Renewable Gas Target

ACIL Allen has been engaged by the Australian Pipelines and Gas Association Ltd (APGA) and Energy Networks Australia (ENA) to model the economic effects of a national Renewable Gas Target (RGT).

An RGT is a policy to support the progressive replacement of natural gas with renewable gases, principally green hydrogen and biomethane. It would work in a similar way to the national Renewable Energy Target (RET) which supports investment in renewable electricity generation, and so an RGT would support investment in the renewable gas industry and allow it to mature and support the decarbonisation of Australian gas users.

To analyse the effects of an RGT we developed a Gas Transition Model (GTM) to provide insights into potential cost pathways to decarbonise Australia’s existing gas using sectors. The model uses a large-scale linear program to identify the lowest cost way of achieving specified abatement objectives, while continuing to satisfy the underlying energy demand from today’s gas using sectors.

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Renewable gases are gaseous fuels that can largely or entirely substitute for existing uses of natural gas in today’s energy system. This analysis focuses on two main types of renewable gas: biomethane (where biogas is produced through anaerobic digestion of biomass and purified to become primarily methane) and green hydrogen (hydrogen produced from electrolysis using renewable electricity).

Policy action is needed to decarbonise Australia’s natural gas sector. In the absence of policy action, today’s gas customers are projected to overwhelmingly stay on natural gas, and emissions from these users will continue to increase, producing over 1.5 Gt CO2-e over the period 2025 to 2050. We estimate that a net zero-consistent gas sector emissions budget would be less than half of this volume of emissions, illustrating the significant abatement task facing the sector.

Efficient emissions reduction is best achieved through a broad-based and technologically-neutral policy that provides equally strong incentives across all emissions sources and abatement actions. ACIL Allen has modelled a Theoretical Efficient Policy scenario that decarbonises the gas industry in line with achieving net zero by 2050 as might occur under a theoretically optimal policy such as a broad-based carbon price. Under this scenario gas customer emissions are reduced to net zero over the period 2025 to 2050, achieving cumulative abatement of 867 Mt CO2-e at an average abatement cost of $143/tonne CO2-e. Renewable gas contributes about two-thirds of the long-term energy needs of today’s gas users, with electricity providing the remaining third.

However, Australia’s complicated history with carbon pricing means that implementing an optimal policy approach consistent with the Theoretical Efficient Policy scenario is not likely to be politically feasible for the foreseeable future. Instead, other more practical policy approaches are needed to decarbonise the gas sector. The policy action required goes beyond existing gas sector emissions policies– such as the national Safeguard Mechanism for large gas users, and the Victorian and ACT bans on new residential gas connections – which are insufficient to reach net zero by 2050.

We have modelled alternate policy frameworks for a net zero consistent pathway for the gas sector, including an electrification-focused approach and a Renewable Gas Target (RGT) that supports the progressive replacement of natural gas with renewable gases, principally green hydrogen and biomethane (Box ES 1).

Our modelling shows that an RGT can reduce emissions to net zero by 2050 at a lower cost of abatement than an electrification-focused approach ($150/tonne CO2-e under the Optimal RGT scenario compared to $165/tonne CO2-e under the Electrify Everything Possible scenario).

When translated to the whole economy, adopting an RGT rather than an electrification-focused approach to decarbonisation of the gas sector will increase Australia’s gross domestic product in the order of $30 billion (in present value terms) over the transition.

Current policies influencing gas customer emissions are insufficient to reach net zero. Our modelling demonstrates that existing gas sector policies are insufficient to achieve net zero emissions for all gas customers – industrial, commercial and residential. It follows that additional policy action is needed to decarbonise this sector.

The most economically efficient pathway to net zero emissions for today’s gas users involves a mix of renewable gas and renewable electricity. Theoretical least cost modelling shows that gas customer emissions can be reduced to net zero over the period 2025 to 2050 by switching to a fuel mix of two thirds renewable gases and one third electricity. This decarbonisation costs an average of $143/tonne CO2-e and reflects possible outcomes under an efficient, broad-based carbon price. However, Australia’s complicated history with carbon pricing means that this policy approach is not likely to be politically feasible for the foreseeable future, and so we have modelled other more practical policy options.

A Renewable Gas Target (RGT) could secure net zero gas emissions at a lower cost than a more electrification-focused approach. We modelled an Optimal RGT scenario that achieves the least cost net zero pathway while kick-starting renewable gas supply by 2030, and found that this approach would deliver an average abatement cost of $150/tonne CO2-e compared to $165/tonne CO2-e under a more electrification-focused approach (the Electrify Everything Possible scenario). Whole-of-economy modelling found that this saving represents an increase in Australia’s gross domestic product in the order of $30 billion (in present value terms) over the transition.

Australia will need access to renewable gas as part of an efficient transition. Sensitivity analysis confirmed the significant role renewable gas is likely to play in decarbonising Australia’s gas using sectors. Even when we changed assumptions to favour electrification, multiple hundreds of petajoules of renewable gas is needed, especially for feedstock use and for some very high temperature industrial processes. This result provides a high degree of confidence that policy-makers will need to implement mechanisms to develop renewable gas and ensure it is available for hard-to-electrify sectors in a timely manner. An RGT offers a viable and cost-effective approach to deliver these benefits.