Pearls and Irritations

We are getting used to mega-sized investment announcements from the government – a couple of billion for hydrogen projects, four or maybe six billion for “critical minerals” and now a billion for solar panel manufacturing.

Of course, these numbers are small compared to government commitments such as the NDIS or of course AUKUS, but they add up. A billion is still a lot of money. It is worth looking at how well-considered the commitments are.

The Hydrogen Headstart program was announced in the May 2023 budget. Through the Australian Renewable Energy Agency (ARENA), it will provide up to $2 billion in subsidies over up to ten years for new projects based on “green” hydrogen – that is, hydrogen made by electrolysis of water using renewable energy. This is on top of over $300 million already provided by ARENA to green hydrogen projects. Six projects have been shortlisted by ARENA for Headstart funding from a larger number of applicants.

There was lots of hype about hydrogen in the last decade. A Grattan Institute report last December helped bring us back to earth. Hydrogen is wonderful stuff, producing only water when burnt or used in a fuel cell. But it is the least dense substance there is, which makes it the devil to store or transport. It is uneconomic as a fuel for most transport or for heating water or buildings. Grattan says its most prospective uses in Australia are to make ammonia (which is mainly used to make fertilisers and explosives and can be exported as a liquid), to provide high-temperature heat in alumina production and (instead of coal or gas) to reduce iron ore to “green” iron. Grattan adds that a hydrogen strategy makes sense only as part of an integrated suite of plans, including to bring down the cost of the electricity it uses as fast as possible.

Some of the hype has found a new home with so-called “critical minerals”. These are minerals (or products derived from them) that will be essential to the transition of the world from fossil fuels to renewable energy. Lithium, used in batteries, is a major one. Cobalt is another. Then there is a string of “rare earths” that have very technical uses. They include neodymium and praseodymium, used in making magnets for electric motors and generators. Nickel, copper and aluminium are sometimes added to the “critical” list but perhaps better fit BHP’s term “future facing”. All the above and a couple of dozen more are on the government’s “critical minerals” list.

Perhaps by accident but probably by design, China dominates the supply of many of these materials. Australia is the largest producer of crude lithium, but we send almost all of it to China for refining. Similarly, we have significant production of rare earths but no refining. China is the main global supplier with about 80 percent of the market.

This has drawn the attention of America. Under its so-called Inflation Reduction Act, the US is subsidising large investments to reduce their critical minerals dependence on China. As a friend of the USA, Australia is keen to hitch a ride.

The Morrison government set aside $2 billion for a “Critical Minerals Facility” (CMF). The Albanese government increased this to $4 billion. You can add to this up to a billion from the National Reconstruction Fund earmarked for minerals value-adding and another half-billion from the Northern Australia Infrastructure Facility (NAIF), established in 2016. Announcements from the PM’s office say the total committed to critical minerals is now $6 billion.

Where is this money going?

There are now three lithium refineries being built, with the first stages of two already operating. More projects are in the wings. In rare earths, the mining company Lynas is establishing a processing plant at Kalgoorlie. Iluka Resources is developing another at Eneabba in Western Australia, supported by a non-recourse loan of $1.25 billion from the CMF granted by the Morrison government.

Another large commitment of $840 million was made last month to Arafura Rare Earths, to develop a mine and rare earths refinery north of Alice Springs. This includes $495 million in loans from the CMF, $200 million from the NAIF and up to $115 million in federal export financing. The press noted that Gina Rinehart, often a government critic, owns ten percent of Arafura. Her company also owns about twenty percent of Liontown Resources, which received $110 million from the Clean Energy Finance Corporation and up to $120 million support from Export Finance Australia for its $1.3 billion investment in a new lithium mine near Kalgoorlie.

The government, and its predecessor, are putting their money (or, rather, ours) where their mouth is. Without more access to data it is hard to judge whether these projects are likely to be successful. One hopes the analysis is thorough. In the case of Arafura, the government commitment does seem large in relation to the size of the company, whose shares are now worth $462 million.

This brings us to solar. Last month Prime Minister Albanese committed $1 billion to the “Solar Sunshot” program to provide grants and subsidies to develop an Australian supply chain from raw silicon to solar panels.

We have the silicon. Near Townsville, Quinbrook Infrastructure Partners is working on a large project to convert local high-grade quartz into polysilicon, a raw material for solar panels and other products. The investment could be up to $8 billion. The project would be the first in the world to be powered by renewable energy. Another company, Solquartz, may develop an adjoining plant to refine the polysilicon to “metallic” silicon for use in integrated circuits and solar cells.

These projects are based on Australian advantages in renewable energy and minerals. They could well attract government support. One hopes the numbers will stack up.

But when it comes to making solar panels, I have great doubts. Perhaps a project announced recently by AGL and Sundrive to make panels at an old Hunter Valley power station site will find a niche where it can survive. But we don’t compete with Boeing and Airbus making airliners or with Apple or Samsung in making phones. The notion of matching China in the broad range of solar panels sounds like pie in the sky.

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