Delivering Net Zero and a Clean Energy Economy

To support the transition to a net zero economy, gas-powered generation is needed to plug gaps in supply and meet peak loads to ensure grid stability. Hydrogen is poised to become an export commodity and fuel for industrial users if production technologies prove to be scalable, commercially viable and supported by abundant large-scale solar and wind power.

Gas will remain a critical backup for renewables in the NEM, SWIS and NWIS, ensuring reliability and power system security as the energy transition accelerates. However, this role depends on timely and sufficient investment in gas supply, transport, and storage infrastructure.

After coal-fired generators retire, gas will increasingly be needed to back up renewable supply (during periods of renewable lulls and peak demand), as well as for system security services. The NEM will need 14 GW of flexible gas-powered generation by 2050, adding to and progressively replacing 12 GW of existing operations as they reach end of life.¹⁶⁵ The SWIS is forecast to require almost double its existing gas generation capacity, adding an additional 3.9 GW of new gas-powered generation by 2042.¹⁶⁶

In the 2025 Gas Statement of Opportunities, AEMO forecasts potential supply gaps in 2028 and clear shortfalls in gas supply for southeastern states from 2029 under all future scenarios. There are also forecast supply gaps for the west coast from 2030.¹⁸⁴

This will require gas supply infrastructure investments by industry to support production, transport, and storage to address supply risks.

Potential supply gaps in southern Australia emphasise an increasing reliance on northern producers to meet domestic gas needs and export obligations.¹⁸⁵ There is potential for increased gas production from Queensland and the Beetaloo Basin in the Northern Territory.

Upgraded infrastructure is required to ensure sufficient gas is available to support both direct-use gas consumers and gas-powered generation. Pipeline constraints, especially in southern states during winter, may restrict gas availability for electricity generation when both gas and electricity demand peaks.¹⁶⁵

Australia’s gas pipelines are privately owned, with a regulated network that includes 4,877 km of larger long-haul transmission pipelines and 75,054 km of urban and regional distribution networks.¹⁸⁶ With significant gas reserves remaining in Western Australia, Queensland and the Northern Territory, there is a long-term national need for gas pipeline and storage infrastructure capacity to improve links between northern gas supplies and consumers.¹⁸³ 

Low Carbon Liquid Fuels (LCLF) offer a low carbon solution for hard-to-abate industries, such as long-distance transport, mining, agriculture and construction. LCLFs can be made from biogenic feedstocks (such as oilseeds, wastes, and biomass), or from non-biomass resources through chemical processes (for example, combining hydrogen and captured carbon dioxide).¹⁸⁷ Renewable diesel and sustainable aviation fuel are two examples of LCLF that can be used as drop-in replacements for fossil fuels, utilising existing engines and infrastructure.

The Refined Ambitions: Exploring Australia’s Low Carbon Liquid Fuel Potential (2025) report, commissioned by the CEFC, finds that a domestic LCLF industry could deliver significant decarbonisation of Australia’s hard-to-electrify sectors, with a cumulative 230 million tonnes of CO2e abated to 2050 in a central scenario, equivalent to more than half of Australia’s annual greenhouse gas emissions in financial year 2025.

The Australian Government is positioning Australia to become a key regional LCLF producer through:

• $30 million of ARENA funding to support the development of a sustainable aviation fuel industry with production from renewable feedstocks
• $250 million of Future Made in Australia funding to accelerate a domestic LCLF industry, focusing on sustainable aviation fuel and renewable diesel
• $1.1 billion Cleaner Fuels Program to encourage domestic production of LCLF.

While scalability and cost will determine the role renewable hydrogen plays in fuelling Australia’s energy mix, as a fuel it has broad appeal for industrial users and as an export commodity.

Hydrogen supports the renewable energy transition as it can help decarbonise hard-to-abate sectors such as heavy industry and long-distance transport. Unlike grey or blue hydrogen, which rely on fossil fuels for production, green hydrogen is produced through electrolysis – using renewable electricity to split water into hydrogen and oxygen – resulting in a zero-emissions fuel suitable for various applications. Technological innovations may prove other hydrogen production methods more cost-effective or viable, such as turquoise hydrogen which is produced through methane pyrolysis using gas as a feedstock and about 70% less electricity than electrolysis.¹⁸⁸

Hydrogen plays three key roles in the energy transition:

• New load: electrolysis for hydrogen production requires dedicated or grid-connected electricity, adding significant load to energy markets. Its flexibility in energy generation means it can participate in demand response and frequency control to support grid stability.
• Storage: hydrogen can store energy by converting excess renewable power into hydrogen, later used for peak generation via fuel cells or gas turbines.
• Fuel: hydrogen can replace natural gas in high-temperature industrial processes (steel, cement) and power fuel cell vehicles, ships, and planes – ideal for hard-to-electrify sectors.

However, there are several challenges to scaling renewable hydrogen, including:

• High investment: Bloomberg estimates Australia needs $326 billion more or 1.8 times current renewable investment to become a global hydrogen exporter.¹⁸⁹
• Production costs: green hydrogen costs between $US 5-6 per kg. To compete with fossil fuel-based hydrogen, cost should drop to around $US 2 per kg.¹⁹⁰
• Enabling infrastructure: hydrogen’s flammability and low density require specialised pipelines, retrofits and refuelling stations, particularly as a gas replacement.
• Market uncertainty: despite interest from Japan, South Korea and Germany, demand remains speculative.¹⁹¹

The Australian Government’s 2024 National Hydrogen Strategy envisions Australia as a global leader in hydrogen production and outlines activities to support hydrogen development, including:¹⁹²

• Hydrogen Production Tax Incentive: to encourage renewable hydrogen production by providing support to eligible hydrogen producers in the form of a tax offset of $2 per kg of hydrogen produced, from 2027 to 2040.
• Hydrogen hubs: support low-cost hydrogen production by concentrating delivery of new infrastructure in regional Australia. The Australian Government is investing more than $500 million to support the development of hydrogen hubs, with funding announced for projects in:
  • the Pilbara and Kwinana in Western Australia
  • the Hunter in New South Wales
  • Bell Bay in Tasmania
  • Gladstone and Townsville in Queensland
  • Port Bonython in South Australia.
• Advancing Hydrogen Fund (CEFC): which is providing $300 million in concessional finance to catalyse investment in large-scale hydrogen projects, which may support technology, construction, operating and revenue risks.¹⁹³

Infrastructure Australia has previously listed Enabling infrastructure for hydrogen production on the Infrastructure Priority List, which identified opportunity to develop supply chains connected to Renewable Energy Zones in Australia to meet potential demand for green hydrogen in domestic and export markets.