Australia's pursuit of a large scale May 2019 - Evaluating the economic viability of a sustainable hydrogen supply chain model - Jacobs
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Australia’s pursuit of a large scale HYDROGEN ECONOMY Evaluating the economic viability of a sustainable hydrogen supply chain model May 2019
Graphic design credited
to Georgina Brown
ii
Foreword
What if we could integrate knowledge from
the water, power and transport sectors to
create a more sustainable Australia?
In 2015 the Australian Government signalled To be sustainable, this supply chain model
its commitment to reducing carbon emissions requires both readily available renewable
and working towards a more sustainable energy generation and a consistent supply
future, signing up to the Paris Agreement of drinking water; both requirements could
on Climate Change and adopting the United be an impediment to sustainable hydrogen
Nations’ Sustainable Development Goals. The production in Australia. While renewable
Government has subsequently implemented energy developments are increasing across the
a range of policy measures in pursuit of 2020 country, our electricity grid is still dominated
and 2030 carbon emission reduction targets, by coal-fired generation and our ability to use
yet the Intergovernmental Panel on Climate grid-purchased electricity generated from
Change 2018 Special Report identifies that we renewable sources for hydrogen production is
must take greater measures to limit the risk limited. Moreover, in a country already facing
and severity of catastrophic climate impacts. increasing fears over future water security,
With its potential to decarbonise a broad the creation of a new industry that relies on
spectrum of industries, hydrogen as an drinking water could further exacerbate supply
alternative energy storage solution is currently risks. Our pursuit of a large-scale hydrogen
receiving renewed attention, including economy should not contribute to broader
from The Commonwealth Scientific and sustainability challenges, including putting
Industrial Research Organisation (CSIRO) and additional strain on an already scarce resource.
Australia’s Chief Scientist. This resurgence This raises two pertinent questions: How might
is largely due to improvements in hydrogen we create a more sustainable hydrogen supply
production technologies and the declining chain model for Australia’s circumstances, and
cost of renewable energy, meaning that large- could such a model prove as economically
scale zero-emissions hydrogen production viable as the current approach?
may be more viable now than ever before.
This paper explores how the current hydrogen
With excellent renewable energy resources
supply chain model could be adapted for
and proximity to large potential export
Australia’s environmental conditions and energy
markets in Asia, Australia is well positioned to
landscape by replacing drinking water with
become a leader in this emerging industry.
recycled water in the production process and
Despite the recent focus on hydrogen, industry evaluating options for sourcing renewable
conversations have largely neglected one energy generation. In doing so, we will assess
critical issue; under the current electrolysis- whether a truly sustainable hydrogen supply
based supply chain model, production may chain model can be employed in Australia
not be sustainable in the context of Australia’s without sacrificing economic viability. •
climate and existing energy landscape.
F O R E WOR D
iii
Authors and contributors
As our world undergoes rapid transformation and the challenges we face become increasingly
interlinked and complex, we must look beyond individual markets, sectors and industries and
engage in meaningful cross-sector conversation and collaboration. It is only in doing so that
we can develop innovative solutions that will drive sustainable growth into the future.
This paper has been authored by Jacobs’ global network of professionals, who
take a cross-sector collaborative approach to address some of the world’s
most critical challenges and advance conversations that matter.
Authors
HENRY S W IS HER J O HN POON D R. BELI N D A H AT T
Strategic Consultant Regional Solutions Director Senior Integrated Water
Energy Markets Drinking Water and Reuse Management Consultant
Australia Asia Pacific + Middle East Australia
Henry.Swisher@jacobs.com John.Poon@jacobs.com Belinda.Hatt@jacobs.com
AU T H OR S & C ON T R IBU T OR S
WA LTER GER A R DI RAC H AEL M I LLAR
Regional Technical Director Marketing Manager
Energy Markets Partnerships
Asia Pacific + Middle East Asia Pacific + Middle East
Walter.Gerardi@jacobs.com Rachael.Millar@jacobs.com
iv
Contributors
JANE BRANSON STEPHEN IRELAND STEVE MANDERS
Regional Technical Regional Solutions Director Manager for Supply
Director for Water Energy Networks & Power Chain & Logistics
Economics and Policy Asia Pacific + Middle East Australia
A U TH OR S & C ON T R IB UT OR S
Asia Pacific + Middle East
GWEBU NGCEBO MITRA NIKFARJAM MOLLY PISASALE
Economist Rail Vehicle Project Manager Economist
Strategic Consulting Strategic Consulting
Canada
Australia Australia
CHRIS SUMMERFIELD IAN SUTHERLAND ANDREW TINGAY
Section Leader Program Manager for Regional Solutions Director
Economics & Strategic Consulting Metrolinx Hydrail Program Strategic Consulting
Australia Canada Asia Pacific + Middle East
© Copyright 2019 Jacobs Group (Australia) Pty Limited. The concepts and information contained in this document are the property of Jacobs.
Use or copying of this document in whole or in part without the written permission of Jacobs constitutes an infringement of copyright. v
DISCLAIMER In preparing this report, Jacobs has relied upon, and Jacobs has prepared this report in accordance with the usual presumed accurate, information from publicly available care and thoroughness of the consulting profession, for the sources. Except as otherwise stated in the report, sole purpose described above and by reference to applicable Jacobs has not attempted to verify the accuracy or standards, guidelines, procedures and practices at the completeness of any such information. If the information date of issue of this report. For the reasons outlined above, is subsequently determined to be false, inaccurate or however, no warranty or guarantee, whether expressed or incomplete then it is possible that our observations and implied, is made as to the data, observations and findings conclusions as expressed in this report may change. expressed in this report, to the extent permitted by law. Jacobs derived the data in this report from information This report should be read in full and no excerpts are to available internally and in the public domain at the be taken as representative of the findings. The report time or times outlined in this report. The passage of has been prepared for information purposes only. No time, manifestation of latent conditions or impacts responsibility is accepted by Jacobs for use of any part of future events may require further examination of this report in any other context. Jacobs accepts no of the project and subsequent data analysis, and liability or responsibility whatsoever for, or in respect of, re-evaluation of the data, findings, observations any use of, or reliance upon, this report by any party. and conclusions expressed in this report. vi
Contents
FOREWORD II
AUTHORS & CONTRIBUTORS IV
EXE CUTIVE SUMMARY 01
INTRODUCTION 05
THE APPROACH 13
RESULTS & DISCUSSION 23
RECOMMENDATIONS & NEXT STEPS 37
CONCLUSION 41
APP ENDICES 43
REFERENCES + NOTES 45
vii
Executive summary
The drive towards a lower-emissions and more The paper does not aim to assess the viability of
sustainable future is gathering pace. At the hydrogen itself; rather it seeks to ascertain the
same time, discussions about hydrogen as an comparative economic viability of a supply chain
energy storage solution are increasing due, model that would improve the sustainability of
in large part, to its potential to decarbonise hydrogen if a large-scale Australian economy
many Australian industries and to support were to develop. Both models were applied
economic growth as a new export market. to convert the existing diesel-powered East-
However, Australia’s pursuit of a large-scale West Rail Corridor to hydrogen rail vehicles,
hydrogen economy could represent a trade- and results were assessed via a cost-benefit
off between environmental sustainability and analysis (CBA). This methodology was used
economic viability if the current electrolysis- to calculate the Net Present Value (NPV)1 of
based hydrogen supply chain model is adopted. adopting both hydrogen scenarios against
a ‘Business-as-Usual’ (BAU) scenario which
The current supply chain model requires ready
assumed no transition to hydrogen rail vehicles.
