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APGAOct 13, 2023 2:58:00 PM69 min read

Victorian Renewable Gas Consultation

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Executive Summary

APGA welcomes the opportunity to contribute to the Victorian Department of Energy, Environment and Climate Change consultant on Victoria’s Renewable Gas Consultation Paper (the Paper).

APGA commends the Victorian Government’s recognition of the value of renewable gas as a gas use decarbonisation option and its pursuit of a renewable gas target. There is an opportunity for such a policy to support gas use decarbonisation far broader than considered within this paper, as well as risks in not applying the policy broadly enough. Put simply, there are major economies of scale available if renewable gas is deployed broadly. APGA adds to a number of design proposals within the paper based upon its own experience in renewable gas target design.

The success of the Renewable Energy Target (RET) offers an excellent roadmap for the development of a renewable gas target. The RET facilitated the development of a deep and mature renewable electricity market in Australia. A renewable gas target can achieve the same end for renewable gases at this critical juncture in the Victorian and Australian energy transitions.

In proposing the policies covered within the Paper, Victoria recognises that renewable electricity cannot deliver the entire energy transition alone. Australian energy consumers have the opportunity to decarbonise via parallel renewable electricity and renewable gas pathways – parallel pathways capable of providing energy security to each other.

While the paper is focused on securing a decarbonisation pathway for gas users which are unable to electrify, APGA highlights that the proposed policies can deliver so much more.

By considering a broader renewable gas customer base, the Victorian Government secures the renewable gas option for those who need it the most. With access to more renewable gas production potential than current natural gas demand, enabling a larger renewable gas customer base secures lower gas infrastructure costs for customers which have no other choice but to use renewable gas.

This in turn permits a broader understanding of which customers could choose to decarbonise through renewable gas based on cost competitiveness and customer preference. This is a unique opportunity for the Victorian Government to deliver customer choice in an otherwise choice constrained energy transition.

Amongst the features discussed by APGA within its submission, one of the most important is the need for customers which are liable under a policy measure to also receive emissions reduction benefit in line with the liability. Without this, gas customers are simply a source of subsidy for other customers. Amendments are required to National Greenhouse and Energy Reporting (NGER) legislation, in particular to the NGER Measurement Determination, to allow for a market based method for gas combustion emissions reporting.

Through the design principles provided within its submission, APGA is confident that the Victorian Government could produce highly impactful policy to support renewable gas uplift in the state, leading Australia in the renewable energy transition.

High level recommendations

  1. Base a renewable gas target on all gas users in Victoria.
  2. Pursue a single renewable gas target of 5-10 per cent by 2030 and 15-25 per cent by 2035. The level of ambition in the renewable gas target should be consistent with the ambition of Victoria’s emission reduction goals.
  3. Apply certificate style market-based policy at the underlying mechanism to deliver upon the target including an initial 3-year holiday period as seen in the RET.
  4. Supplement this with a government-funded scheme to support projects in the immediate term while the certificate-based mechanism is deployed.
  5. Engage the Federal government to amend NGER so customers can benefit from emissions reductions when surrendering certificates to comply with the policy.
  6. Directly support vulnerable residential customers.

Recommendations relating to consultation paper sections

Types of policy mechanisms
  • APGA recommends pursuing a certificate-style scheme.
Market-based approach
  • APGA recommends the Victorian Government engage with the Federal Government to request that the emissions reporting method under section 7.4 of the NGER Measurement Determination be replicated for gas combustion emissions reporting, and for Victorian market-based approach compliance to be recognised under such an emissions reporting method.

Managing consumer impacts

  • APGA recommends providing direct support to low-income households and households at risk of energy hardship via consumer protection programs (such as the Energy Bill Relief Fund, payment difficulty framework, and other existing concession schemes).

