One of Australia's biggest energy companies has pulled out of plans to build the country's biggest green hydrogen plant, saying the fuel is too expensive to produce.

In a blow to the federal government's ambitions of developing a green hydrogen industry in Australia, Origin Energy on Thursday said it was walking away from a planned project near Newcastle in New South Wales.

The project, known as the Hunter Valley Hydrogen Hub, includes explosives giant Orica and was set to involve the production of 5,500 tonnes a year of hydrogen made using renewable energy.

But in a statement to the Australian Stock Exchange on Thursday morning, Origin boss Frank Calabria said the company was "exiting" the project because it could not get the maths to add up.

What's more, Origin told investors it "intends to cease work on all hydrogen development opportunities".

The announcement is a further setback for the fledging hydrogen industry and its backers in Canberra after billionaire Andrew Forrest's Fortescue slashed jobs and cut investments in the technology.

"We continue to believe hydrogen could play a role in the future energy mix," Mr Calabria said.

"However, it has become clear that the hydrogen market is developing more slowly than anticipated, and there remain risks and both input cost and technology advancements to overcome.

"The combination of these factors mean we are unable to see a current pathway to take a final investment decision on the project."

Decision a 'disappointment'

Federal Climate Change and Energy Minister Chris Bowen, who has spearheaded the federal government's hydrogen sales pitch, criticised the decision by Origin.

Mr Bowen said it was a disappointment that sold short Australia's potential to be a leader in any green hydrogen industry that emerges globally.

He said the government's incentives – headlined by its $8 billion hydrogen head-start program – could "unlock" billions of dollars in private investment.

And he applauded Orica for remaining part of the Hunter Valley project, saying the company "remains committed to … the region and to manufacturing solutions for a low carbon economy."

"Origin's decision is disappointing for the workers and businesses developing Hunter hydrogen hub," the minister said.

"Green hydrogen plays to Australia's unique strengths and remains important to the future of manufacturing and industry both in the Hunter and other regions, as well as globally.

"The Albanese government's hydrogen incentives are estimated to unlock around $50 billion of private investment.

"Australia's announced pipeline for hydrogen already valued at over $200 billion from 100-plus projects, a quarter of which are already operating or under construction."

Instead of ploughing on with its hydrogen plans, Origin said it would focus on investing money in renewable energy assets such as wind and solar farms and battery storage projects.

Mr Calabria, whose company is one of Australia's biggest energy generators and retailers, with more than four million customers, said the company was not abandoning its decarbonisation plans.

Costs and doubts mount up

He said when Origin originally announced its plans for the Hunter Valley, it wanted to use clean energy to make hydrogen that could replace natural gas in Orica's ammonia manufacturing plant on Kooragang Island.

But he said uncertainty about the costs of producing that green hydrogen – and doubts about whether there would be a market willing to buy the associated ammonia at a profitable price – prompted its decision.

"The decision to exit reflects the prioritisation of capital expenditure towards opportunities closely aligned to Origin's strategy," Mr Calabria said.

"Ultimately, we believe investments focused on renewables and storage can best support the decarbonisation of energy supply and underpin energy security over the near-term."

Analysts were unsurprised by Origin's decision.

Dale Koenders, the head of energy and utilities research at investment bank Barrenjoey, said high costs remained the hydrogen industry's biggest handbrake.

Mr Koenders said there was little doubt that the need for hydrogen would grow in future as more industries sought to get off fossil fuels.

But he questioned the extent to which this would happen, saying there appeared to be little case for using expensive hydrogen in applications where cheaper renewable energy could do the job.

"Hydrogen is obviously in its infancy in Australia.

"There's a lot of hope that it can be a solution for decarbonisation and the energy transition and it absolutely may play a part in the future.

It's the customer, stupid

Crucially, Mr Koenders said the markets that were most likely to underpin the development of a green hydrogen industry – Japan and South Korea – were shifting away from the fuel.

He said both North Asian markets seemed to be showing a greater interest in green ammonia – a derivative of green hydrogen – because it was easier to transport and, potentially, use.

Either way, he said few buyers were on the market for green hydrogen or ammonia and fewer still were willing to pay a premium to underwrite its development.

"At this point in time there is just not the customer demand for hydrogen, be it domestically or internationally to build scale to then drive down the costs," he said.

"Much of this is reliant on having a cheap and affordable cost of electricity.

"The Australian electricity market is going through its own problems and challenges in terms of decarbonising and shifting across to renewables.

"With that uncertain backdrop, I think it makes a lot of sense for shareholders for a company like Origin to not be ploughing excessive amounts of capital into projects which are high-risk and likely to be uneconomic."