access to a renewable electricity grid and a
consistent supply of drinking water. Neither The details of each scenario and the
of these conditions are present in Australia, modelling inputs are summarised in
a drought-prone country with an electricity Chapter 2 and Appendix A respectively.
grid composed predominantly of emissions-
intensive coal-fired generation. We must
determine whether a more sustainable model
is possible and how this might compare to
the current model on an economic basis.
Results summary
Developing a hydrogen economy that
successfully navigates potential environmental In terms of economic
and economic hurdles will require collaboration
across the water, power and transport viability:
sectors. This paper draws on knowledge from
• Our results indicated that the Current
professionals across each of these sectors to
Model was more economically viable than
investigate and compare the sustainability and
the Proposed Model, with the electrolyser
economic benefits of a hydrogen supply chain
usage rate representing the key cost driver.
that uses renewable energy and recycled water
(the Proposed Model) rather than grid-purchased • Power Purchase Agreements (PPAs) were
electricity and drinking water (the Current Model). the most viable means of producing zero-
emissions hydrogen at large volumes.
Reliance on dedicated behind-the-
meter or curtailed renewable energy are
unlikely to be viable as sole sources of
energy for hydrogen production at the
E XE C U T IV E S U MMA RY
scale required to create a functioning
large scale hydrogen economy.
• While the source of water did not have
a large impact on NPV, using recycled
water for hydrogen production could
be beneficial due to its availability
throughout the year, thus eliminating
drinking water supply shortage risks
and creating additional commercial
opportunities for water businesses.
1
In terms of environmental
sustainability:
• Although the Current Model was not zero-
emissions, replacing diesel rail vehicles with
hydrogen rail vehicles still resulted in net
emissions savings averaging about 232,000
tonnes per annum. However, it is important
to note that while the modelling assumed
a national emissions reduction policy with
targets that would ensure Australia meets
its Paris Commitment targets in 2030 and
reaches zero emissions by 2070, no such
policy is currently in place. Achieving these
targets is equivalent to a decline in the
emissions intensity of the electricity grid
at an average rate of 5% per annum from
2025 to 2065. Emissions created from the
Current Model could be substantially higher
if this decline is slower than projected.
• Even if no policy is implemented, hydrogen
production could effectively reduce
its emissions over time by procuring
an increasing proportion of energy via
PPAs and during periods where there is
an oversupply of renewable energy.
• The use of recycled water in the supply
chain model would have no adverse impact
on Australia’s drinking water supply.
In terms of rail freight:
• Sensitivity tests indicated that the
price of diesel and cost of hydrogen
rail vehicles were major influencing
factors on economic viability.
• Though the analysis is high-level and
could vary substantially based on
project and site-specific factors, an
increase in diesel prices of approximately
18% or a reduction in the cost of
hydrogen rail vehicles of approximately
30% resulted in a positive NPV.
E XE CU T IV E S U MM ARY
• Adopting the Current Model to convert
the East-West Rail Corridor to hydrogen
would result in emissions savings
equivalent to taking 49,000 passenger
cars off the road every year2.
Based on these findings, the following
recommendations outline means to support
large-scale hydrogen projects that do not
create a trade-off between environmental
sustainability and economic viability. •
2
Energy
recommendations
The current discourse on hydrogen in Australia
focuses on its zero-emissions benefits. However,
our results indicate that if hydrogen production
is scaled up to meet its large range of potential
applications, sourcing the electricity required
from only zero-emissions energy sources
would negatively impact its economic viability.
The following actions should be considered:
1 2
TA K E A ‘ S TA G E D ’ EXPLORE FLEXIBLE
APPROACH TO ZERO- ENERGY SOURCING
EMISSIONS HYDROGEN OPTIONS TO
AV O I D L O C K - I N
While producing hydrogen from Australian
grid-purchased electricity would create Most zero-emissions hydrogen projects to date
emissions in the short to medium-term, this have been small-scale pilots or demonstrations
may be acceptable if the hydrogen produced that made effective use of behind-the-meter
is able to create more significant emissions wind or solar generation. Our findings indicated
reductions in its end-use application. Taking that this approach is cost prohibitive for large-
a progressive or ‘staged’ approach to making scale production facilities, locking-in their
hydrogen zero-emissions could therefore still source of energy at a high cost. There are a
create net benefits from an emissions reduction number of other downsides to this approach.
perspective and enable earlier adoption of First, not all locations that are suitable for
hydrogen by making the production process hydrogen production are likely to have strong
more economically viable. As outlined in Chapter renewable energy resources. Second, even
3, such approaches could take the form of a where resources are available, it may not be
hydrogen-specific emissions reduction target possible to develop renewable energy plants
or enacting policy measures to reduce grid large enough to meet hydrogen demand due
emissions faster than currently projected. to the trade-off between proximity to urban
centres and planning restrictions/land availability.