Target design

  • APGA recommends a successful policy option (or combination of policy options) would rapidly accelerate renewable gas deployment while instating a long-term decarbonisation trajectory and avoiding unintended consequences.
  • APGA strongly advises that the Victorian Government engages with the Federal Government on enabling NGER reporting of renewable gas emissions in line with certificates surrendered via:
    • Duplication of Section 7.4 of the NGER Measurement Determination Compilation 15 for an electricity market based method into the relevant section for gas combustion emissions reporting; and
    • Ensuring that such a method can consider certificates surrendered under potential Victorian market-based policy.
  • APGA recommends that a holiday period be instated in the early years of any market-based policy measure.
  • APGA recommends that a renewable gas target be based on all gas consumption by customers connected to distribution and transmission in Victoria.
  • APGA recommends a 5-10 per cent renewable gas target in 2030 for Victoria. Beyond 2030, APGA proposes a 2035 target of 15-25 per cent.
  • APGA recommends that the Victorian Government base its renewable gas target on all current gas customers.

Hydrogen sub-target

  • APGA recommends using a Contracts for Difference scheme to boost hydrogen in early years of a renewable gas target.

Project eligibility

  • APGA recommends broad project eligibility while ensuring that all natural and renewable gas consumed without surrendering a renewable gas certificate is deemed to have the average emissions intensity of all gas consumed in Victoria.

Benefits of a policy mechanism

  • APGA recommends the Victorian Government recognises the primary benefit of a policy mechanism supporting renewable gas uptake as being the increased uptake of renewable gas for customers which can or must choose to decarbonise via a transition to renewable gas.

Barriers to increasing the uptake of renewable gas

  • APGA recommends that the Victorian Government does not limit its renewable gas options by basing policy on in-state renewable gas production options alone.
  • APGA recommends that the Victorian Government support the social licence of renewable gas in the Victorian community.

Certification and administration

  • APGA recommends that Victorian Government policy does not rely solely upon the GO Scheme.

Interaction with the Safeguard Mechanism

  • APGA recommends that renewable gas production facilities should at least have the option to either produce renewable gas target certificates or ACCUs.

 

About

The Australian Pipelines and Gas Association (APGA) represents the owners, operators, designers, constructors and service providers of Australia’s pipeline infrastructure, connecting natural and renewable gas production to demand centres in cities and other locations across Australia. Offering a wide range of services to gas users, retailers and producers, APGA members ensure the safe and reliable delivery of 28 per cent of the end-use energy consumed in Australia and are at the forefront of Australia’s renewable gas industry, helping achieve net-zero as quickly and affordably as possible.

APGA supports a net zero emission future for Australia by 2050[1]. Renewable gases represent a real, technically viable approach to lowest-cost energy decarbonisation in Australia. As set out in Gas Vision 2050[2], APGA sees renewable gases such as hydrogen and biomethane playing a critical role in decarbonising gas use for both wholesale and retail customers. APGA is the largest industry contributor to the Future Fuels CRC[3], which has over 80 research projects dedicated to leveraging the value of Australia’s gas infrastructure to deliver decarbonised energy to homes, businesses, and industry throughout Australia.

 

To discuss any of the details within this submission further, please contact APGA’s National Policy Manager, Jordan McCollum, on +61 422 057 856 or jmccollum@apga.org.au.

 

 

1        General consideration of a Victorian Renewable Gas Target

APGA strongly advocates for a renewable gas target. Whether state based or national, a renewable gas target has the ability to support gas use decarbonisation for all gas users, and the Victorian Government should do what is required to accelerate renewable gas industry development in Victoria.

Design of a renewable gas target and associated mechanisms is complex – APGA understands this, as it is in the process of researching its own renewable gas target recommendations. This research has helped to shape the industry recommendations found in this submission on a range of subjects including trajectory, mechanisms, liability and benefits. It has also made it clear that restricting renewable gases to only support those customers which have no choice but renewable gases undermines Australia’s opportunity for least cost gas use decarbonisation.

Alongside feedback to specific questions in Section 3 below, APGA provides the following general renewable gas target design feedback. While this feedback and more can be found throughout answers to questions, providing key points in one place will help ensure the connection between these points is realised.

1.1         The value of renewable gas and an RGT

APGA commends the Victorian Government’s recognition of renewable gases as an important gas use decarbonisation pathway for customers which have no other gas use decarbonisation alternative. Developing a renewable gas supply chain to support decarbonisation in parallel with the renewable electricity supply chain is a critical step forward in enabling whole of economy decarbonisation for Victoria and Australia as a whole.

