From the Union

Hydrogen and industry

Hydrogen has long been seen by many as a solution in search of a problem. Hydrogen from fossil fuels was of interest in refining and fertilisers and rocketry. But in a world with cheap and secure fossil fuels, and no apparent consequences from burning them, why would you bother with hydrogen for any other purpose? And why would you go to the expense and trouble of making it cleanly?

That sentiment is recent. But subjectively it now feels quite distant. Today the climate, price and security problems of traditional energy are urgent and glaring. Hydrogen is clearly one of the most scalable and broadly relevant solutions, even if it will not solve everything. The Ukraine situation is an earthquake for energy, as for so many other topics. Existing disruption to Russia’s immense coal, gas and oil exports, and the fear of more to come, has seen fossil energy prices soar. Among the many consequences is that hydrogen will receive two big boosts: the first is to its immediate cost competitiveness; the second to the speed of long-term hydrogen cost decline. Every doubling of global installed electrolysis capacity slashes the cost of the next doubling as manufacturers and supply chains learn and scale up. So as Europe and others deploy more hydrogen in response to high fossil energy costs, we should expect cost reduction goals to be hit earlier than past forecasts. There may be growing pains in the immediate term as supply chains adjust, however. So what can Australia do to realise the opportunities and manage the risks in hydrogen development? Ahead of the upcoming Federal Election, Ai Group recently launched policy statements setting out industry priorities for Australia’s next Government, whoever forms it. In our Energy paper, we suggested national policy needs a sharper focus on gas transition and the demand side. The states are taking the lead here at the moment, including through Victoria’s Gas Substitution Roadmap. But gas has national implications for the economy, emissions and security. Managing these risks only on the supply side, and without an eye to the net zero destination, is like trying to fly a plane with a missing wing – blindfolded. A big push on all the options for gas transition – hydrogen, biogas, electrification and efficiency – is essential. Different tools and different solutions will be appropriate for different users. For large industry, changes to the existing Safeguard Mechanism to gradually lower emissions baselines would help make hydrogen and other solutions more investable. Care will be needed to ensure uneven policies don’t compromise competitiveness. But with investors and customers expecting deep emissions cuts, and major economies developing carbon border adjustments, there are also competitive risks in being left behind. The Safeguard Mechanism also presents a possible solution to the social license and credibility questions around blue hydrogen, made from fossil fuels with the carbon emissions captured and stored underground. High carbon capture rates are physically possible, but what will motivate their achievement? In addition to baselines for existing facilities, the Safeguard contains a latent system of best practice benchmarks for new facilities. Nothing has yet been done with it. But a technology-neutral benchmark for hydrogen production – most logically, zero tonnes of emissions per tonne of hydrogen produced – would provide a strong regulatory motive to capture as much carbon from blue hydrogen projects as possible, and to offset any residual emissions. Other tools will be relevant too. The NSW Government has opened a new Australian policy frontier by legislating a green hydrogen target that ramps up to eight petajoules by 2030. Similar to previous renewable energy targets, the scheme requires gas retailers and large gas customers to buy certificates from accredited green hydrogen producers (made using renewables-powered electrolysis). The cost of buying those certificates will depend both on the evolving cost of producing hydrogen, and the price that physical customers for that hydrogen are willing to pay given the alternatives in each context for its use. Scheme costs will be passed through to gas users, with some exemptions still to be finalised. This kind of scheme could be extremely promising for underpinning hydrogen expansion. Eight petajoules is not much in a net zero world, but it is a hell of a lot more guaranteed demand than existed beforehand. Ai Group has tried to calculate the cost of the NSW scheme. Every time we run the numbers it looks cheaper. Pre-Ukraine, assuming a long-term natural gas price of $12 per gigajoule, the target looked like it might add 23 cents per gigajoule to the cost of using gas in NSW for unexempted users. Post-Ukraine it will be cheaper, as hydrogen costs fall faster and methane prices rise higher. How much cheaper? Who knows? If natural gas is $25 a gigajoule in 2030, the scheme costs nothing. And that eye-watering gas price would be cheap in Berlin or Tokyo right now. Cheaper schemes could potentially be pushed harder and faster. And the technology-specific NSW scheme is not the only option. The broader energy savings schemes in NSW, Victoria and SA can boost gas transition in a more technology-neutral way. But the costs of any of these schemes need to be better understood and fairly distributed. Trade-exposed industry needs a pathway to net zero – but they need to stay alive on the way there. And vulnerable households will also need help with the cost of living and transition, whether that is delivered through energy-specific arrangements or the broader social safety net. The key message is urgency. The invasion of Ukraine has unleashed immense upheaval in energy, trade and global security. Geopolitical, economic and climate factors are now lined up to require an accelerated transition from oil and gas starting in earnest this decade. Hydrogen is well placed to provide big chunks of that transition. But both the supply and demand sides need to get on with it – and government needs to play its part.