Finally, building dedicated renewable energy
plants increases capital and operating costs
E XE C U T IV E S U MMA RY
and may make scaling production difficult
and time-intensive given the lead times for
building additional generation. Instead, more
flexible interim solutions should be considered,
such as grid-purchased electricity with
emissions offset by renewable PPAs. •
3Water
3
A D D S U S TA I N A B L E
HYDROGEN AS AN
recommendations OPTION IN ENERGY
S T R AT E G I E S
The role of water in hydrogen production must
be recognised and become a component Cities and towns with medium to large
of current and future conversations about wastewater facilities should incorporate
the development of a large-scale hydrogen hydrogen production as a potential option into
economy. A large-scale hydrogen project their economic growth and energy strategies.
using recycled water could serve as a test Business cases will be further supported if these
case for a more sustainable model that locations are adjacent to existing or planned
reduces potential resource scarcity and transport hubs and other large potential end-
climate risks, while providing additional users such as industrial business parks.
economic benefits. As such, the following
actions should be considered:
4
GOVERNMENT
1
SHOULD ENCOURAGE
W AT E R B U S I N E S S E S M O R E S U S TA I N A B L E
S H O U L D E V A L U AT E T H E PRODUCTION METHODS
POTENTIAL BENEFITS
OF HYDROGEN Government has a role to play in
PRODUCTION establishing measures that encourage
the adoption of hydrogen in a way that
Water businesses should evaluate the supports responsible consumption of
feasibility of producing hydrogen and consider scarce resources and in allocating funds
the potential revenue stream, cost-savings to projects that advance this objective.
and efficiency gains this would entail for
their organisation. It is envisaged that water
In summary, if Australia is to become a
utilities would find this an attractive prospect,
global leader in hydrogen production, early
given the current challenge of finding a
planning that accounts for the sustainability
demand for recycled water that does not
implications highlighted in this paper is
result in increased costs for customers.
critical as project lifetimes can span multiple
decades. Decisions related to hydrogen
2
will require government and industry to
DEVELOP HYDROGEN engage collaboratively with professionals
PRODUCTION and academics across multiple disciplines.
FA C I L I T I E S T H AT U S E Promoting a greater diversity of perspectives
R E C Y C L E D W AT E R in strategic forums such as the Council of
Australian Governments (COAG) Energy
Using recycled water to produce hydrogen Council’s Hydrogen Working Group will support
would eliminate the need to use drinking water this aim and encourage the development of
E XE CU T IV E S U MM ARY
resources. The prevalence of wastewater innovative solutions that drive sustainable
facilities across Australia and their proximity to growth in the Australian market. As with any
urban centres would offer flexible siting options. emerging technology nearing commercial
Ideally, hydrogren facilities should be located deployment, it is vital that a holistic view is
in areas with the largest number of potential applied in early phases of development to
end-users to reduce distribution costs to these identify risks and maximise potential. Overall,
users and create economies of scale. Increasing taking a view that considers the broader
demand for recycled water would also reduce implications of rapidly changing technological,
the water quality impacts of discharging environmental and social trends supports the
recycled water to waterways and oceans, development of integrated solutions that create
delivering an additional environmental benefit. a more connected, sustainable world. •
41
Introduction
Towards a zero-carbon
future: the role of energy
storage solutions
The Intergovernmental Panel on Climate
Change’s (IPCC’s) 2018 Special Report
emphasised the need to rapidly decarbonise
emissions-intensive sectors, including energy,
agriculture, industrial processes, waste and
transport, to limit global warming to 1.5oC3.
We are making some progress towards this
target, with renewable energy generation There are two major barriers to achieving
technologies such as wind turbines and solar widespread decarbonisation in Australia. First,
photovoltaic (PV) panels already delivering because the wind does not always blow and
emissions reductions. Taken together, they the sun does not always shine, transitioning to
represent over half of new energy developments 100% renewable energy is only possible if we
globally in recent years and investment in can make these resources reliable. We do not
these technologies is growing. However, the presently have a cost-effective means of storing
world is not yet on track to meet the IPCC’s energy generated from renewable sources for
IN T R O D U C TI O N
recommended target and greater action is long periods of time, meaning many countries,
necessary. Australia is a prime example of these Australia included, still rely on emissions-
trends, with the Department of Environment intensive fossil fuels to provide consistent
and Energy’s 2018 emissions projections energy supply. Second, industries that are not
report highlighting that despite increasing connected to the electricity grid, such as much
renewable energy uptake, the country is not of the transport sector, cannot access renewable
on track to meet its 2030 emissions reduction energy without storing it in a portable form.
target of 26-28% below 2005 levels4.
5Figure 1: Australia’s historical and projected emissions trends (1990 – 2030) show a clear
gap between projected emissions levels and our emission reduction target.
Mt CO2-e Mt CO2-e
700 700
650 650
600 600
550 550
695 Mt 762 Mt
500 500 (26%) (28%)
450 450
400 400
350 350
300 300
1990 1995 2000 2005 2010 2015 2020 2025 2030
2017 projections Trajectory to minus 5% target (in 2020)
2018 projections Trajectory to minus 26% target (in 2030)
Trajectory to minus 28% target (in 2030)
Source: Figure 4 in ‘Australia’s emissions projections 2018’ report
by the Department of the Environment and Energy
Discussions about how to make renewable Lithium-ion batteries are arguably the most
energy sources more reliable (and accessible) well-known energy storage technology,
through energy storage have recently surged in large part due to the recent installation
in Australia. The advantages of energy storage of one of the world’s largest lithium-ion
solutions are that they can provide back-up battery systems in South Australia. However
power in the event of black-outs and allow hydrogen is currently receiving renewed
renewable energy use to be optimised. They also attention, including from the Commonwealth
make renewable energy transportable, enabling Scientific and Industrial Research Organisation
I NT R OD U C T ION
widespread use of zero-emissions electricity (CSIRO) and Australia’s Chief Scientist. This
by industries not connected to the grid. resurgence is largely due to improvements
in hydrogen production technologies and
the declining cost of renewable energy.
6While the efficiency and cost benefits of batteries To achieve a zero-emissions future, a variety
and hydrogen are often compared, the two of energy storage technologies are required.
technologies have different characteristics Based on its versatile characteristics, hydrogen
and therefore different advantages and could play a key role in decarbonising
potential end-uses. Batteries are heavy, many applications where other energy
highly efficient and are best suited for use storage technologies are unsuitable. •
in passenger vehicles and to supply high
volumes of power over short timescales.
In contrast, hydrogen in gaseous form is
light weight, energy dense and has great
potential for use in large-scale, long-distance
transport, as a replacement for household
natural gas applications and thermal-peaking
generators, and as a back-up energy source
for lengthy periods (ten hours or more).
