Hydrogen fuel will gradually be introduced to power the proposed Kurri Kurri gas-fired power plant, energy and emissions minister Angus Taylor has confirmed.
It came a day after the region's status as a national hydrogen hotspot was cemented with the state government's announcement that it would establish a $70 million Hunter hydrogen hub.
Mr Taylor said the hub would complement the federal government's work to accelerate the development of the new energy sector.
"We are delighted to see state governments, like the NSW government, showing enormous interest," Mr Taylor told the Newcastle Herald.
"We have got huge interest coming out of Asia, in particular Japan to start building the (hydrogen) supply chain. We know there are markets in Australia that are ready to go, in particular in the mining industry.
"The Hunter Valley has obviously got a lot going for it in terms of creating a hydrogen cluster and a hydrogen hub. We will be talking further with the NSW government but we think it is a very positive announcement."
The key to introducing hydrogen fuel into the plant was reducing the cost of production.
"We expect the proportion of the feed going into it to go up over time as the price of hydrogen comes down," Mr Taylor, who was in Victoria's LaTrobe Valley on Friday, to oversee the first shipment of hydrogen to Japan under a world-first trial, said.
"That's how we see the evolution of gas generators; it's one of the reasons why gas generators are so attractive now because you can reduce emissions over time by gradually shifting the feeds from methane to either green or sequestered hydrogen."
"We have set an economic target for what we want to get the costs down to. The money ($500 million) we have committed to it is all about getting those costs down and getting to the point where we can get more hydrogen into our energy system and industrial system, such as the fertilisers that are produced in the Hunter Valley."
The hub will provide groups of hydrogen users common infrastructure for the local production, use and distribution. It will also reduce costs by delivering hydrogen in a coordinated fashion.
It will complement the recently announced Hunter hydrogen cluster, one of 13 clusters across Australia created as part of a push to support growth and industry collaboration.
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Director of the University of Newcastle'sInstitute for Energy and Resources Alan Broadfoot said the projects would help establish the region as a national 'engine room'.
"I think as a region we will be the place of choice for investment in energy-intensive industries that will take advantage of these energy sources," Professor Broadfoot said.
"We also have a very strong industrial sector that can support the nation in its transformation - the skills to build new plants to deploy new technologies. It's our traditional model, look at Varley, Bradken and AmpControl."
A Port of Newcastle spokesman said growing demand for clean energy sources would provide diversification opportunities.
"Port of Newcastle is well positioned to be a hub for the production and distribution of energy streams including hydrogen, LNG and solar, in addition to facilitating existing trade in thermal coal and liquid fuel," he said.
"This supports the region as it embraces alternative energy solutions, assists local industry looking for green energy options and provides more employment opportunities and economic prosperity for people across the Lower Hunter.
"Minister Kean's announcement of funding to the Hunter hydrogen hub is a welcome development and sends a strong market signal. It provides the necessary funding to kickstart the Hunter's hydrogen economy, which bodes well for the future prosperity of the region."
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