The Australian Renewable Energy Agency (ARENA) announced $15 million in funding for the Victorian testing facility on Thursday, which will be co-located with a steelmaking plant.
The project will build on an earlier trial of Hadean Energy's green hydrogen technology that promises to use 30 per cent less electricity than conventional electrolysers, cutting the cost of its production.
The test will come months after Fortescue revealed it had produced molten metal from an electric furnace, moving closer to green steel production, and after a study warned Australia could risk losing value from its multibillion-dollar iron exports if it did not transition to greener metals.
Hadean Energy's testing facility has been earmarked for BOC's facility in Hastings, south-east of Melbourne, near a steel manufacturing plant.
The company's solid oxide electrolysis technology uses waste industrial heat to reduce the energy needed to produce hydrogen, potentially making it cheaper.
High costs had become a major barrier to deploying renewable hydrogen, ARENA chief executive Darren Miller said, and cutting its price could make it a more practical option for industries.
"This pilot will demonstrate how Hadean's technology performs in a real-world industrial environment and provide the evidence needed to assess its commercial potential," he said.
"This could open the door to broader use of green hydrogen in steelmaking and other industrial applications, while helping build Australia's hydrogen industrial capability."
While subject to final approvals, the pilot plant was expected to produce up to seven kilograms of green hydrogen per hour, Mr Miller said, and could supply most of the hydrogen needed for a process that heats and cools steel to make it more flexible.
The green hydrogen technology was originally developed over eight years by the CSIRO and has previously been tested at BlueScope's Port Kembla Steelworks in NSW.
If the technology proved ready for commercial deployment, Energy Minister Chris Bowen said it could be used in other sectors such as low-emission fuels and fertilisers.
"Renewable hydrogen has an important role in cutting industrial emissions, particularly where using electricity directly is difficult," Mr Bowen said.
"Bringing down the cost of producing it is critical."
The trial comes after a Climate Energy Finance study found Australia's $120 billion iron ore export market could fall in value over the coming years as more nations sought to decarbonise iron and steel.
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