Figure 2: Due to their different characteristics, hydrogen and batteries are suitable for different
transport modes, with hydrogen more suited to medium to large-scale vehicles.
Weight
(Tons)
10,000+
1,000
1
100
1
Light commercial
vehicles
10
Small cars / urban
mobility 2
1 Medium to large cars 2,
fleets and taxis
0.1
10 100 1,000+
Battery electric Fuel cell electric Average mileage per
vehicles (BEV) vehicles (FCEV) day/trip
(Km)
IN T R O D U C TI O N
Bio- and Bubble size representing the relative annual
(H2-based) energy consumption of this vehicle type in 2013
synthetic fuels
1 Battery-hydrogen hybrid to ensure sufficient power 2 Split in A- and B-segment LDV’s (small cars) and C+-segment
LDVs (medium to large cars) based on a 30% market share of A/B-
segment cars and a 50% less energy demand
Source: Toyota, Hyundai, Daimier
Source: Adapted from Figure 5 in Hydrogen Council (2017)5
7Investment in Figure 3: There are three main opportunity
areas for Australian-produced hydrogen
hydrogen is
EXPORT
increasing but ++ Liquefied hydrogen
is the future or hydrogen in
ammonia form
‘sustainable’? ++ Proximity to large
potential export
markets (Japan,
Australia is well positioned to become a market China, South Korea,
leader in zero-emissions hydrogen production and Singapore)
if the nation’s excellent renewable energy
resources are developed. The 2018 Hydrogen
for Australia’s Future report outlined three
opportunity areas for Australian-produced
hydrogen: as an export product, to decarbonise
domestic industries and to improve energy DOMESTIC
system resilience6. In support, the Federal
Government has opened public consultation on
a national hydrogen strategy. In addition, multiple ++ Replacement for
State governments have initiated strategies, natural gas in
pilot projects or investment vehicles to develop heating, cooking, hot
hydrogen production opportunities, with several water, and industrial
cities submitting project ideas with the aim of applications
becoming Australia’s first hydrogen city7. ++ Transport
However, while terms such as ‘green’ and ++ Industrial processes
‘renewable’ hydrogen are often used in the
media, there are still potential barriers that must
be overcome to enable hydrogen production
to occur both at the scale required to meet
the opportunities described above and deliver
on its sustainability-related credentials. • ENERGY SYSTEM
RESILIENCE
++ Electrolysis as
flexible load
++ Stored hydrogen
for dispatchable
electricity generation
++ Hydrogen for fuel
diversification
I NT R OD U C T ION
89
Sustainability barriers to
Australian-produced hydrogen
Discussions around developing a large-scale Neither of these conditions are present in
hydrogen economy in Australia often suggest Australia, a drought-prone country where
adopting the electrolysis-based supply drinking water reserves are already often strained
chain model proposed overseas in regions and the electricity system is still dominated
such as Ontario in Canada and Norway in by emissions-intensive coal generation.
Europe (see Figure 4). However, this model While industry conversations have discussed
cannot be readily implemented in Australia. means of making hydrogen zero-emissions
The model assumes that zero-emissions by pairing production facilities with renewable
electricity from renewable energy energy generators, there has been limited
and a high-volume, reliable supply discussion to date about whether this is viable
of drinking water are available. on a large scale, or how scaling production
would impact drinking water supplies.
Figure 4: The current electrolysis-based hydrogen supply chain model
1 ENERGY
G E N E R AT I O N 2 A D D W AT E R
This energy is fed
into the electrolyser
3 HYDROGEN
PRODUCTION
Energy is The electrolyser splits
purchased from with drinking water the water molecules
the electricity grid to create hydrogen
and oxygen
H2 O2
+ -
cathode
anode
Hydrogen
H2O
4 STORAGE
The hydrogen gas 5 A P P L I C AT I O N
Once stored, this
I NT R OD U C T ION
is compressed gas can be used for
and stored multiple applications
10Access to zero- Increasing pressure
emissions energy on water resources
In countries with electricity systems made up Climate change is already diminishing Australia’s
mostly of renewable energy, it is possible to water security; rainfall patterns are shifting
buy electricity from the grid at the cheapest and the frequency and severity of droughts
times without creating emissions. In Australia, are increasing. This means that less water
the cheapest times to buy electricity also tend is likely to be available for agriculture, urban
to be times when coal generation levels are at water supplies and ecosystems across
their highest, meaning hydrogen production Australia in the future. The additional strain
facilities that rely on grid-purchased electricity a new hydrogen economy would place on
would most likely create more emissions, not finite water resources must be considered.
less—a fact highlighted recently by researchers To supply the opportunity areas identified
at Queensland University of Technology previously, hydrogen production would have to
(QUT)8. Research from the CSIRO (2018) be scaled up substantially. We would need to
supports this finding but also indicated that produce approximately 500 million kilograms
hydrogen produced from grid-purchased of hydrogen per year to service the estimated
electricity would be more cost-effective than 2030 export market10, using an additional 5.5
from dedicated renewable energy options9. billion litres of water per year. If we also looked
So, for now at least, there is a clear trade-off to decarbonise some of Australia’s domestic
between economic viability and environmental industries by replacing the 39 million tonnes
sustainability. Although this may change as more of imported diesel and petrol fuel currently
renewable energy projects are built, modelling used across the country with hydrogen, this
conducted by Jacobs’ Energy Market Insights would require 99 billion litres of water per year.
group in 2019 on the future of the national This would have the same impact on water
electricity market has indicated that ongoing demand as adding an additional 1.7 million
investment in renewable energy will require people to Australia’s urban population.
some form of national emissions reduction While this may seem trivial when compared
policy and that coal generation is still likely with the agriculture sector which used about
to make up a large portion of the electricity
11 trillion litres of water in 2018, our existing
system for at least the next 20 years. Further drinking water resources are already stretched.
analysis is therefore necessary to evaluate Several major Australian cities are already reliant
the cost of different options for sourcing on energy-intensive desalinated water plants
renewable energy for hydrogen production to meet their existing drinking water needs and
and to improve their economic viability. many farms across Australia are experiencing
water shortage issues. Hydrogen usage would
be expected to increase every year as our
population and export demand grows and the
technology becomes increasingly widespread.
Ongoing population growth and climate change
already represent significant risks to the nation’s
drinking water reserves and developing a
large-scale hydrogen economy represents an
irresponsible use of a scarce resource unless an
alternative sustainable water source is identified.