The opportunity is even larger than Victoria has recognised in the consultation paper, which considers the renewable gas decarbonisation opportunity for customers who cannot electrify. However, there is a much broader set of gas customers which could choose to electrify their gas demand, but for which renewable gas is either a cheaper or cost competitive option. There are further customers which may wish to choose to pay more for renewable gas than choose to electrify.

Victoria has the opportunity to support gas use decarbonisation for all gas customers who wish to choose to decarbonise via renewable gas via a renewable gas target.

Victoria has access to more potential renewable gas supply than its current 193 petajoules per annum (PJpa) natural gas demand. Victoria’s biomethane production potential is significant, and Victoria can access the over 500 PJpa biomethane production potential across Australia, predominantly in states already connected to Victoria via gas pipelines.[4]

Viewing this through a customer choice lens, supported by the abundant supply potential, improves the decarbonisation opportunity represented by a renewable gas target. This lens also improves the likelihood of success of a renewable gas target. By basing a target upon as many customers as possible, the volatility of individual customer sector demand is smoothed, reducing unintended consequences of a moving target.

A renewable gas target inclusive of gas power generation can also support decarbonisation of the Victorian grid. Gas power generation (GPG) fuelled by biomethane or hydrogen can secure the Victorian grid with firm, dispatchable renewable electricity generation. The South Australian Government is demonstrating the potential of hydrogen in this regard, with planning well underway for a hydrogen power plant comprising a 200MW power station, 250MW electrolyser and 3,600 tonne storage facility at a cost of $600 million. Hydrogen electrolysis can additionally provide grid firming services as well by acting as demand response. Simply having more customers using renewable gas rather than renewable electricity also helps secure the Victorian grid by reducing grid demand overall.

1.2         RGT design

APGA has engaged ACIL Allen to undertake macroeconomic analysis of renewable gas target design. Through this process, industry has considered many of the complexities behind renewable gas target design. The final report for this project is anticipated within 4 – 6 weeks of lodging this submission and an interim report will be provided confidentially to the DEECA. The most important points to consider are covered within this section, with additional learnings noted in answers to consultation questions below.

1.2.1      RGT Trajectory

APGA recommends designing a renewable gas target trajectory from 2025 through 2050. This is primarily based on ACIL Allen’s modelling and with reference to Diffusion of Innovation Theory, which depicts the uptake rate generally followed by new product diffusing into an incumbent market. Note that the implementation of RET effectively supported the renewable electricity industry to follow the Diffusion of Innovation curve (see Appendix 1).

The renewable gas industry has the potential to be even more ambitious than this in the immediate term. Bioenergy Australia has identified 26 PJpa worth of investment-ready biomethane production projects in Victoria alone.[5] This represents potential biomethane production greater than 10 per cent of current Victorian gas demand.

As such, APGA proposes an initial straight-line trajectory of 5-10 per cent renewable gas by 2030, and 15-25 per cent renewable gas target for 2035. This percentage refers to the current total Victorian gas demand of 193 PJ (Table 7 of the consultation paper).

Note that this does not perfectly follow the ‘least cost’ trajectory modelled by ACIL Allen. This is appropriate in comparison to the RET (see Question 3.1.a).

1.2.2      RGT Mechanism

Mechanisms to ensure an RGT is met can loosely be divided into market-based and government-funded mechanisms, as per the consultation paper. A market-based mechanism based upon a certificate scheme is best suited to deliver Victoria’s long term renewable gas uptake goals. This recommendation takes lessons learned from the success of the RET and applies these to a similar renewable energy uplift challenge.

This comes with its challenges however, noting administrative and legislative burden and certificate discovery challenges for customers in early years. To address the first challenge, APGA proposes a government-funded mechanism across early years, being cautious of the negative impacts of the ending of such schemes. To address the second challenge, APGA recommends a holiday period across the first three years of the scheme liability period in order to allow for certificate market development and discovery to occur – a solution successfully applied under the RET.

