separately, the Government continues to provide funding for hydrogen research in New Zealand supported by MBIE’s Endeavour Fund, Catalyst Fund and Strategic Science Investment Fund, with over $40 million of funding evidenced by MBIE in the Roadmap.
Global partnership and cooperation: The Government has committed to building on international relationships on key areas of interest relating to hydrogen, including research and development, standards alignment and building connections with private companies and sources of international capital that will be important to enable the construction of projects required for the development of a hydrogen economy in New Zealand.

The final Hydrogen Roadmap will be a key factor in determining the role that hydrogen will play in New Zealand’s energy transition. While the Government’s desire to develop a green hydrogen economy in New Zealand is clear, questions remain as to whether the financial commitments that have been provided by the Government at this time are sufficient to achieve this, in particular when contrasted with the financial commitments made by governments in other countries (such as the United States and Japan). Industry participation and stakeholder engagement on the Interim Hydrogen Roadmap will be critical to inform the development of the final Hydrogen Roadmap.

If you wish to discuss any of the issues arising from MBIE’s consultation on the Interim Hydrogen Roadmap, or would like assistance in developing submissions, please contact any of our experts.