Reports of hydrogen's death in South Australia are greatly exaggerated

I was stopped by a young woman who worked at the SA Office of Hydrogen, after my talk at the Adelaide Writers’ festival in the botanical gardens a few weeks ago.

“Tell me that what they are saying is not true” she said. “Is hydrogen dead?”.

“It can seem like it”, I replied, “if you get your information from the SA newspapers.

“It can seem like it if you see the reports of many large companies pulling back from commitment to hydrogen projects”. “And it’s not altogether clear from what the Government is saying that hydrogen industry is alive. “But the economics says something different and clear. And in the end, the economics has a pretty big say in what happens”.

So what does the economics say about the future of hydrogen industry in SA, the hydrogen jobs plan and all the state development that was to flow from them? It says that the reports of death are not only exaggerated, but false.

Hydrogen’s Role is in Industry not Direct Exports.

Let’s be clear from the start that hydrogen’s main role in Australia’s economic future was always as an input into industry, and not as an export in liquid form like LNG, or as an alternative to fossil carbon in running thermal power plants. Hydrogen shares with carbon a capacity to attract oxygen out of its bond with other elements, including the iron in iron ore, and silicon in sand and quartz. When it pulls oxygen out of mineral ores and leaves the metal, the waste is water. In contrast, when carbon pulls oxygen out of iron ore to leave iron metal, the waste is carbon dioxide—the earth-heating greenhouse gas.

Hydrogen bonded chemically with carbon, in hydro-carbons, is an important ingredient in transport fuels, plastics and fertilisers and many other chemical products. The hydrogen and carbon are both present in oil and gas. That’s been handy in industrial production, except that large quantities of carbon dioxide are released into the atmosphere when oil and gas are used in this way. If the hydrogen comes from splitting water with renewable energy, and carbon from sustainably growing and harvesting plants, the chemical benefits come without the addition of greenhouse gases to the atmosphere.

In the fossil carbon economy, Australia is the world’s largest exporter of coal and liquefied gas taken together. Japan, Korea and China import huge quantities of Australian iron ore and coal and put them together to make iron metal, releasing greenhouse gases as a waste. Conversion of Australian iron ore into iron and steel produces about 4 percent of the world’s greenhouse gas emissions—more than three times the emissions from everything we do in Australia.

Why didn’t we make iron at home in the fossil carbon economy? That’s partly transport economics. It doesn’t cost much to transport Australian coal to industrial plants in other countries. It is actually cheaper to use Australian metallurgical coal in Kobe, Pusan or Shanghai than in Whyalla. And it’s partly because, unlike other large exporters of gas, we choose not make to make gas available cheaply for industrial use at home.

Hydrogen is much harder and more expensive to convert into a liquid than methane gas and much harder and more expensive to ship across the ocean. Unlike Australian gas and coal, hydrogen for industry would be several times as expensive in importing countries as in Australia. As Reuben Finighan of The Superpower Institute set out in his paper The New Energy Trade last November, only a few very small and rich economies would ever carry and justify those costs. The high costs of international transport for hydrogen mean that its main economic value for Australia is in producing here in Australia many of the products that are currently made overseas with Australian coal and gas. Foremost amongst these is the reduction of iron and some other mineral ores into metals. The case for using hydrogen at home is also strong for the chemical industries —reinforced by Australia’s advantages in producing plants for bio-carbon.

The high costs of international transport for hydrogen mean that its main economic value for Australia is in producing here in Australia many of the products that are currently made overseas with Australian coal and gas.

These factors underpin Australia’s potential as a Superpower of the zero-carbon world economy. I first set out the case a decade ago, in the Favell Lecture to the Engineering School at the University of Adelaide. I expanded the case in the books Superpower, and the Superpower Transformation. Reuben Finighan has gone into more detail in The New Energy Trade. The Superpower became part of the Australian discussion of future economic development.

Although it was peripheral to the Superpower narrative, direct export of hydrogen and its carriers dominated the hydrogen hype that emerged a few years ago. That was a mistake and a pity. The bursting of that hydrogen bubble was inevitable and necessary. The bursting of the bubble returns the emphasis to the use of hydrogen in zero-carbon industrial production.

The Economics of the Superpower Industries

Why hasn’t the economics driven early development of green iron, green chemicals and other zero-carbon industrial production using iron?

The answer is in simple, uncontested economics. Economics that has been in good textbooks for a hundred years. This economics has been accepted by economists like Friedman and Hayek at the extreme free market end of the debates about the role of Government in economic development.