1.2.3      Liability and Benefit

A market-based mechanism should make wholesale customers and retailers liable for the cost of compliance, with retailers passing this cost on to retail customers. The cost of decarbonisation should be spread across as broad a base as possible.

If the need for all gas customers to decarbonise is combined with the customer choice model of renewable gas use cases, gas customers will either: achieve least-cost or cost comitative decarbonisation by transitioning to renewable gas, or are better off electrifying their energy demand. This cost liability is only a liability unless customers are able to gain the emissions reduction benefit of transitioning to renewable gas through compliance with the liability, in particular under National Greenhouse and Emissions Reporting (NGER) requirements.

Currently, NGER legislation would not allow those liable to pay for renewable gas certificates under Victorian policy to receive the emissions reduction benefit of their liability. This could be addressed by the Victorian Government engaging with the Federal Government to seek amendment of the NGER Measurement Determination such that surrendering renewable gas certificates to comply with Victorian policy conveys the emissions intensity of renewable gas in the customers emissions reporting.

Once it is possible for gas customers to receive the emissions reduction benefit in line with their liability under Victorian policy, focus turns to who the scheme is designed to support. If the scheme is designed to support high heat industry only, then only high heat industry should be liable. If a limited number of customers are targeted for decarbonisation under Victorian policy, other customers should not be liable to pay for the decarbonisation of others. This relates to the basis on which a target is set.

Once this is addressed, all gas customers in Victoria will be able to gain the emissions reduction benefit of a market-based approach to delivering a renewable gas target.

1.2.4      Jurisdiction

Due to the need to amend NGER legislation, APGA typically advocates for a national renewable gas target. APGA understands the desire for Victoria to have its own renewable gas target in line with its ambitious emissions reduction targets. However, a national renewable gas target can ensure that Victorians aren’t paying a higher cost for national decarbonisation when lower cost options could exist elsewhere.

1.3         Risks to industrial decarbonisation through an RGT

For customers which only have the option to decarbonise via renewable gas, the greatest risk to decarbonisation of is policy which undermines the fair and equitable access to renewable gases – for all Victorian gas customers. Victoria has access to more potential renewable gas supply than total current natural gas demand – there is no supply-constraint limitation to demand. As such, policies which prohibit customers from choosing renewable gas will reduce the total user pool and will only serve to increase gas infrastructure costs for those customers who can only decarbonise through renewable gas.

Section 1 of the consultation paper suggests that the Victorian Government intends to exclude residential gas use when developing renewable gas policy. Section 3 of the paper meanwhile implies that residential gas customers may be liable for policy compliance, despite policy excluding them from the positive impacts for which they may be paying. APGA strongly submits that neither of these options suit the needs of Victorians. The Victorian Government must both include residential customers and allow them to receive the emissions reduction benefit of the renewable gas production their liability helps to fund.

Excluding residential gas customers – who represent 50 per cent of all gas consumed in Victoria – risks undermining the purpose and intent of a Victorian renewable gas policy. Forcing all residential gas customers to electrify will directly result in higher costs to those industrial customers for whom renewable gas is the only option – presently, residential customers represent well over 90 per cent of the revenue for distributors. Instead, sharing the distribution network between residential, commercial and industrial gas users allows the network to operate at low cost for each individual customer.

This is not to say that gas customers who could decarbonise more cheaply via electrification should be prevented from electrifying – quite the opposite. A market-based policy to achieve a renewable gas target will incentivise electrification for those customers who can achieve lower cost decarbonisation via this pathway. At the same time, the many gas customers who can achieve lower cost decarbonisation or choose gas at equal or higher cost to electrification, can all support the network costs experienced by customers which are unable to electrify.