IN T R O D U C TI O N
In short, large-scale hydrogen production
using the current hydrogen supply chain
model is unsustainable in Australia.
11Pathway to a
more sustainable
hydrogen future
The noted sustainability challenges should not
deter our progress towards zero-emissions
hydrogen, however, we must determine:
1 2
Whether a more sustainable Whether that model would prove
hydrogen supply chain model economically viable compared to
can be developed that does not the current non-sustainable model
exacerbate water scarcity risks in
addition to being zero-emissions
This paper therefore compares the sustainability
and economic viability of a hydrogen supply
chain which uses renewable energy (behind-
the-meter or contracted) and recycled water
against the current model which uses grid-
purchased electricity and drinking water. •
122
The approach
A more sustainable hydrogen
supply chain model
The current process A new approach
The current electrolysis-based supply chain STEP 1: OPTIONS FOR ZERO-
model (the Current Model) assumes access EMISSIONS ENERGY
to abundant drinking water sources and
renewable energy. For reasons already The Australian electricity grid is likely to include
discussed, the model presents potential a large proportion of coal-fired generation
sustainability challenges in Australia. This for at least the next two decades. The
section outlines how the Current Model might CSIRO (2018) has identified three potential
be adapted for Australian conditions to create options for sourcing zero-emissions energy
a more sustainable solution and whether this for hydrogen production in the interim:
approach would prove as economically viable. 1. Building dedicated renewable energy plants
To ground the results in a real-world application, for the sole purpose of producing hydrogen;
both the Current Model and proposed supply 2. Securing a renewable Power Purchase
T H E AP PR O AC H
chain model (the Proposed Model) are applied Agreement (PPA) – a contract to buy
to an existing diesel-powered freight line in electricity from renewable energy facilities
Australia: The East-West Rail Corridor, an located anywhere in the market;
intermodal freight route from Melbourne to Perth.
3. Using spare or ‘curtailed’ capacity from
renewable energy plants which would
otherwise not have been used.
13Any of these options could feasibly be Water sourced from desalination plants is one
used to produce hydrogen without creating option. Although this is a sustainable way to
emissions and each is examined for use in source water, it is also an expensive one. The
the Proposed Model via sensitivity analysis. cost to source desalinated water from the
At this stage, it is important to note that there existing Victorian Desalination Plant (VDP) is
are two main types of electrolyser technology approximately $5/kL11, compared to the cost
and the choice of technology used will of sourcing fresh drinking water estimated
impact sustainability and economic feasibility at approximately $2.75/kL12. Further, the
outcomes. Alkaline Electrolysers (AE) are a production capacity of existing desalination
mature electrolysis technology but must be infrastructure is insufficient to meet the water
run continuously. Proton Exchange Membrane demands of a large-scale hydrogen economy;
(PEM) electrolysers are a more recent technology new desalination plants would need to be
that can be switched on and off quickly without built. The costs of materials, construction of
the need to operate continuously. Not only can core and supporting infrastructure and the
PEM electrolysers produce hydrogen at times additional energy required to operate these
when variable renewable generation such as plants could increase the cost to $10/kL13.
wind or solar is available, they have a smaller A second option is to use recycled water
installation footprint and are modular in nature, sourced from wastewater treatment plants.
meaning that electrolyser capacity can be scaled This water is in abundant supply and volume
up progressively to reduce upfront capital costs is consistent throughout the year. Wastewater
and benefit from technological advancements. treatment facilities servicing major urban
For these reasons, the modelling assumes PEM centres and even medium-sized towns
electrolysers are used for hydrogen production produce millions of litres of recycled water
in both the Current and Proposed Models. each year. Despite being treated to a very high
standard, this water is mostly discharged to
the environment due to the political, legislative
STEP 2: OPTIONS FOR and cost barriers that limit its use for a broad
S U S TA I N A B L E W AT E R I N P U T S range of potential applications (see Table 1).
Most hydrogen research to date has paid The use of recycled water for hydrogen
little to no attention to the role of water in the production is unlikely to encounter these
production process, assuming access to a challenges. It could also reduce the impact
reliable supply of drinking water. However, of wastewater treatment facilities on local
the use of this resource to produce hydrogen ecosystems which can be highly sensitive
at scale in Australia would be subject to to changes in water chemistry and flow
limited social license given supply shortages patterns. From a cost perspective, recycled
and growing concerns about the scarcity of water for hydrogen production could also be
freshwater sources. Alternative water sources less expensive than both desalination water
for hydrogen production must be considered. and drinking water at approximately $0.70/
kL14. Recycled water is therefore used as a
sustainable alternative to primary-use drinking
water sources in the Proposed Model.
‘Social license to
operate’ (SLO)
We only need to look at recent history to see
that gaining social approval or acceptance
T HE A PPR OA CH
for projects that use significant amounts of
drinking water is a major challenge. For example,
during the Millennium Drought, concerns
over the use of drinking water to top up Lake
Wendouree in Ballarat, Victoria, resulted in
an alternative more sustainable and socially
acceptable approach which utilised harvested
stormwater, groundwater and recycled water.
14Table 1: Positives and negatives of recycled water in potential applications
Potential Application Positives Negatives
Irrigation Potentially large volumes Water is only required part of the year
of water used Can be used for low value uses
Can substitute drinking
water in urban areas
Dual pipe Possible in greenfield developments Expensive to retrofit in
(urban development) existing developments
Residential/ A constant supply of water is No political appetite
commercial drinking required throughout the year Legislative barriers
Industrial Can substitute for drinking water The volume required is limited
Environmental flows Potentially replace drinking Legislative barriers
water during prolong dry periods Need to be able to store wastewater
and provide minimum flows to supply water at specific times
Risk of water quality impacts
on waterways that may
outweigh benefits
Hydrogen production A constant supply of water is May require additional treatment
required throughout the year and higher purity compared
to other applications.