Markets work wonders for economic development whenever and wherever trade brings benefits to society similar to the benefits accruing to the contracting parties. But they don’t work for economic development if and when business transactions confer large benefits to firms or people who are not parties to market exchange, or impose large costs on them.

These are “externalities”—benefits or costs not captured by the parties to the exchange. Two large externalities are important in the transition from the fossil carbon to the zero-carbon economy. There is a positive externality associated with innovation—the development of new technologies, business institutions and products. There is a negative externality from emission of greenhouse gases into the atmosphere.

Innovation generates benefits that the investing firms cannot capture for themselves. Pioneer investors in new ways of doing things show others what works and what is not worth trying. They make costly mistakes that followers avoid. They generate knowledge from which followers benefit.

Investments that embody “First-of-a-Kind” use of a technology can cost many times as much as applications when the technology is well established. So sound economics has taught for a hundred years that we don’t get enough innovation unless governments provide financial support for it.

There is a negative externality—a cost imposed on others--when a firm releases carbon dioxide into the atmosphere. Markets won’t work for economic development unless governments block economic transactions that impose large costs on others, or apply taxes that recoup for society the damage done to others, or subsidise competing activities.

The increase in average global temperature and the damage it does will continue to rise until emissions have fallen to net zero. We can get some reductions in greenhouse gases with voluntary action. But we won’t get anywhere near net zero in Australia or the world as a whole without mandatory Government action—a tax on carbon emissions equal to the social cost of carbon, or bans on activities that generate emissions, or subsidies for competing zero-emissions activities. The mandatory government action generates a “green premium” for investment in zero-carbon economic activity.

We haven’t yet seen much investment in the industries of the future despite Australia’s advantages in them because the two policy foundations have not been in place. We have not had the support that brings financial incentives for innovation in line with the benefits to society. And we have not had the green premium on zero-carbon production that recognises the advantages to us all from reducing greenhouse gas emissions.

Australia has made recent progress in putting in place the building blocks for the Superpower. The economic principles are set out clearly and well in the National Interest Framework for A Future Made in Australia released by the Commonwealth Treasury with the 2024 budget. But we won’t make large progress until the principles are turned into policies that provide the right level of support for innovation in zero-carbon production, and a green premium equal to the social benefits from replacing emissions-intensive with zero-carbon activity.

Some other countries have done better. The European Union, the UK and other European countries are closest to getting it right, with carbon pricing closer to the social cost of carbon, and large financial support for innovation. Australia’s major trading partners in Northeast Asia—China, Japan and Korea—were once laggards but are edging towards favourable policies for the zero-carbon transition.

The US under President Biden provided effective support for zero-carbon activities, although in ways that generated larger budget deficits than other countries could afford. President Trump is seeking to unwind those policies and to deny the validity of the science that defines the need for them. We will learn over the next few years whether the Trumpian policies on climate and other things are a temporary detour from global development, or a catastrophic departure.

Incentives are more likely to unlock the magic of the market if they are provided in general form, with conditions known in advance by all market participants. General grants for innovation that are available to all firms that meet specified conditions are better than those that depend on officials’ discretion and artificial “auctions”. Green premia are most cost-effective if they are available to all market players who meet specified conditions. The Renewable Energy Target established by Prime Minister John Howard in 2001, and strengthened by Prime Minister Kevin Rudd in 2011, and the hydrogen tax credit introduced by Prime Minister Anthony Albanese in 2024, are examples of market-enhancing general incentives for low-carbon production.

The Laws of Economics in Upper Spencer Gulf Development

SA’s Upper Spencer Gulf has been on the national mind since the Premier announced on February 19 that the Whyalla Steelworks would go into administration, and the Prime Minister and Premier announced major financial commitments to the future of Whyalla. The funding that the SA Government had allocated to the hydrogen electrolyser and peaking power plant would now go to saving and building a future for the Steelworks. Separately, the Commonwealth would allocate a large sum to green iron and steel development at Whyalla, and a larger amount to securing the future of the Steelworks.

The National Interest Framework for A Future Made in Australia says that support for innovation should be confined to industries in which Australia has good prospects of having comparative advantage in international trade.

