The Japanese government's clean energy fund has selected a joint venture between conglomerates J-Power and the Sumitomo Corporation to head up the project.

It has committed $2.35 billion to progress the project further.

It follows a world-first pilot program where hydrogen produced using Latrobe Valley coal was shipped to Japan via the Port of Hastings last year in a specially-constructed boat.

The consortium plans to use carbon capture and storage (CCS) to trap emissions produced during hydrogen production and store them underground.

"This project takes the CO2 which we can capture and safely store it in … things like the depleted oil and gas reservoirs in Bass Strait," J-Power Latrobe Valley non-executive director Jeremy Stone said.

He said the consortium was looking at the Victorian government's CarbonNet project and ExxonMobil's Gippsland Basin Joint Venture as potential CCS options.

"So there's now two options we have down in Gippsland and over the next 12 months, we'll choose one of the ones which best suits," Mr Stone said.

Carbon capture 'unviable':

However, Environment Victoria, the state's peak conservation body, is skeptical about CCS technology.

"CCS is an unviable technology and we know that it has never worked globally," Environment Victoria policy and advocacy manager Bronya Lipski said.

In Western Australia, the Gorgon gas project's CCS system was meant to capture 80 per cent of its emissions over a five-year period.

But by 2021, it had only managed to store 30%.

Ms Lipski said if the project proceeded as planned, communities in the Latrobe Valley and Hastings would pay the price environmentally, while the benefits were enjoyed in Japan.

"Presumably [the coal] will come from Loy Yang … that may mean that Loy Yang would have to be expanded," she said.

"That has massive complications regarding [mine] rehabilitation, not to mention all the use of water on already stressed river systems."

The pilot project produced hydrogen using coal from Loy Yang coal mine, about two hours east of Melbourne.

It is Victoria's largest coal mine and is about 200 metres deep.

Energy company AGL, which operates the Loy Yang A power station and the mine, has an annual water entitlement for its operations.

The consortium aims to initially produce between 30,000 and 40,000 tonnes of gaseous hydrogen each year.

Mr Stone said the project could support 1,000 jobs a year in the Latrobe Valley, an electricity-producing region with a history of high unemployment.

Original Story By | Jarrod Whittaker & Mim Hook