Fortescue hydrogen U-turn highlights risk to taxpayers

The big lesson for government in its wrangling with Andrew Forrest’s Fortescue to repay taxpayers for the money they have put into his now cancelled green hydrogen plant in Queensland is that picking winners can be a costly business.

Industry and Innovation Minister Tim Ayres said the federal government believed it was appropriate for Fortescue to refund the taxpayer assistance provided to it under the federal Modern Manufacturing Initiative. The government’s position was that it was reasonable to seek reimbursement for where the grant agreement had not been fulfilled.

Fortescue now says it has agreed to repay some taxpayer funding, no doubt with an eye to future agreements as part of its plan to produce green steel. “We have been upfront with the government and will return funds where required under the grant agreement,” a Fortescue spokeswoman said.

Ultimately, it will come down to the terms of the MMI agreement, which was a Morrison government scheme established to provide “co-funding to encourage linkages between local businesses and domestic and international firms, increasing scale, supply capacity and the ability to innovate”.

Announcing the scheme in October 2020, Scott Morrison said about $1.5bn in new funding would be invested across four years in the Modern Manufacturing Strategy to make Australian manufacturers more competitive, resilient and able to scale up to take on the world. Applications for funding have closed. But there is little public information available on what should happen if projects fail to fire.

Hydrogen certainly has been a high government priority but it also has been high-risk. This is confirmed by the fact major hydrogen projects are being cancelled around the world as the costs and market opportunities fail to stack up. Fortescue had big plans to dominate the export trade in hydrogen but has pulled out of its projects in Australia and the US.

There was further bad news for hydrogen on Thursday with the decision by global energy major BP to withdraw from the $55bn clean-energy megaproject in Western Australia’s Pilbara region. BP has walked away from the Renewable Energy Hub project two years after acquiring a 40.5 per cent stake and assuming operatorship.

The hub had aimed to build up to 26 gigawatts of wind and solar capacity across a 6600sqkm footprint in the Pilbara, generating hydrogen and ammonia for export to Asia.

The failure of the projects to materialise is a normal part of business risk. A key part of corporate decision-making is knowing when to cut your losses. This is a lesson government has yet to master.

There are big questions to be asked about the collapse of Fortescue’s Gladstone hydrogen ambitions. High among them is whether the MMI was the right scheme for such a high-risk investment and whether the interests of taxpayers were properly protected. It is a question that must be applied to the billions of dollars being provided by government across the renewable energy sector through a plethora of schemes.

According to research by the Centre for Independent Studies, the 2024-25 budget allocated more than $22bn to boost renewables in Australia. This included $13.7bn in production tax incentives for green hydrogen and processed critical minerals, as well as the $1.7bn Future Made in Australia Innovation Fund aimed at developing new industries such as green metals and low-carbon fuels.

Additionally, the Capacity Investment Scheme was expanded to a target of 32GW of new capacity nationally. Subsidies include the Renewable Energy Target scheme, federal government grants and concessional loans through the Clean Energy Finance Corporation and the Australian Renewable Energy Agency. The ultimate figure is likely to be higher when other programs such as the MMI are brought to account.

The Gladstone hydrogen experience provides a welcome reality check for government to get its house in order. This is particularly so given the determination to forge ahead with a winner-picking Future Made in Australia policy.

Government increasingly is being called on to protect existing businesses – including aluminium smelting and base metal refining – that are being pushed to the wire by rising energy costs. It is simultaneously being asked to subsidise high-risk ventures of tomorrow. Front of the queue is Dr Forrest’s Fortescue, which wants to protect its market position in iron ore by investing in downstream processing to produce green steel. Taxpayers beware.