The three cities of the Upper Spencer Gulf developed distinctive industrial strengths in the old, protected Australian economy. Whyalla was adjacent to Australia’s early known iron ore resources. Ships taking ore to the iron and steel plants in Newcastle and Port Kembla could bring metallurgical coal on the return voyage. This contributed to a case for local iron and steel production. Port Pirie was the closest outlet to the sea for the Broken Hill base metals mines, and a logical location for the processing of ores before shipment overseas. Port Augusta was the closest urban location to the Leigh Creek coalfields that Premier Thomas Playford determined should supply the state’s power generation. The power transmission system spread out from Port Augusta at the top of the Gulf—southeast to Port Pirie and Adelaide and southwest to Whyalla and Port Lincoln. Port Augusta also had strengths as a land transport hub—it was a choke point through which the east-west railways and roads had to pass.

Half a century ago, Whyalla, Port Pirie and Port Augusta represented around 7 percent of this state’s population, when South Australia was home to a tenth of Australia’s people. Today they are more like 3 percent of the state’s when South Australia has a fourteenth of the national total. The industrial legacy remains relevant to future industry: the electricity transmission, port and water infrastructure; the industrial skills and culture; and urban amenities built for larger populations.

The industrial legacy makes an enduring contribution to comparative advantage for the manufacturing industries of the future. So does the region’s and South Australia’s relatively low cost structure for construction and operation of industrial facilities—lower than most of urban and industrial Australia and far lower than the other iron ore producing region, the Pilbara.

The Upper Spencer Gulf is adjacent to Australia’s most important copper and uranium mining regions. Both minerals, and copper in particular, are set to become much more important in the zero-carbon world economy. The South Australian Government has recognised the potential for zero-emissions copper processing to contribute to regional and state development.

The region is richly endowed with wind and solar energy resources. Uniquely in Australia and rare in the world, the excellent renewable resources are linked to industrial and metropolitan centres by transmission lines built for the old coal generation. This juxtaposition of excellent solar and wind resources and established transmission has contributed to South Australia’s world-leading position in solar and wind generation. That leading position, in turn, has led South Australia to develop mechanisms and systems early for making high proportions of variable renewable energy reliable and secure. South Australia is a world leader in use of battery storage of electricity.

Whyalla does not and will not have comparative advantage in iron and steel production using the old coal-based technologies. The Whyalla blast furnace was kept alive beyond its natural life by brilliant application of local metallurgical and engineering skills. But there is no economic case for bringing coal from Newcastle or Port Kembla or Mackay artificially to build new facilities for sub-economic scale steel-making in a blast furnace in Whyalla.

By contrast, there are good reasons why Whyalla and adjacent towns around the Spencer Gulf are likely to have comparative advantage in making iron and some steel in the new zero-carbon economy. The local ores include some that are highly suitable for application of the hydrogen-based technologies utilising the state’s unusual renewable energy advantages. Other Australian including South Australian ores will become suitable as new technologies are applied to their direct reduction into metal. Globally competitive power in the zero-carbon world also confers advantages in conversion of iron into steel in an electric arc furnace—although not such large advantages as in converting iron ore to metal. Any advantages of Whyalla in the rolling of steel into products depends on the legacy of skills and machines. These advantages are small, and easily overwhelmed over time by cost disabilities of other kinds.

If future steel-making depended on coal, there would be no National Interest for a Future of Iron and Steel Made in Whyalla or Australia. There is every reason to envisage a profitable and sustainable Future for Iron Made in Whyalla in the zero-carbon economy.

These are critical issues as the Administrator comes to grips with the future of the Steelworks and the South Australian and Commonwealth Governments with the future of Whyalla.

Current steelmaking goes through four steps: mining and concentrating ore; using coal to convert iron ore into metal in the blast furnace; converting iron into steel in the Basic Oxygen Furnace; and rolling the steel into rails and other long products.

Future steel-making has five stages: mining and concentrating ore; making iron metal using hydrogen in a direct reduction iron-making plant; producing hydrogen in an electrolyser from electricity drawn from the grid or from nearby wind and solar generators; and rolling the steel into rails and other long products. Iron can be produced for the electric arc furnace with lower but still high emissions by using natural gas. A mixture of natural gas and green hydrogen can produce iron metal with intermediate levels of emissions-intensity.

The State and Federal Governments are determined to continue with at least the recent scale of final products output. The scale is likely to be near or only modestly above historical levels. Whether more or at the current level, it would damage the bigger Future Made in Australia in other industries if production were induced by tariffs or other restrictions on trade that raised the price of steel used in Australia above the lowest international levels.