2        Specific feedback to consultation questions

It is important that our comments be considered in the context of our response to question 3.9.a (barriers to increasing the uptake of renewable gas), where APGA corrects several statements made within the consultation paper. In particular, consider:

  • 100 per cent hydrogen can be transported in new steel pipelines designed for hydrogen service. Many existing gas pipelines can be readily converted to 100 per cent hydrogen.
  • Distribution networks can be upgraded to 100 per cent hydrogen at minimal cost, as many are already suitable for hydrogen transport. Constraints of 10 to 20 per cent hydrogen blend are considered by industry to ensure existing customer appliances can use hydrogen–gas blends without modification, not due to inherent network constraints.
  • Victoria has access more renewable gas than considered by this paper in the short, medium, and long term. Policy should not be made on the basis of constrained supply.
  • Firm renewable gas is only high cost in relation to their fossil fuel alternative, firm natural gas. It is cheaper or cost competitive in comparison to firm renewable electricity.
  • The lack of incentive to switch to renewable gas is due to a lack of Federal recognition of renewable gas emissions intensity under NGER, not due to anything inherent to renewable gas or renewable gas prices where renewable gas is economic (see above).
  • Many households can benefit from using renewable gases in the home, rather than strictly relying on electrification to decarbonise.

2.1.a – Key considerations of biomethane and hydrogen

Do you agree with the use cases this paper has set out for biomethane and renewable hydrogen?

The industrial high heat sub-sector does include some gas customers which physically do not have an option other than renewable gas – or shutting down their business – to decarbonise. However, there are also a range of customers in this sub-sector which physically could use either renewable electricity or renewable gas, but with different economic or secondary impacts. Secondary impacts could include changes to product quality, practicalities around associated processes, or impacts other than cost which drive a customer to preference one option over the other.

Rather than taking a binary or absolute view of which option is available to customers between renewable gas or electrification, the Victorian Government has the opportunity to enable customer choice, where customers have the ability to choose either. Market driven least cost outcomes to gas use decarbonisation is supported by enabling both options, rather than constraining customers to only one.

This same opportunity to enable customer choice between renewable gas and electrification applies to other sub-sectors, with the exception of industrial feedstock and GPG. Industrial – low heat, commercial buildings, and all other gas customer sub-sectors which directly use gas as an energy source could be supported to achieve least cost decarbonisation by considering their ability to choose between renewable gas and electrification options.

This isn’t to say that there is no nuance when it comes to industrial feedstock and GPG gas customers. More research into the combined capital and energy costs of converting industry using methane today to other feedstocks could uncover greater opportunity to decarbonise existing industry or start entire new renewable gas feedstock industries – a topic on which we will defer to the expertise of Chemistry Australia. Constraining GPG to only using hydrogen misses the opportunity to use biomethane in existing GPG to produce dispatchable renewable electricity by consuming biomethane.

Choosing to focus on binary or absolute customer decarbonisation options risks governments picking the wrong winners. The market, once appropriately incentivised to choose decarbonisation options, can best ensure customers access the decarbonisation solution which best suits their unique set of needs.

Figure 1 demonstrates the relative cost effectiveness of using renewable electricity or renewable gases to decarbonise different carbon intensive sectors. Note the range where renewable gas is cost comparative with renewable electricity. The importance of this overlap becomes apparent when used to determine a merit order of emissions reduction.

Figure 1: Grid-connected renewable electricity vs decarbonisation of current energy pathways

Source: BCG, 2023, The role of gas infrastructure in Australia’s energy transition

Figure 2 shows that the most cost-effective decarbonisation comes from applying the next 174 TWh of renewable electricity to decarbonisation of coal fired generation and light vehicle use before decarbonising any other sector via renewable electricity. Furthermore, the next 166TWh of renewable electricity decarbonisation could be achieved through other forms of renewable energy for equal or lesser cost.

This analysis shows there is a quicker and lower cost way to decarbonise all sectors considered within the analysis compared to electrification alone. The second half of the decarbonisation merit order could be pursued simultaneously by using renewable gas and other renewable fuels instead of electrification. Residential and commercial heating and cooking sits on the boundary of the cost competitive and lower cost portions of the decarbonisation priority stack.

Pursuing parallel renewable electricity and renewable gas decarbonisation can double the pace of decarbonisation while reducing cost. This would allow renewable electricity to be used in its highest value applications decarbonising coal fired generation and light vehicles.

