The cost of solar and wind energy in Australia is too high for the country to become a hydrogen superpower and has to drop by two-thirds this decade, the head of the Australian Renewable Energy Agency has warned.

ARENA boss Darren Miller said his agency had kick-started a program to ramp up the efficiency of solar modules and drive down installation costs, because Australia needed to be installing 10 times more solar capacity each year than it is now.

“If we don’t do that, we can’t be a superpower because our electricity will be too expensive,” he told The Australian Financial Review.

“We won’t be able to compete with hydro in Canada or in Norway, we won’t be able to compete with other technologies. Our superpower is underpinned by solar, but it has to be cheaper solar.”

ARENA is also weighing up what role Australia can play in manufacturing solar kit. China’s scale makes equipment cheaper, lowering the cost, but leaves Australian customers with an intense supply-chain vulnerability.

“The developers are going to buy the panels at the quality and the price that they need to make it work, they’re not going to just buy Australian because we made it in a factory in Adelaide or wherever,” Mr Miller said.

“So the panels have to be the same or better quality, and they have to be a price that makes the economics work for a commercial development.”

On ARENA’s analysis, the $60-per-megawatt-hour input cost of renewable energy in Australia translates into a green hydrogen cost of $3 a kilo, above the generally agreed $2-a-kilo benchmark at which hydrogen becomes a viable industrial commodity.

“To make the superpower vision work – and hydrogen being a key ingredient of that superpower vision, whether that’s green steel, or hydrogen, or ammonia – we need to drive the cost of electricity down so that the operating costs are lower, so that hydrogen can be produced at $2.”

The goal is $20 per MWh, which ARENA hopes to reach through its 30-30-30 strategy. First, it will fund innovation that pushes the efficiency of solar modules up to 30 per cent, from 22 per cent now.

Second, it will bankroll technology to drive the installation cost of solar in the field down by two-thirds, to 30¢ per watt. And third, it will try to hit these targets by 2030 – which Mr Miller admitted was “a stretch”.

But ARENA’s other challenge is even stretchier: “where do you get the solar panels from?”

It was not only the geopolitics of relying on China, Mr Miller said, but also the simple fact that China needed plenty of its own output for its own transition, and might not always have enough to spare for Australia to install 10 times more – 50 gigawatts a year – than it does now.

Australia must consider if it can competitively manufacture panels “so that we can be the masters of our own destiny with this transition and superpower ambition”.

‘If we want to do this, it needs subsidies’

Mr Miller suggested Australia could be competitive at the processing of quartz into metallurgical silicon and then into polysilicon, the material that underpins the cells. “It requires high-energy content, and we’ve got the right conditions for that,” he said. “The polysilicon work, I know people in Australia are looking at that.”

This polysilicon might then be shipped back to China for the next stage, which was producing ingots and wafers. Mr Miller said other countries with capability to make solar cells could potentially do this: “you can do that in Korea, you can do it in the US, Thailand, we could do it in Australia one day”.

The final stage of the supply chain is producing the modules, which only one or two players in Australia were looking at right now. But ARENA has funded the Australian Photovoltaics Institute to do a full study of the opportunity for supply chains and manufacturing in Australia, and the report is due out soon.

Mr Miller said ARENA had not previously funded manufacturing, apart from the innovation component. He pointed to the potential for the new $3 billion National Reconstruction Fund, or the Clean Energy Finance Corporation, to become involved.

“We’ve got views about where to deploy capital. And we can do that with the funding we’ve got, so we’re happy to be a partner in that too. But it has to make sense for the right reasons,” he said.

“We can’t be doing manufacturing just for the sake of it because we like the idea, it has got to play a valuable role in the transition. And I think the key role for manufacturing in solar is around security of supply chains.”

But he admitted it would be challenging: “The cost of solar PV in China is at record lows. It’s just so cost-effective and it keeps coming down, which makes it hard to stand up a business case for doing something, because it’s just such a competitive product out of China.

“The industry can’t set up at a great scale without government support. Because of China’s subsidies, if we want to do this, it’s going to require subsidies from Australia.

“The players that are interested in manufacturing I don’t think we’ll be able to get going off their own bat just because we’re coming off zero, China’s running at a million miles an hour. So if we want to do that we’re going to have to start with a bit of government support.”

Hydrogen Headstart picks up speed

Meanwhile, the government has been focusing its subsidies on Hydrogen Headstart, the $2 billion program announced in the last budget that hopes to kick-start the capacity to produce green hydrogen.

ARENA in late December announced the half-dozen projects it has shortlisted to go through its full application process.

“Hopefully by mid-year to say third quarter of 2024, we should be able to announce who we are offering the subsidy to and having these projects reach financial close shortly after that,” Mr Miller said.

“I’d be happy if the projects were up and running by the end of the decade. And I think at the very most optimistic you’d have something going by financial year 2027.”

Mr Miller said the government was contemplating how to help the handful of projects that make the shortlist but ultimately just miss out on the Headstart funding.

He expected to see more funding become available, but ARENA was doing its part by co-funding those candidates’ studies, which can cost up to $30 million apiece, to ensure they get to the point where they can reach final investment decision.

“We’ll keep the momentum going for a bigger range of projects than we otherwise might, by risk-sharing with them on that,” he said.

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