South Australia’s retreat from state led green hydrogen has crystallized around a blunt admission from Treasurer Tom Koutsantonis. Gas, not hydrogen, will underpin the recovery and future operation of the Whyalla Steelworks, at least for the foreseeable election cycle.
The shift marks a sharp departure from the Malinauskas government’s 2022 pledge to anchor a green hydrogen economy to steelmaking, a promise once costed at $590 million and framed as the foundation of a new industrial era.
The reversal did not emerge from a reassessment of hydrogen chemistry so much as from balance sheet pressure. In early 2025, the state intervened to force the steelworks into administration, removing control from Sanjeev Gupta and triggering a $2.4 billion state federal rescue package. Funding earmarked for hydrogen infrastructure was redirected to stabilize creditors linked to OneSteel and to keep Australia’s only long steel producer operating. Hydrogen, previously Labor’s flagship, was deferred overnight.
The underlying industrial logic remains unresolved. Direct reduced iron pathways require a reducing agent, traditionally coking coal, increasingly methane, and ultimately hydrogen. Koutsantonis insists hydrogen electrolyzers will eventually be built in Whyalla, framing the issue as timing rather than feasibility. Yet timing matters when capital intensity collides with weak demand signals. The abandoned project would have hosted what the government described as the world’s largest electrolyzer, tied to green steel ambitions at a facility ranked among Australia’s top ten industrial emitters in a 2023 analysis by the Australian Conservation Foundation.
Cost competitiveness remains the binding constraint. A gas led transition is itself expensive. The report A Strategy for Whyalla: Enabling the Transformation and Decarbonisation of the Steelworks estimated public capital expenditure of $1.7 billion to $2 billion over a decade to subsidize gas supply and pipeline infrastructure. That assessment also highlighted South Australia’s structural disadvantage, citing some of the highest domestic methane prices among gas producing regions globally. Betting on gas as a bridge does not eliminate subsidy dependence; it reshapes it.
Despite this, the government is doubling down on gas availability. Four turbines purchased for the hydrogen plan are now being sold in an effort to recover more than $250 million, while policy attention has shifted to pipeline access and fuel security for potential buyers pursuing direct iron reduction. Koutsantonis has been explicit that any purchaser will need assured gas supply, reinforcing methane as the default decarbonization lever rather than a transitional one.
Political accountability has sharpened alongside fiscal exposure. Auditor general findings showed the now defunct Office of Hydrogen Power SA spent more than $280 million over three years, including a controversial $830,000 employee payout. Total public spending linked to the administration of the steelworks now stands at roughly $2.6 billion, spanning creditor support, operational costs, and stranded assets. With administrators KordaMentha tasked with securing a buyer by August 2026, the state has ruled out nationalization, pushing responsibility toward Canberra if the sale falters.
Opposition criticism has framed hydrogen as a costly miscalculation rather than a premature technology. Shadow energy minister Stephen Patterson argues that the rapid pivot from coking coal to green hydrogen ignored the economics of scale and market readiness, leaving taxpayers exposed while electricity prices rose more than 40 percent since Labor took office. The government counters that protecting jobs and sovereign capability must come first, even if decarbonization timelines stretch.
What emerges is not a rejection of hydrogen but a recalibration of risk. The state has stepped back from acting as first mover, signaling that future electrolyzers must be built by industry once costs fall and offtake is credible. Until then, gas is positioned as the anchor fuel for Whyalla’s survival. The gap between political aspiration and industrial execution, measured in billions of dollars, has become the defining lesson of South Australia’s hydrogen experiment.