Figure 2: Decarbonisation by renewable electricity priority stack, with APGA analysis (in black) of accelerating decarbonisation considering the renewable electricity priority stack

Source: APGA analysis of BCG, 2023, The role of gas infrastructure in Australia’s energy transition

 

 

2.1.b - Key considerations of biomethane and hydrogen

Are there any other use cases that should be incentivised through a policy mechanism?

Table 1 of the consultation paper implies that the only renewable gas use cases to be incentivised through a policy mechanism are:

  • Industrial – high heat
  • Industrial feedstock
  • GPG constrained to hydrogen
  • Industrial – low heat (potentially)

By taking the more nuanced customer choice view of renewable gas use cases, this list can be expanded to include renewable gas for all use cases.

This becomes an important consideration relative to questions about target basis and market-based policy liability (see questions 3.2, 3.4, 3.5 and 3.7). A market-based policy to support a renewable gas target would achieve the most decarbonisation and can rely on the most stable forecasting when this target is based on the greatest number of gas customers. However, it would be unreasonable to apply scheme liability to customers unable to benefit from decarbonisation via renewable gas. Knowing that all use cases identified by the Victorian Government can benefit from decarbonisation via renewable gas removes any downside to expanding the scheme to cover all Victorian gas customers.

3.1.a – Policy objectives

Regarding specific technology development, do you think the objective should be to:

  1. consider all renewable gases neutrally (e.g., the lowest cost is supported); or
  2. target specific technologies (e.g., renewable hydrogen)?

Consider this on the basis of commercial readiness, emissions and energy intensity.

APGA supports a renewable gas target as a mechanism to drive least cost gas use decarbonisation. Policy which considers all renewable gases neutrally is required to deliver this outcome for gas customers. Importantly, such policy would not exclude hydrogen production, and can still lead to hydrogen production investments where such investments suit customer needs.

There are a few aspects to consider alongside this response which are addressed under Question 3.6.

  • Policy supporting renewable gases equally could lead to greater pressure to innovate within the hydrogen sector, further accelerating the hydrogen learning curve.
  • Policies which allow customers to support project proponent investments by contracting renewable gas or certificate supply will best support the uptake of hydrogen if all options are supported.

The RET is a useful precursor to the concept of a broad-based renewable gas target. The RET considered all forms of renewable electricity equally. Solar PV, wind and biogas powered generators all have different levelised costs, just like different forms of biomethane and hydrogen do. In implementing the RET, the Federal Government enabled market forces to apply pressure to those technologies which cost more, driving innovation. Importantly, the higher cost technologies didn’t have to achieve lower cost in order to prosper.

Enabling all technologies in the transition is necessary to allow the pace of change which is required to achieve decarbonisation targets. Setting policy with a binary view of what is cheapest misses the opportunity to leverage market forces to accelerate the transition.

3.2.a – Market-based approach

Should a renewable gas policy in Victoria be government-funded or market-based? Why?

Once it has been agreed that a target should be pursued, multiple mechanisms can be considered to achieve the target outcome. APGA proposes parallel solutions, some of which are market based, some of which are government funded.

As a foundation, a market-based policy is most likely to deliver the desired outcome in the long term. While such schemes lead to customers baring the cost of renewable gases, APGA supports renewable gases on the basis that they are either lower cost or cost competitive decarbonisation options for said customers. While renewable gas may be more expensive than natural gas, an obligation to pay for renewable gas is not expected to increase customer decarbonisation costs in comparison with the next most costly renewable energy option.

It is APGA’s position that a certificate scheme form of market-based policy can best achieve the target outcome. However, if Victoria seeks a more rapid start to renewable gas uplift, a parallel government funded scheme can deliver quicker uptake in the immediate term. A government-funded scheme could be compatible with an underlying market-based policy, providing a boost to production in early years.

Care is needed so that producers do not become reliant on government funding as the only basis on which they are able to be competitive. Further, government-funded schemes must take care to not produce damaging price cliffs at their conclusion as these may stall renewable gas uptake at the point of scheme conclusion.

3.2.b – Market-based approach

Have we captured the advantages and disadvantages of a market-based approach? Are there any missing?