Minimal need for expensive storage
T H E AP PR O AC H
15The Proposed Model
A sustainable hydrogen supply chain
model using recycled water and renewable
energy is proposed in Figure 5. The
economic viability of this model relative
to the Current Model is evaluated via a
Cost-Benefit Analysis (CBA), the details of
which are outlined later in this section. •
Figure 5: Proposed sustainable hydrogen supply chain model which uses renewable energy and recycled water
1 ENERGY
G E N E R AT I O N 2 A D D W AT E R
This energy is fed
into the electrolyser
3 HYDROGEN
PRODUCTION
Energy is sourced The electrolyser splits
from renewable with recycled water the water molecules
generation to create hydrogen
and oxygen
H2 O2
+ -
cathode
anode
Hydrogen
H2O
4 STORAGE
The hydrogen gas
is compressed
5 A P P L I C AT I O N
Once stored, this
gas can be used for
and stored multiple applications
T HE A PPR OA CH
16Test application: the use of rail freight
Why rail?
Hydrogen has strong potential for use in medium For these reasons, rail freight represents
to large-scale transport vehicles due to its a potential early adopter of hydrogen
light weight, long travel range per kilogram, technology and is an ideal real-world
fast refuelling times, and ability for fuel cells scenario to compare the viability of different
to operate continuously and at full capacity hydrogen supply chain models.
without reducing their lifespan. Despite these
The existing diesel-powered East-West
advantages, the implementation of hydrogen
Rail Corridor from Melbourne to Perth was
solutions for transport applications faces certain
selected for our test application because:
challenges. One of the main barriers to adoption
stems from the lack of existing hydrogen • It is the longest freight route in Australia
production and refuelling infrastructure, along and would require a relatively large volume
with the difficulty of estimating where and to of hydrogen. This allows the hydrogen
what extent this infrastructure would be required. supply chain models to be tested at scale.
These challenges are more easily overcome • The locomotives are currently powered
in the rail sector in general and rail freight by imported diesel fuel and options to
in particular for the following reasons: improve energy security for large diesel
importers should be considered.
• More space for hydrogen gas
• The Victorian Labor Government has
Hydrogen gas is energy dense but takes
recently legislated the Victorian Renewable
up larger amounts of space than other
Energy Target (VRET) and the State
fuels. Rail freight has more fuel storage
is projected to see a large increase in
capacity than other modes of transport.
renewable energy uptake by 2025. This
• Reduced infrastructure requirements is particularly true of regions such as
Australia’s lack of hydrogen production, North-West Victoria which is near to the
distribution and re-fuelling infrastructure planned intermodal Western Interstate
is one of the major barriers to hydrogen- Freight Terminal (WIFT) in Ballarat.
fuelled vehicles in this country. However, • Both the Victorian and Western Australian
locomotives are typically serviced and Governments are currently developing
refuelled at the end of their journey, hydrogen strategies and allocating funding
eliminating the need to develop an to develop hydrogen-fuelled transport
extensive hydrogen refuelling network opportunities. Creating large-scale
along the transport routes. sustainable hydrogen production facilities
• Predictable routes and at central transport terminals in each
journey distances State could support their strategies. •
Rail freight operations are more predictable
than other modes of transport and journey
distances are fixed. As a result, the
amount of hydrogen required to support
operations and the size of hydrogen
T H E AP PR O AC H
production equipment, storage tanks
and dispensing equipment needed
can be estimated more accurately, Perth
thereby reducing capital and operating
costs by limiting potential overbuild. Melbourne
17Assessing the Relative economic viability
relative economic The economic viability of the Proposed Model
and the Current Model relative to a Business-
viability and as-Usual case was assessed via a Cost-Benefit
Analysis (CBA) on converting the East-West
sustainability of the Rail Corridor freight route to hydrogen fuel.
The CBA identifies and expresses all the
Proposed Model incremental costs and benefits created to
calculate the Net Present Value (NPV)15 of
adopting each Model. This is a well-established
methodology that is widely employed in
project evaluation. The costs include initial
capital investment, ongoing fuel consumption
costs, replacement costs and routine
maintenance costs. The included monetised
benefits of the options are outlined below.
1 2 3
Local environmental Avoided Greenhouse Fuel cost savings
externalities Gas Emissions Reduced fuel costs brought
Avoided noise, air pollution, Avoided cost of greenhouse gas about by using hydrogen
upstream/downstream emissions from using renewable which is more energy dense
costs of switching to energy to produce hydrogen. per unit than diesel.
hydrogen powered trains. This benefit is only received if a
shadow value on greenhouse
gas emissions (dollars per
tonne of CO2-e) is applied.
Relative sustainability
T HE A PPR OA CH
The environmental sustainability of each
Model is measured by the amount of
greenhouse gas emissions created in the
hydrogen production process and whether
the water required would put additional strain
on existing drinking water resources. •
18Test scenarios
The NPV of the Current and Proposed The details of each scenario are summarised
Models is calculated by using a ‘Business- below and outlined in greater detail in
as-Usual’ (BAU) scenario as a baseline which Table 2. Key modelling assumptions,
assumes no transition to hydrogen fuel for including capital and operating costs,
the freight route. The hydrogen scenarios energy prices, and technology learning
assume an operational start-date in Financial rates, are provided in Appendix A.
Year (FY) 202516 and all scenarios are
assessed over a 40-year project lifecycle.
Scenario 1
BUSINESS-AS-USUAL
(BAU)
Operations continue as they are today, with
locomotives powered by diesel fuel. Perth
Melbourne
Scenario 2
CURRENT HYDROGEN
S U P P LY C H A I N M O D E L
Locomotives transition to hydrogen fuel by Perth
FY2025. Hydrogen is produced using grid-
purchased electricity and drinking water. Melbourne
Scenario 3
P R O P O S E D S U S TA I N A B L E
H Y D R O G E N S U P P LY
T H E AP PR O AC H
CHAIN MODEL
Locomotives transition to hydrogen fuel Perth
by FY2025. Hydrogen is produced using
renewable electricity and recycled water Melbourne
and is therefore zero emissions.
19Sensitivities for the three different sources of
renewable energy - previously discussed on
page 13 - are also tested within Scenario 3:
3A D E D I C AT E D
RENEWABLES H2
+ -
O2
Wind and/or solar PV plants are built ‘behind-
the-meter’ of the hydrogen production
facilities. Because these plants are not
connected to the electricity grid, market
fees are avoided. Plants receive only enough
compensation to recover their costs.
3B RENEWABLE
POWER PURCHASE
AGREEMENT
Emissions created by electricity purchased
from the grid are offset by entering a contract
to pay a fixed price for renewable electricity.
