The Hydrogen Production Tax Incentive: A tight deadline for green hydrogen ambitions

Summary

On 15 February 2025, Royal Assent was given to the Future Made in Australia (Production Tax Credit and Other Measures) Act 2025 (Cth) (the Act). The Act contains key incentives that are part of the Australian Federal Government’s ‘Future Made in Australia’ plan, an indicator of progress toward Australia’s ambitions to transition to a net zero economy.

Most importantly, the Act introduces the:

• Hydrogen Production Tax Incentive tax offset (HPTI); and
• Critical Minerals Production Tax Incentive tax offset (CMPTI).

This article focuses on the HPTI. For further context on the Future Made in Australia plan and the CMPTI, please see our previous insights here and here.

Key takeaways

• The HPTI is an uncapped and refundable tax offset set at AU$2 per whole kilogram of ‘green’ hydrogen.

• The HPTI applies to qualifying projects over a prescribed period. Companies may receive the HPTI for a window of up to ten consecutive years between 1 July 2027 and 30 June 2040 for an eligible project, with the key project eligibility criteria being:
  • the ‘green’ hydrogen is produced in Australia;
  • FID being taken by 1 July 2030; and
  • the project having a minimum electrolyser capacity equivalent to 10MW.

• The incentive forms a key part of the federal government’s ‘Future Made in Australia’ legislative framework. Access to the HPTI requires compliance with:
  • the ‘Guarantee of Origin’ scheme, established under the Future Made in Australia (Guarantee of Origin) Act 2024 (Cth); and
  • ‘community benefit rules’ (yet to be made) substantially based on the ‘community benefit principles’ provided for under the Future Made in Australia Act 2024 (Cth).

• The HPTI will only benefit ‘green’ hydrogen projects. The HPTA will not apply to hydrogen produced from hydrocarbons, including “low carbon” or “blue” hydrogen projects (irrespective of whether carbon capture and storage is utilised).
• The 2025 federal election may determine whether the HPTI comes into effect. It remains to be seen whether the HPTI will be a short-lived, with its fate seemingly dependent on the upcoming Federal election in May. The Leader of the Opposition, Peter Dutton, has already announced that the HPTI will be repealed under a Liberal Government.

The HPTI

The HPTI will be available for proponents of qualifying hydrogen projects as an uncapped and refundable tax offset, equal to AU$2 per whole kilogram of ‘green’ hydrogen produced (which may be reduced in certain circumstances).

The uncapped and refundable nature of the HPTI is similar to R&D style tax incentives, enabling project proponents to benefit from the tax incentive (even where the applicable taxpayer entity may have little or nil income tax liability in an applicable income year) by providing a tax refund to the extent the total of a company’s refundable tax offsets (that includes the company’s HPTI) exceeds its income tax liability for that income year.

How the HPTI is established

The operative sections of the Act (as applying to the HPTI) will commence tomorrow, 1 April 2025. On and from that date, the body of the HPTI will be established under Australia’s income tax framework, legislated under the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) as a new Division 421.

The Act also makes other related amendments to:

• the Taxation Administration Act 1953 (Cth), to account for reporting by the Commissioner of Taxation (Commissioner) of information about the HPTI in respect of entities entitled to the HPTI for an income year. This will include the amount of the company’s HPTI for the income year;
• the general anti-avoidance provisions in Part IVA of the Income Tax Assessment Act 1936 (Cth), to include the HPTI as a ‘tax benefit’ to which Part IVA can apply;
• ensure that the Commissioner of Taxation is not prevented from amending an assessment of a company to give effect to any consequences of a revocation of certification of a production profile, or the issue or revocation of a correction notice, for the period of four years after the issue or revocation; and
• address a technical issue with shortfall interest charge (SIC).  These amendments will provide that if an assessment of an entity’s tax liability is amended and, as a result, the entity’s entitlement to a tax offset is reduced, the entity is liable to pay SIC on the excessive amount of the tax offset it received. The amendments will apply to all tax offsets and not just the HPTI.

Eligibility

To qualify for the HPTI, three sets of requirements must be met:

1. Company requirements

Constitutional Corporation: The entity must be a company to which section 51(xx) of the Constitution applies, or a body corporate incorporated in a Territory.

Residency & income subject to tax: The company must be an Australian tax resident, or a foreign resident carrying on the relevant enterprise through a permanent establishment in Australia.  Importantly, the company cannot be an exempt entity and it must have an Australian Business Number (ABN).

