A multi-billion dollar bid to convert coal from the Latrobe Valley into hydrogen has hit a major roadblock after an international partner walked away from a trial in the region.

Japanese media reported on Friday that Kawasaki Heavy Industries had withdrawn from the trial to develop a hydrogen network.

The original plan was to establish an international supply chain to produce hydrogen from the valley's coal and use commercially unproven CO2 capture and storage technology to sequester carbon in the Bass Strait.

Brown coal from the valley would have been extracted and turned into hydrogen, which would then be piped more than 150 kilometres from Gippsland to the Port of Hastings before being shipped to Japan.

The project received $50 million each from the Victorian and federal governments, while also receiving $2.35 billion from the Japanese government.

But reports from Japan indicate Kawasaki has backed out of the plan due to potential difficulties procuring hydrogen within the 2030 deadline.

"The completion of the demonstration by 2030, which was originally planned, was an absolute condition for ensuring competitiveness," reported the Nekkei. 

"The company will now look to procure hydrogen from within Japan and hydrogen carriers will also be reduced in size as the company steers towards 'a real solution'."

In a statement, Kawasaki Heavy Industries confirmed the commercial demonstration phase of the project would occur in Japan due to time and cost pressures.

Kawasaki Hydrogen Project Group executive Yasushi Yoshino said the company was committed to the Gippsland town.  

"The change to phase one of the project does not impact Kawasaki's commitment to a commercial scale project in the Latrobe Valley and Kawasaki remains committed to the Latrobe Valley and Victoria," he said.

New fuel mix fanfare

The project was announced in 2018 and promised 400 jobs if the trial was successful.

The prospect of converting coal to hydrogen was met with much fanfare, with a world-first hydrogen tanker arriving in January of 2022 to test potential for exporting the fuel source to Japan.

Then prime minister Malcolm Turnbull visited the Latrobe Valley in 2018 to state the importance of hydrogen in the country's energy mix. 

"It is critically important we invest in the energy sources of the future, and we affect the transition from old forms of [power] generation to new forms of generation, and we do this seamlessly," he said.

Kawasaki was one of a consortium of companies behind the project, including Japanese Energy giant J-Power and AGL, which owns Loy Yang.

The project was touted as being an important part of the energy source for the future because it burned clean when consumed.

However environment groups maintained criticism of the project throughout its trial because of the carbon emissions released during production.

'Another empty promise'

Wendy Farmer is a local organiser for the community group Voices of the Valley and Friends of the Earth.

She said she was unsurprised to hear the news that Kawasaki had withdrawn.

"I never thought it was a viable option," she said.

"Why would you make hydrogen from coal when you can actually do it from renewable energy with a lot less pollution and emissions involved?"

She said it was always doubtful that it would go past the investigation stage.

"It just felt like another money grab from Latrobe Valley," Ms Farmer said. 

She said both levels of government were better served investing in renewable energy projects. 

"It just seems like why are we investing into these, 'Let's test this out and see if it works' [projects] when we have technologies that work and we should have been putting money into that," she said.

The consortium behind HESC has stated it would not commercialise the project unless it was able to capture and store its emissions.

The Victorian government has simultaneously been looking into the Carbon Net project, which was to investigate the feasibility of capturing emissions from the project and store it in disused gas and oil wells in the Bass Strait.

The futures of both projects were uncertain.

'It was always in doubt," Ms Farmer said.

"'Nowhere in the world have they actually done the carbon capture and storage they were promoting in this idea."

Hope remains

Latrobe City Council Mayor Dale Harriman said the most recent development did not mark the end of the HESC project.

He said the council was yet to receive confirmation from the HESC consortium on its current status, but believed there was still sufficient support for the project.

"You look at the number of major companies that are still involved in this project as consortium members, and there's very significant players involved, and from what we've heard they're still very keen for this project to go ahead," he said.

"So we don't see this as a major issue or a death knell for the project."

Cr Harriman said the state government needed to provide surety of coal supply for HESC to ensure other partners did not walk from the project.

"The concerning part from us is that there has been a continual lack of support from the state government that is behind a lot of the nervousness behind the HESC scheme," he said. 

"The sticking point is the guarantee of coal. 

"We are looking at how we can get the state government to come out and guarantee that supply of coal that they need."

A spokesperson for Energy Minister Chris Bowen said the government had honoured the previous government's commitment to their Japanese partners on the HESC project and that the withdrawal was a commercial decision by the Japanese consortium.

The state government has been contacted for comment.