Understanding the Hydrogen Production Tax Incentive 

What you need to know

• In the 2024–25 Federal Budget, the Australian Government announced the Hydrogen Production Tax Incentive (HPTI) to support and incentivise the production of renewable hydrogen. This forms part of the Federal Government’s Future Made in Australia package.
• On 28 June 2024, the HPTI Consultation Paper was released. Interested parties are invited to submit feedback on the proposed design, administrative arrangements and interaction with other government incentives outlined in the HPTI Consultation Paper before 12 July 2024.
• The goal of the HPTI is to incentivise renewable hydrogen production with a time-limited and uncapped refundable tax offset. The HPTI will apply to eligible producers of renewable hydrogen for a maximum of 10 years between 2027-28 and 2039-40.
• The HPTI will be demand driven and support will be dependent on responses from industry and broader economic factors that help bring projects online.

What you need to do

• Review the HPTI Consultation Paper and consider making a submission before 12 July 2024.
• Prospective recipients of the HPTI should ensure that they understand the requirements of the Guarantee of Origin certification scheme, which will effectively verify renewable hydrogen production that is eligible for the HPTI.
• Carefully consider the Community Benefit Principles, as the HPTI will only be available to proponents that are able to effectively align their hydrogen production with investment in local communities, domestic industry and supply chains, and the promotion of diverse workforces, secure jobs and tax transparency.
• Consider the capital structures of your projects in line with HPTI and other government incentives (such as the Hydrogen Headstart program), and the consequential impacts on project costs and investment returns.

Background

In the 2024–25 Budget, the Federal Government announced the HPTI to support renewable hydrogen production, which is intended to expedite project development of renewable hydrogen and build scale to reduce production costs over time.

The HPTI will provide refundable tax offsets of $2 per kilogram of renewable hydrogen produced in eligible facilities between 1 July 2027 and 30 June 2040, available for up to ten years for projects that reach final investment decisions by 2030.

Incentive amount

The $2 per kilogram offset will be provided to eligible corporations as a credit against their corporate income tax liability, either as a cash refund, a reduced income tax liability or applied to pre-existing tax liabilities.

As the HPTI is delivered through the Australian tax system, it will only be available to corporations subject to Australian income tax throughout the relevant income year and excludes entities fully exempt from paying corporate income tax.

Eligibility criteria

The HPTI will only be available to eligible entities that satisfy the eligibility criteria, which includes the following:

• operating an eligible facility in Australia that has a minimum capacity equivalent to a 10 MW electrolyser and demonstrates production meeting the minimum capacity, and will achieve financial investment decision by 30 June 2030;
• registering the eligible facility with the Clean Energy Regulator and using a GO production profile to verify production volumes and emissions intensity under the Guarantee of Origin scheme;
• producing renewable hydrogen with an emissions intensity of less than or equal to 0.6 kg of CO₂ from well to the production gate; and
• satisfying community benefit criteria to boost investment in local communities and supply chains, promote diverse workforces and secure jobs and compliance with tax obligations.

Key takeaways

The HPTI will attract investment in Australia as an emerging player in hydrogen, and encourage industrial decarbonisation at an international level. In particular, notable features of the HPTI include the following:

• No additionality or time-matching or temporal matching: The HPTI does not require hydrogen production to be accompanied by new power generation or to be matched with clean electricity power operations. This approach avoids the practical complications currently faced in the United States, where proposed matching requirements within tax credits designed to incentivise a move from gas-derived hydrogen to green hydrogen have raised fears of increased costs and delays in green hydrogen production. Instead, hydrogen production under the HPTI is proposed to be matched with Guarantee of Origin (GO) certificates from the same year. By simplifying matching requirements, the HPTI ensures that hydrogen produced is verifiably linked to renewable energy sources without imposing burdensome conditions on the production process.
• Emissions intensity of less than 0.6 kg of CO₂: The threshold of 0.6kg of carbon dioxide equivalent up to the production gate aligns the 2040 hydrogen carbon intensity threshold under the Climate Bonds Standard. Compared to other certification and regulatory frameworks for hydrogen, ammonia and hydrogen-based fuels, the HPTI is intended to support the cleanest hydrogen in line with the Government's decarbonisation goals. It is expected that the majority of the production will come through electrolysis.
• Eligibility will require compliance with the Community Benefit Principles: The HPTI will only be available to producers that align with the Future Made in Australia Community Benefit Principles, with compliance to be established as part of accessing the taxpayer support through the HPTI. The Community Benefit Principles will focus on ensuring that the benefits of investment flow to local workers, industries and communities and includes investment in local communities (including First Nations communities), domestic industry and supply chains, and the promotion of diverse workforces, secure jobs and tax transparency.
• Eligible entities can also apply for Hydrogen Headstart: Renewable hydrogen projects may be eligible for both the HPTI and support through Hydrogen Headstart if they are successful during the competitive application process. However, payments under the Hydrogen Headstart program will proportionally reduce if a project is also receiving the HPTI.

Submissions on the HPTI Consultation Paper may be lodged electronically via email to HydrogenProductionTaxIncentives@treasury.gov.au or submitted via post before 12 July 2024.

We will continue to provide updates on the HPTI developments as they become available.

Authors: Paul Lingard, Partner; Nikki van der Meer, Counsel; Mike Webb, Senior Associate; Lauren Howe, Associate and Emma Hallab, Graduate.