Compliance with community benefit rules: The company must comply with the ‘community benefit rules’ which will be set by legislative instrument, and any specified conditions in relation to those rules.  Such community benefit rules are intended to be formed with regard to the community benefit principles under the Future Made in Australia Act 2024 (Cth) (FMA Act).  Non-compliance with the rules may result in a company becoming ineligible for the HPTI, or it may result in a reduction in the amount of the company’s HPTI. 

3. Activity requirements

To qualify for the HPTI, a company must comply with certain requirements in respect of the new ‘Guarantee of Origin’ scheme (GO Scheme). More on the GO Scheme has been detailed by KWM in this article.

The GO Scheme standardises the measurement methodology used to record and verify the carbon intensity of a product across each step of its lifecycle. To receive the HPTI, a company must hold, in relation to its hydrogen project:

i. a certified production profile

Registration of production profile: A ‘production profile’ must first be obtained and registered under the GO Scheme. The registered production profile captures information relating to the facility, including the ‘production pathway’ utilised (i.e. the method of making hydrogen).

Certification of production profile: The production profile obtained under the GO Scheme must be certified by the Clean Energy Regulator (CER) against certain additional requirements under the ITAA 1997:

• the relevant production pathway must not be an “excluded process”: these excluded processes include coal gasification, steam reformation of natural gas, and any other method prescribed under regulations. In practice, this prevents non-renewable production pathways from being approved for the HPTI. As a result, only ‘green’ hydrogen production will form a compliant production profile; the HPTI is not available for activities involving the production of hydrogen from fossil fuels (regardless of whether emissions are captured/sequestered);
• single site requirement: there can only be one site for the facility, which must be in Australia;
• production capacity: the facility must have production capacity equivalent to the capacity of an electrolyser with a 10MW nameplate capacity;
• final investment decision (FID): FID must be taken on the relevant project before 1 July 2030; and
• eligibility statement requirement: the CER must reasonably believe that the eligibility statement provided is correct.

ii. a registered PGO Certificate

PGO Certificates: to receive the HPTI for a given kilogram of hydrogen, a PGO certificate must be obtained and registered under the GO Scheme in relation to that kilogram certifying:

• the facility: that the producing facility is that specified in the production profile;
• product characteristics: that the relevant kilogram of hydrogen:
  • is produced in accordance with the production pathway specified in that production profile; and
  • has a production emissions intensity that is less than or equal to 0.6 kilograms of carbon dioxide equivalent (CO_2e) (i.e. 0.6kg of CO_2e to each kilogram of hydrogen); and
• grid matching: that, if the facility is connected to an electricity grid, certain grid matching requirements have been met (ensuring that electrolysers are connected to the same grid from which they draw power). These requirements will be prescribed by legislative instrument.

Satisfaction of this latter requirement for a registered PGO Certificate will also be assessed after an ‘initial reconciliation period’ for each financial year, so that the HPTI tax offset cannot be claimed while CER conducts an ‘annual reconciliation check’ of PGO Certificates under the GO Scheme.

Importantly, if a proponent fails to meet these requirements, the CER has the power to:

• revoke certified production profiles where the information contained in those profiles is no longer accurate or the production profile is revoked under the GO Scheme; and
• provide correction notices in relation to PGO Certificates where the recorded emissions intensity is no longer accurate or the grid matching requirements are no longer met,

which can prevent volumes of hydrogen from being eligible for the HPTI.

Commentary

While the HPTI marks further progress in the Australian government’s support for the fledgling hydrogen industry, there remain ambiguities and limitations to the incentive which prospective project proponents will need to consider. It is notable that many issues raised in public consultation on the HPTI have not been resolved.

Limited competitiveness

As a refundable tax offset that is calculated against the emissions intensity and volume of hydrogen actually produced, the HPTI does share some similar characteristics to the Hydrogen Production Tax Credit available under the United States’ Inflation Reduction Act (IRA).

Project proponents, however, will no doubt be most concerned with the dollar value of the HPTI, which remains fixed at $2 AUD per whole kilogram of ‘green’ hydrogen, as opposed to the sliding-scale approach of the IRA’s Hydrogen Production Tax Credit. As the below table illustrates, while this means that the HPTI provides a greater benefit to projects that have a carbon intensity of between 0.45 and 0.6kg of CO_2e per kilogram of hydrogen, the IRA otherwise provides a higher ceiling for financial support for the cleanest hydrogen projects (noting that the figures in the Table 1 are in US, rather than Australian, dollars), while also providing support for a deeper pool of projects based on carbon intensity. 