Ai Group’s Federal Election Policy Statement on Energy and Climate is available here: www.aigroup.com.au/news/ election-2022

Skills are our pathway to a brighter future

I think most of us would agree that learning a trade is a good way to improve your lot in life. It gives you important skills, gives you a career path and improves the range of opportunities that are open to you. We encourage young people to go into apprenticeships to start their careers, and our skills-based Award system rewards workers who improve or expand their skills with higher wages. Or at least it is meant to – more on that later.

We’ve long known that skills are a key part of unlocking improved productivity, which is as vital to the success of our key industries as it is for the profitability of an individual business. Our standard of living will only improve if we’re able to continually improve our productivity and we can’t do that without a skilled workforce. So, if we all know how important skills are for individuals, businesses and our nation, why are we so bad at delivering them? In my view, there is a lack of certainty amongst employers, workers, students and the community about what the Vocational Education and Training (VET) system is for. Are we aiming to develop a highly skilled, agile and mobile workforce based on recognition of portable and transferable skills? When it comes to higher education, the answer seems to be “yes”. However, when it comes to vocational training, the system seems to be designed to specifically to meet the narrow interests of individual employers rather than that of industry or the nation. This disconnect between what we need and what the VET system is delivering has many causes. Too often governments have thrown their hands in the air and said it was all just too hard, and left it all to the bureaucrats. Too often changes have simply tinkered at the edges of a system that needs a complete overhaul. Worst of all, when it’s training providers telling industry what they are going to have, we are really in trouble. I don’t have the space here to cover all of them, so I’ll highlight some of the most urgent changes that I think the winner of the next federal election will need to address right away. Invest in workers

It is clear that more needs to be done to invest in the skills that workers need in the 21st century. These skills are best taught at TAFE and perfected in the workplace. We need better funding for TAFE because they have shown time and again that they are the best provider to deliver quality outcomes that benefit workers, the industry and employers in the long run. These things can’t be done on a shoestring budget, with casualised educators and without proper resources. We need a properly funded, professionally developed and supported workforce at TAFEs around the country who can deliver the skills that we need. Time and again we’ve seen that private providers do not meet the same standards or deliver the same outcomes. We need to get back to what works, and invest in TAFE. Pay more for skills

I recently saw a statistic that amazed me in a Productivity Commission report. The report highlighted that while 85% of the workers in the VET system are there because they want to improve their skills in the workplace, only 18% are employed at a higher level after they’re finished. Australia’s has a world-leading Award system that for decades has linked skills with wages so that workers were encouraged to improve their flexibility and productivity with the promises of higher pay. As the Award has moved from the primary wage setting device for most workers to a safety net, the nexus between skills and wages has been forgotten. We need to reagitate the classification structures in Australian workplaces to ensure that workers can be trained and assessed in their workplace and be paid according to the skills that they’ve got. This not only encourages workers to seek out additional training, it also helps workers to get formal, national accreditation of the skills that they already possess. As a union secretary I am always going to argue for higher wages for my members. I can already hear the employers out there complaining that they don’t want to pay for skills that they don’t use, but it is this sort of small thinking that has landed us in our current skills crisis. We need to think about skills at an industry level, which helps everyone in the long run as the pool of skilled and available workers gets larger and are able to move between jobs with greater flexibility. Investment is the key

In our industry, you can’t talk about skills and productivity without talking about investment in capital. While our skilled workers can work miracles, they can only do it for so long as the machinery that they’re working with isn’t ageing and out of date. Labour productivity has improved much faster than multifactor productivity in Australia for the last 30 years. Workers are doing their bit to produce more for each hour that they work – it is a lack of investment in capital and intermediate systems, and a failure to fully realise the potential of that investment, that is holding Australia back. The future of Australian manufacturing is bright. But to realise that future, we need government and employers to be willing to invest in skills, to pay skilled workers what they’re worth and to deliver modern capital equipment that we'd can work with. We need each of these three elements in lockstep if we want to deliver a future that is Made in Australia.