APGA agrees with the advantages identified for a market-based approach. To the two disadvantages, consider the following additional issues.

Cost premium borne by customers

The cost premium borne by customers is only with relation to the current fossil fuel alternative – not the next most cost-effective renewable energy option. If Victoria agrees that these customers need to decarbonise, then this is a reasonable cost to bare.

The more nuanced customer choice view of renewable gas use cases is based upon the understanding that renewable gases will be a cheaper or cost competitive option for gas customers to decarbonise. This is relative to other renewable energy options, not natural gas. So long as customers are able to access the decarbonisation benefits of a renewable gas target, then the only cost which customers will bear will be the economic cost of decarbonisation through renewable gas.

On this basis, APGA considers the cost premium borne by customers to be a positive aspect of a market-based approach. This is because customers will be paying for what they get – gas use decarbonisation – at equal or lesser cost than they would bear through other options.

From this position, a secondary benefit of a renewable gas target can be seen. Customers which can achieve lower cost decarbonisation through electrification will be incentivised through a market-based approach to make a choice – stay on gas or make the move to electrification. Due to the gradual nature of a market-based approach, these customers are likely to experience the pressure of paying for renewable gases slowly over time, rather than experiencing a shock change in price, reducing the burden of this impact upon customers while sending a strong, predictable market signal. Of course, customers which prefer gaseous energy enough to pay a premium for renewable gas over renewable electricity can still make the choice to stay on renewable gas.

The most important condition of the above being true for a market-based approach is the ability for customers to be able to receive the benefit of renewable gas decarbonisation – lower emissions. This means that an effective market-based scheme must convey the lower emissions of renewable gas to customers for the percentage of renewable gases which they are liable for. This typically requires amendment to National Greenhouse and Energy Reporting (NGER) legislation, hence APGA typically advocates for a national renewable gas target scheme.

Compilation 15 of the NGER Measurement Determination 2008 includes a market based method to electricity emissions reporting in Section 7.4, but no market based method to recognise renewable gas combustion.

APGA recommends the Victorian Government engage with the Federal Government to request that the emissions reporting method under section 7.4 of the NGER Measurement Determination be replicated for gas combustion emissions reporting, and for Victorian market-based approach compliance to be recognised under such an emissions reporting method.

Renewable gases not delivered to best use

This disadvantage becomes an advantage of a market-based approach when considering the customer choice view of renewable gas use cases. An approach which allows more gas customers to access more renewable gas on an economic basis can only incentivise more rapid decarbonisation.

The only reason to not take this approach is a perception of limited supply. As noted under Question 3.9.a, Victoria has access to sufficient renewable gas supply to decarbonise all gas customers. As seen through the RET, production projects to deliver this supply are expected to arise once renewable gases are incentivised by policy. Bioenergy Australia has identified 26 PJpa of renewable gas production projects in Victoria without any advantageous policy, with 40 PJpa having arisen in states connected to Victoria by gas pipeline.[6]

APGA has no doubts that ambitious targets by Victoria will be met with sufficient projects to supply the renewable gas required to decarbonise all gas use in the state.

3.3.a – Types of policy mechanisms

Have we captured the potential policy options (and their advantages and disadvantages) to drive the uptake of renewable gas?

Section 3.3 of the consultation paper provides a largely accurate reflection of different policy options for delivering a renewable gas target. Where different options have advantages and disadvantages, consider the opportunity to use more than one option in parallel.

Table 1 considers the most relevant advantages and disadvantages APGA sees in the different policy options. An ideal option would rapidly accelerate renewable gas deployment while instating a long-term decarbonisation trajectory and avoiding unintended consequences. No single policy achieves this. However, a combination of policies would.