H2 O2
+ -
3C C U R TA I L E D
RENEWABLES
Wind and/or solar PV plants are built with
the primary purpose of supplying energy to
the electricity grid but are also connected to
hydrogen production facilities. This allows any
energy that is not able to be sent to the grid
to be diverted to hydrogen production. •
Key assumptions
Project Assumptions Technology Assumptions Electricity Market Assumptions
First year of Full Capital costs ($/kW): Emissions reduction policy:
T HE A PPR OA CH
operations: 2025 • Wind: $1,600/kW in 2040 The Australian electricity market
Operations appraisal achieves a 26% emissions
• Solar: $1,240/kW in 2040
period: 40 years reduction on 2005 levels by 2030
• Electrolyser: $750/kW in 2040 via an Emissions Intensity Scheme,
reaching zero emissions in 2070.
Note: See Appendix A for further details on modelling inputs and assumptions.
20Table 2: Details of each scenario tested
Scenario 2: Current Scenario 3: Proposed
Scenario 1: Business
Parameter Hydrogen Supply Sustainable Hydrogen
As Usual
Chain Model Supply Chain Model
Scenario Assumes no change Assumes that all diesel- Assumes that all diesel-
Description from current operations fuelled rail vehicles are fuelled rail vehicles are
and fuels. replaced with hydrogen replaced with hydrogen
rail vehicles by 2025. rail vehicles by 2025.
Freight operators continue
to use diesel powered The hydrogen is produced The hydrogen is produced
trains and must replace using grid-purchased using renewable energy
locomotives as they electricity and purified and recycled water
approach their end of life. drinking water. to improve supply
chain sustainability.
For simplicity, diesel
locomotives are For simplicity, diesel
de-commissioned locomotives are
once hydrogen fuel de-commissioned
cell locomotives once hydrogen fuel
become available. cell locomotives
become available.
Fuel Diesel Hydrogen (emissions Zero-emissions Hydrogen
dependent on grid
emissions intensity factor)
Energy Input N/A Grid electricity Renewable Energy:
3a. Dedicated Renewables;
3b. Renewable PPA;
3c. Curtailed Renewables.
Water Input N/A Drinking water Recycled water
Production N/A As close to existing Most suitable wastewater
Facility rail terminals as treatment plant(s).
Location possible to minimize Suitability based on
infrastructure costs. water quality, volume
available and proximity
to rail terminals.
Electricity N/A Jacobs’ Energy Markets Team April 2019 ‘Base Case’.
Price The Base Case assumes an Emissions Intensity Scheme
Projections (EIS) is applied to the National Electricity Market (NEM)
and Western Electricity Market (WEM) from 2021 to
achieve Australia’s Paris Agreement commitment,
with a target of zero grid emissions by 2070.
T H E AP PR O AC H
21T HE A PPR OA CH
223
Results &
discussion
The purpose of this paper was to propose a While the Proposed Model’s sensitivities –
more sustainable hydrogen supply chain model 3a. Dedicated Renewables, 3b. Renewable
for a large-scale hydrogen economy in Australia PPA, and 3c. Curtailed Renewables – were all
and to evaluate whether this model could be zero-emissions, none of them proved more
adopted without sacrificing economic viability economically viable than the Current Model.
when compared to the current approach.
Both the Current and Proposed models were
Figure 6: Total emissions produced from
applied to convert the East-West Rail Corridor 2025 to 2065 in each Scenario
to hydrogen to ensure our cost-benefit analysis
was grounded in a real-world application. 25,000,000
Emissions (tonnes CO2-e)
Overview of 20,000,000
R E S U LT S & DI SC U S S ION
findings 15,000,000
10,000,000
Figure 6 displays the greenhouse gas
emissions produced in each Scenario and
Figure 7 presents findings on the economic 5,000,000
viability of the Current Model (Scenario
2) and the Proposed Model (Scenario 3)
relative to Business-As-Usual (Scenario 1).
Scenario 1 Scenario 2 Scenario 3
(BAU) (Current (Proposed
Model) Model)
23Figure 7: Economic viability of Scenarios 2 and 3 relative to Scenario 1 (BAU)
Perth Perth
Melbourne Melbourne
SCENARIO 2: CURRENT MODEL SCENARIO 3:
Cost viability: Yes (relative to Scenario 3) PROPOSED MODEL
• NPV: -$270 million Cost viability: No (relative to Scenario 2)
• 3a NPV: -$2,000 million
• 3b NPV: -$1,060 million
• 3c NPV: -$6,250 million
Note: These figures assume no shadow value on greenhouse gas emissions is applied beyond the electricity market.
Electrolyser usage rate
as a key cost driver
Although we determined that recycled water renewable energy was available to avoid creating
was less expensive than drinking water earlier emissions. Conversely, the Current Model drew
in this paper, when the costs of hydrogen on a consistent supply of grid-purchased power
production are viewed holistically, water prices (which enabled a usage rate of 85-95%). This
were not a substantial cost driver in the overall allowed the use of lower capacity electrolysers
R E S U LT S & D IS CU S S I ON
economics. Rather, the intermittent nature of while producing the same amount of hydrogen.
renewable energy had a much larger influence The need for larger electrolysers in the Proposed
on cost as it meant that electrolysers could Model scenarios and the resulting increase in
not run as frequently (see Figure 8). Therefore, capital and operating costs is evident when
larger capacity electrolysers were needed in comparing the levelised cost17 of hydrogen by
the Proposed Model scenarios to produce the Scenario (see Figure 9). The declining costs
same amount of hydrogen as the Current Model. over time are primarily due to the decreasing
The reason for the lower usage rates under the cost of energy required for hydrogen production
Proposed Model scenarios (40-50% for Scenario and increasing efficiency of the electrolyser
3a and 3b, and 11% for Scenario 3C) is that from technological advancements. •
hydrogen production could only occur when
24Figure 8: Average annual electrolyser usage rate in each Scenario
100 %
Electrolyser Usage Rate (average annual %)
80%
60%
40%
20%
0%
Current Model Proposed Model Proposed Model Proposed Model
(Scenario 2) (Scenario 3a. (Scenario 3b. (Scenario
Dedicated Renewable PPA) 3c. Curtailed
Renewables) Renewables)
Figure 9: Levelised cost of hydrogen ($/kg) by Scenario and year
$25
$20
$15
$/kg
$10
R E S U LT S & DI SC U S S ION
$5
$
2025 2030 2040 2050
Current Model Proposed Model Proposed Model Proposed Model
(Scenario 2) (Scenario 3a. (Scenario 3b. (Scenario
Dedicated Renewable PPA) 3c. Curtailed
Renewables) Renewables)
2526
Improving
economic viability
A
ACHIEVING HIGHER
E L E C T R O LY S E R
U S A G E R AT E S
Given that the usage rate of the electrolyser
represented the most significant cost driver
of the Proposed Model, we suggest three
potential solutions that might increase this
rate and improve economic viability:
1. Source the electricity from a high
capacity factor renewable energy source.