Table 1: financial incentives under the IRA 

Short timeframe for support

The applicable timeframe for the HPTI is tight: prospective projects have approximately only five years to reach FID.

While the lifespan of HPTI support is consistent with that offered in other jurisdictions, the 30 June 2040 sunset date puts pressure on project proponents to move quickly. That is, proponents will need to commission projects by 30 June 2030 to benefit from the full ten-year lifespan of the incentive. For reference, the United States’ incentive is also a ten-year benefit but became effective in 2023 and requires construction on eligible projects to have only commenced by 2033.

No legislative guidance for the nature of FID

Notably, there is no legislative basis for discerning what constitutes FID for the purpose of this key eligibility criteria. Guidance is only provided in the explanatory memorandum (the EM) to the Future Made in Australia (Production Tax Credit and Other Measures) Bill 2024 (Cth) (the Bill) which preceded the Act, stating that FID is an “unqualified decision of the company, made by its directors, to proceed with the project for the production of hydrogen” (EM, paragraph 1.06) which must be accompanied by subsequent tangible action but is not required to be wholly unconditional (EM, paragraph 1.96).

With respect to cumulative FIDs which incrementally expand capacity to satisfy the 10MW requirement, the EM states that the decision which expands capacity to finally meet that threshold will be the operative FID for the purpose of the HPTI (EM, paragraph 1.100).

Ultimately, the CER will have some discretion to determine whether FID has been taken, and “may seek documentary evidence about the nature and timing of a final investment as part of the certification process” (EM, paragraph 1.98).

Community benefit rules are highly uncertain

As the community benefit rules are set by statutory instrument by the Treasurer (having regard to the ‘community benefit principles’ under the FMA Act), it is unclear what requirements will need to be met by a project proponent now and going forward.

In addition, the EM notes that there may be a role for ”expert bodies” to conduct certification of compliance (EM, paragraph 1.53), and while the EM suggests that the ATO will be responsible for confirming compliance with the rules (at paragraph 1.53), the consequences of non-compliance are vague. There is no guidance as to how any reduction of eligibility to the HPTI would be calculated or administered, nor clarity on which decision-making body must have regard for the rules or when regard must be had.

Similar concerns were raised in a dissenting report by Coalition Senators within a report of the Senate Economics Legislation Committee on the Bill, handed down on 31 January 2025. Consequently, the Coalition proposed amendments to the Bill which would prevent the Treasurer from specifying certain conditions under the rules that could extend to union agreements, duplicative environmental or Indigenous consultation practices, and onerous tax disclosures. While those amendments were rejected, and these concerns remain, the main report noted that further consultation is expected on the community benefit rules.

No small scale or dispersed projects

The HPTI does not support smaller scale and dispersed projects, including those that could support heavy transport via re-fuelling stations by limiting eligible projects to a single site with large capacity. For context, the minimum 10MW capacity threshold is considerably larger in scale than current capabilities – at the time the Bill was introduced, the largest operating electrolyser in Australia was 1.25MW (noting that larger projects are currently in the pipeline).

What is next?

While the HPTI comes into effect tomorrow, proponents’ attention will turn to the 2025 Federal election, which could bring an abrupt end to the HPTI before it is ever utilised. The Opposition Leader, Peter Dutton, has announced that the HPTI would be repealed if the Liberal Party takes government.

As the future of the incentive plays out, proponents should begin taking steps to position themselves for eligibility, while being mindful of the need for further certainty with respect to certain aspects of the regime.

Assessing project viability and compliance: Proponents should evaluate whether a project meets the eligibility criteria, including minimum production capacity (10MW electrolyser), production pathway requirements, and compliance with the GO Scheme.

Consider the path to FID: Given the 1 July 2030 FID deadline, proponents looking to benefit from the HPTI may need to closely consider timeframes for financing, finalising project designs, and obtaining necessary approvals in managing FID pathways for prospective projects in the most timely manner.

Monitor opportunities for consultation and policy developments: Further guidance is needed on community benefit rules under the ITAA 1997, which will inevitably require consideration of how the community benefit principles are administered under the FMA Act.  In the interim, proponents may benefit from participating in the government’s expected consultation on those community benefit rules.

Additionally, evolving hydrogen certification standards in export markets should be closely monitored by proponents seeking to maximise competitiveness in a possible import/export market.

We will be monitoring this space as it develops. Subscribe to our alerts to stay updated.