Two Technologies for an Iron Future Made in Whyalla

Let’s focus on two paths to a Future of Iron and Steel Made in Whyalla. Here I draw on work of South Australian-based ZEN Energy with its partners over several years on green iron in the Upper Spencer Gulf. Its partners in this work include the major European industrial gases and metallurgical engineering firms, one of which is a sponsor of this conference today. I focus on what seem today to be the two most likely green iron technology pathways that could be applied now for iron-making at Whyalla. One is shaft technology using high Fe grade iron ore pellets. The other is a fluidised bed technology using high grade fines only.

Shaft direct reduction iron technology has been developed for a number of decades predominantly using natural gas. There is now over one hundred million tonnes of annual capacity in operation around the world. This is now a mature technology. Capital costs have come down with accumulation of production capacity. There has been recent European work in progress on use of 100% hydrogen in shaft reduction processes, including in projects by the companies HYBRIT and Stegra.

A fluidised bed plant using 100 percent hydrogen was operating commercially from 1999 to 2006 in Trinidad. The hydrogen came from transformation of stranded natural gas. The commercial foundations of the hydrogen supply were broken when gas became exportable in Trinidad and gas prices rose to international levels. Other fluidised bed technology developments are also underway in Austria and Korea.

Both shaft and fluidised bed technologies could use a range of ores, including the lower grade hematites that account for most Australian iron ore exports. However, use of lower concentrations of iron leaves a high proportion of slag, which must be removed through a separate, smelting process.

Future steel-making would typically have five stages: mining and concentrating ore; making iron metal using hydrogen in a direct reduction iron-making plant; producing hydrogen in an electrolyser from electricity drawn from the grid or from nearby wind and solar generators; steelmaking such as melting the iron in an electric arc furnace to produce steel; and rolling the steel into rails and other long products. Iron can be also prepared for the electric arc furnace using natural gas, with somewhat lower emissions intensity than a coal-fed blast furnace but high emissions in absolute terms. A mixture of natural gas and green hydrogen can produce iron metal with intermediate levels of emissions-intensity.

The first, fourth and fifth stages of production are much the same whether shaft or fluidised bed processes make the iron.

Iron from either process can be used together with steel scrap in an electric arc furnace to produce steel. The same rolling mills turn the crude steel into final products. An electric arc of 1.2 million tonnes per annum would have the same capacity to produce steel as the old blast and basic oxygen furnaces. This volume of steel output would meet the requirements of the rolling mills operating at current scale with a surplus for sale to rolling mills elsewhere in Australia or overseas.

The same concentrated magnetite from the Middleback Ranges can be used in both processes. However, a shaft process requires pellets made from these magnetite concentrates. The current mine and concentration capacity could meet the feed requirements of a 1.2 million tonnes per annum output DRI plant.

Gas versus Hydrogen in a Future made in Whyalla

A gas-based process would need to draw feedstock from the pipeline across the Spencer Gulf to Port Pirie which connects to the main line from the Cooper Basin to Adelaide. A hydrogen fed process would be supplied from a local electrolyser adjacent to the iron plant in Whyalla, drawing electricity from the grid and behind the meter from local solar generation.

South Australian gas is scarce and expensive—at the moment, rather more expensive than Australian gas available to many industrial users in Asia. If the future of iron-making were based on gas, you would not make iron in South Australia.

Gas may become cheaper in future, with reduced demand from the greater use of renewable energy and increased supply from expansion of gas production in the US during the Trump Presidency. Private investors are unlikely to commit to gas use on the possibility of lower prices in future. They are likely to require Government guarantees on availability and price.

A detailed comparison of gas-based production at today’s gas prices, versus 100% renewable hydrogen, shows modestly lower costs for the hydrogen solution if the principles of the National Interest Framework for the Future Made in Australia are applied. These principles would lead to a grant to recognise the external benefits of innovation, and measures, including the hydrogen tax credit, to provide the green premium for the absence of greenhouse gas emissions.

The Administrator will be considering a range of possible futures for the Steelworks. There must be a good chance that an electric arc furnace with capacity of 1-1.2 million tonnes per annum would be part of the future. Part—perhaps several hundred thousand tonnes per annum—of the feed may be available from scrap steel currently exported from South Australia. That would leave a balance of around a million tonnes per annum to be supplied from locally produced iron. Any iron that is surplus to the local requirements would be easily sold with a premium to international steelmakers.