Existing options in Australia are either
hydropower or waste-to-energy plants.
2. Government could assign a hydrogen-
specific emissions reduction target or
continuous improvement policy.
3. Incentivise grid emissions reductions
by adopting more ambitious emissions
reduction targets or State and
federal subsidy schemes to support
renewable energy development.
Each option is explored in more detail in Table 3.
R E S U LT S & DI SC U S S ION
27Table 3: Evaluation of solutions for increasing electrolyser usage rate and cost viability
1
High capacity factor renewables
Source the electricity from a high capacity 2 3
factor renewable energy source.
Hydrogen Lower Emissions
Existing options in Australia are either Emissions Policy Grid
hydropower or waste-to-energy plants.
1a. Hydropower
1b. Waste-to-energy
plants
Description Hydropower plants The process of generating Government could Grid emissions
release water stored energy in the form assign a hydrogen- reductions could be
in a dam to spin of electricity and/or specific emissions incentivised by adopting
turbines and thereby heat from the primary reduction target more ambitious
generate electricity. treatment of waste. or continuous emissions reduction
improvement policy. targets or State and
federal subsidy schemes
to support renewable
energy development.
Rationale Hydropower plants alone As many of Australia’s Policies could mandate If the emissions intensity
would not provide high landfills close to large that hydrogen production of the grid declines faster
enough usage rates metropolitan centres begin becomes increasingly than projected, hydrogen
but could be combined to reach capacity, interest less emission intensive, production could run
with wind and/or solar in waste-to-energy plants presumably at a faster more often without
to allow the electrolyser has grown. Waste-to-energy rate than the grid itself. creating emissions.
to run more frequently. plants typically generate
at high capacity as long
as there is a consistent
supply of waste materials.
Benefits The energy is available Reduces the residual Lower capacity Electrolysers would
at times when wind waste going to landfill and electrolysers that run be able to run in an
or solar isn’t and is contributes to a more more frequently could optimised way at the
zero emissions. circular economy18. be installed earlier, highest utilisation
while sourcing an rates. A less emissions
increasing proportion intensive grid would
of renewable energy also reduce emissions
from PPAs over time. across all electricity-
using sectors.
Downsides New projects may be The supply chain of waste Policy and/or regulatory Transmission
required as the capacity material is still evolving and arrangements need to be infrastructure upgrades
of existing hydropower only about 50% of electricity developed and are reliant and increased energy
plants becomes generation can currently on State and/or federal storage investment are
stretched. Developing be classified as renewable. government decisions. likely to be required to
new hydropower plants This is because waste support higher volumes
Due to their progressive
can result in local streams usually have some of renewable energy
nature, these target-
environmental impacts. non-renewable content. uptake. The lack of these
based schemes would
measures could result
R E S U LT S & D IS CU S S I ON
The output of The waste-to-energy create low emissions
in much higher energy
hydropower is industry in Australia is hydrogen rather
losses, increasing energy
dependent on emerging and will take time than zero-emissions
costs and potentially
rainfall levels. to mature, which may also hydrogen in their early
delaying renewable
create logistical difficulties years. This may be
energy investment.
in the ease of sourcing and acceptable if it enables
This trend is becoming
transporting the waste. net emissions-savings in
apparent in the current
Further, waste-to-energy the end-use application
electricity market, with
projects typically have for the hydrogen.
many projects facing
longer development times
delays or increased
due to the need to engage
transmission losses.
local communities and
mitigate the environmental
impacts of projects during
construction and operation.
28All three of the solutions in Table 3 could, a national emissions reduction policy is
hypothetically, be implemented to improve implemented. No such policy is currently in
the economic viability of the Proposed place and emissions from hydrogen could
Model, each with their own advantages. therefore remain substantially higher than
projected if the emissions intensity of the
• Least emissions intensive: Solution 1
electricity grid declines slower than projected.
(sourcing high capacity factor renewable
energy) would allow hydrogen to be Hydrogen production may itself support
completely zero-emissions, while the increased solar PV investment and thereby
other options would still create some reduce grid emissions by scheduling production
emissions in the short to medium-term. to occur at the times solar is operating. One
It is also less influenced by the political of the concerns around the projected increase
landscape than the other two solutions. in large-scale and residential solar PV is the
imbalance between energy production and
• Most cost efficient: Although Solution 1
demand across a 24-hour period, which would
(sourcing high capacity factor renewable
greatly reduce their revenue and potentially
energy) is the least emissions intensive,
limit their uptake (shown in Figure 10). While
Solution 2 (Hydrogen Emissions Policy)
investment in battery storage and pumped
and Solution 3 (Lower Emissions
hydro energy storage (PHES) can help store
Grid) may be more efficient overall as
some of this energy until periods of high
they would allow the most economic
demand (such as the evening peak period),
renewable energy projects to be built,
hydrogen facilities producing in the afternoon
thus reducing overall electricity costs.
could also improve the economics of solar
Creating some emissions from hydrogen and enable greater uptake. While electrolysers
production may be acceptable if net emissions would still need to be run at a high utilisation
from the end-use application are reduced. rate overall, it is likely that as afternoon prices
This is likely to be the case in many transport- decrease solar will be increasingly incorporated
related applications if the emissions intensity into hydrogen production arrangements. •
of the electricity grid declines at a rapid
enough rate. The projected decline in grid
emissions intensity in the modelling assumed
Figure 10: The ‘Duck-Curve’ - impact of projected solar generation on Victorian electricity prices (Summer
2030). The dip in mid-day prices reflects the imbalance between energy supply and demand.
4000
$140
3500
$120
Electricity Price ($/MWh)
3000
Solar PV Output (MW)
$100
2500
$80
R E S U LT S & DI SC U S S ION
2000
$60
1500
$40
1000
$20
500
$0
0
0:00 2:00 4:00 6:00 8:00 10:00 12:00 14:00 16:00 18:00 20:00 22:00
Solar Rooftop PV Price
Source: Analysis from Jacobs’ Energy Markets Insights Group 2019
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