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Fortescue (ASX:FMG) share price rises on credits for green hydrogen in Budget

The Fortescue Ltd (ASX: FMG) share price is up more than 1% as the Australian Federal Government announced billions of dollars of credits for green hydrogen.

The Federal Budget was revealed last night, and there are some benefits for businesses focused on decarbonisation efforts.

Billions for green hydrogen

According to reporting by the ABC, green hydrogen production will be supported with tax incentives of $8 billion over the next 11 years.

Treasurer Jim Chalmers said:

This budget invests in our renewable energy superpower ambitions – including $13.7 billion in production tax incentives for green hydrogen and processed critical minerals, so industries are rewarded for scale and success.

The ABC reported the incentive will be worth $2 for every kilogram of hydrogen produced, and critical minerals will be valued at 10% of relevant processing and refining costs, at an estimated cost of about $14 billion to the budget for both over the medium term.

The goal of this is to make Australia’s pipeline of hydrogen projects commercial “sooner”.

How much could this benefit Fortescue shares?

Fortescue thinks hydrogen and hydrogen-based fuels can play an important role in the decarbonisation of sectors where emissions are hard to reduce and where alternative solutions are either unavailable or difficult to implement. Examples of that include heavy industry and long-distance transport.

Fortescue Energy is focused on the green hydrogen and ammonia challenges. Its goal is to produce 15mt of green hydrogen by 2030, which the company thinks will see it contribute approximately 20% of the projected global demand for low-emission hydrogen by 2030.

We can’t assume that Fortescue is going to receive $2 per kilo on 15mt of green hydrogen production. Firstly, Fortescue is working on a global portfolio of energy projects, so the Australian production will only account for a percentage of its overall output.

Second, Fortescue has a lot of work to do to get to 15mt of green hydrogen production per year.

Third, the business will need to find customers for its green hydrogen, it can’t just rely on government tax credits. Fortescue has already signed on some sizeable customers, such as E.ON, so it has made good progress here.

Final thoughts on the Fortescue share price

For Fortescue, this is a pleasing development and will help its future earnings, but it needs to get to production first. I wouldn’t call it a buy right now – the Fortescue share price is quite high – but if the iron ore price drops substantially, it could be an opportunistic time to invest in Fortescue shares.

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At the time of publishing, Jaz owns shares of Fortescue.
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