Ore requirements of an iron plant to produce 1.2 million tonnes per annum of metal could be met from existing mining and concentrating capacity at the Iron Duke mine in the Middleback ranges. The electricity requirements of the electrolyser of around 500Mw could be met alongside those of the electric arc furnace, the rolling mills and the iron plant without any augmentation of transmission. The transmission lines from Port Augusta to the north, the recent augmentation of the lines south from Whyalla through wind farms under development and the construction-ready Cultana solar farm near the steelworks would together supply the necessary power.

The Administrator and a new Steelworks owner could have high confidence that the new iron-making capacity would be ready to feed an electric arc furnace from the earliest likely steel production in 2029. The concentrated ore supply would fit comfortably within established capacity. The large electricity requirements would be met through a combination of the arrangements developed to supply the SA Government’s electrolyser, agreements with new wind farms to the south, and the development of adjacent solar sites at an advanced state of preparation. The international company that was working on the Government’s electrolyser could efficiently apply the intellectual property developed in that work to a moderately larger electrolyser. The international company that was working on hydrogen storage for the SA Government’s electrolyser could expand that project for hydrogen storage for the new iron plant. The site that the SA Government had identified for its electrolyser would be ideal for the new electrolyser and a candidate for the iron plant.

On the other hand, there would be timing risks for a gas-based solution. There may need to be augmentation of mine and magnetite concentration capacity. The gas requirement would probably exceed the capacity of the existing pipeline across the Spencer Gulf. Augmentation would introduce a risk to time of completion.

Various hybrid solutions could be considered.

One possibility would be the encouragement of private investors to develop a hydrogen-based Whyalla iron facility before the Administrator had taken decisions determining the iron supply requirements of the Future Steelworks. The hydrogen-based iron plant could be developed for a hungry export market in Europe and Asia, and provide an option upon which the Steelworks could draw if it was eventually decided that this fitted plans for the Steelworks.

The essential condition for an Iron Future Made in Whyalla is application of the National Interest Framework, set out in the Treasury paper that was released with the 2024 Budget. Funds set aside in the 2025 Budget would provide the necessary support.

An Iron Future Made in South Australia

Follow the economics and the Administrator and the SA Government will have attractive options for the future of the Steelworks.

Follow the economics, and in 2029 Whyalla will have the world’s second commercial-scale green iron plant. The first is under construction in Sweden, and has generated immense global interest. Whyalla’s would generate more, because it would be built in a region with opportunities for globally competitive expansion of production.

The expansion would start in the other Upper Spencer Gulf cities with capacity to supply iron production from established electricity transmission infrastructure. There is capacity across the Gulf in Port Pirie for another plant of similar scale. Its location is convenient to supply concentrated ore from the adjacent Braemar magnetite deposits, so there would be advantages in a second plant also being designed around high-grade magnetite concentrates. The Second-of-a-Kind would have lower costs, because it would draw on design and knowledge from the first. Electrolysis producing hydrogen at Port Pirie would reduce the costs of supplying the immense demand for oxygen at the adjacent base metals smelter, to be shared with a lower cost of hydrogen. The availability of green oxygen alongside utilisation of local renewable energy would put the Port Pirie smelter on a path to zero-carbon output, with potential for attracting premia in European and Northeast Asian markets.

The old locus of coal power generation in Port Augusta, still the centre of the electricity transmission system, offers other possibilities. An ecosystem of low-carbon economic activity already provides more jobs than the old coal generators. Sundrop Farms in Port Augusta supplies salad vegetables grown with temperature control in greenhouses to supermarkets all over Australia. Much of the energy for temperature control and for desalination of water for the plants comes from Australia’s sole solar thermal system. Commonwealth Treasurer Jim Chalmers and Climate Change and Energy Minister chose Sundrop Farms as the place to discuss the Future Made in Australia after its announcement in the 2024 Budget. Alongside Sundrop Farms and the old Davenport power station connection to the transmission network, Adelaide’s Hallett Group is developing a pioneering green cement project. A new green iron plant using fluidised bed technology with smelter could supply the green slag for making green cement. That, together with the large network connection, excellent local renewable energy and established rail connections to abundant iron ore resources makes Port Augusta the economically natural location for the first application of fluidised bed technology with a smelter to remove slag. Clean water from Sundrop Farms’ surplus desalination capacity would serve the hydrogen electrolyser as well as the cement plan’s need for water.

A strong base would have been established for a globally significant iron processing region.

That is all worth thinking about once the first green iron plant is under construction in Whyalla.

So I say with great confidence to that young woman at the Adelaide Writers’ Festival: Let the economics have its say, and hydrogen is centrally important to a new era of South Australian economic development.