Table 1: High level advantages and disadvantages of different policy options

Policy option

Advantage

Disadvantage

Feed-in tariffs

·         Government funding reduces burden on customers

·         Funding accelerates deployment beyond market forces

·         Likely shorter term

·         Single price risks under-funding some producers and over-funding others

·         Price cliff at end of scheme, risking stalled deployment

Reverse auctions or competitive grants

·         Government funding reduces burden on customers

·         Funding accelerates deployment beyond market forces

·         Government allows producer to be competitive, reducing competition/innovation

·         Likely shorter term

·         Price cliff at end of scheme, risking stalled deployment

Certificate-style schemes

·         Creates underlying long-term decarbonisation trajectory

·         Customers experience market outcomes

·         Not government funded

·         Slower uptake and harder discovery in early years

·         Requires administrative / legislative development

Direct obligation

·         Creates underlying long-term decarbonisation trajectory

·         Customers experience market outcomes

·         Not government funded

·         Slower uptake and harder discovery in early years

·         Requires administrative / legislative development

3.3.b – Types of policy mechanisms

Which policy mechanism would be best suited to deploy renewable gas in Victoria? Why?

Based upon the advantages and disadvantages in Table 1 above, APGA recommends pursuing a certificate-style scheme boosted by a government-funded scheme.

The underlying certificate-style scheme supported by an initial government-funded scheme would ensure long-term emissions reduction targets are achieved, delivering least cost options through market forces over time.

To address the disadvantage of slower uptake and harder certificate supply discovery for customers in early years for the certificate-style scheme, APGA recommends the Victorian Government take a similar approach as the RET in which an initial 3-year holiday period was provided before mandating compliance with the scheme (see Question 3.5.a).

If implementing a government-funded scheme, the Victorian Government should consider a requirement for renewable gas produced to go into gas infrastructure, as to allow as many customers as possible to gain advantage from renewable gas produced through Victorian Government funding.

3.3.c – Types of policy mechanisms

What are the critical factors or policy design elements that are needed for successful project investment?

APGA defers to renewable gas producers on this topic.

3.4.a – Managing consumer impacts

Do you agree with the energy consumer types most impacted above? Are any user types, or potential impacts, missing?

APGA considers the list under Section 3.5 as identifying the main groups which the Victorian Government may need to support to resolve negative impacts alongside renewable gas supportive policy, and would be happy to consider any other groups raised in this consultation process.

Prior to highlighting the below advice relating to additional user types or potential impacts missing, APGA notes that this section implies that renewable gas supportive policy could impact households. As addressed under Question 3.4.b of its response, APGA comments on the appropriateness of customers which are unable to gain emissions reduction benefit from the scheme being liable to pay for the scheme and proposes options to address this.

Potential impacts: Positive impact

The positive benefits for customer segments had not been considered. There is an opportunity for all customer segments to have positive cost impacts where renewable gases are cost competitive or cheaper than renewable energy alternatives. This is particularly the case for customer segments which may struggle to cover the higher upfront cost of electrification – having access to a renewable gas alternative can remove the need to accept the higher upfront costs of decarbonisation of higher cost pathways.

Potential impacts: Market deterioration through adjacent policy

In the event that adjacent policy significantly reduces the number of distribution network participants, all remaining gas customers are at risk of higher than necessary gas distribution network costs. Economies of scale are important for existing users of natural gas and future users of renewable gas. If the Victorian Government genuinely intends to pursue a renewable gas industry, it must consider the economics of scale, both to minimise costs for existing users, and to minimise costs for industry development.

Impact context: Cost comparisons

Section 3.5 considers cost comparisons between renewable gas and natural gas. Considering Victoria’s world leading high emissions reduction targets, it is also important to consider the total cost to customers of decarbonisation via renewable gas and its net zero alternatives. If all customer segments must decarbonise, this latter comparison is just as important as the immediate impact, potentially more so considering the gradual nature in which a target trajectory would apply price pressure to customers.

User types: Differences between new and existing households

Analysis by BCG (Appendix 2) indicates that there is a difference in impact between new and existing households. In particular, the economic impacts upon households which do not need to change gas appliances to access renewable gas is significant.

3.4.b – Managing consumer impacts

What potential consequences should we consider in analysing the impact of potential policy costs?

The paper notes that increasing numbers of gas users leaving the gas network to switch to electricity may also result in a diminishing pool of users still connected to the gas network.

While some electrification of gas demand is anticipated, the most recent economic analysis foes not support gas use reducing by levels sufficient to increase network costs to unacceptable levels. This can be seen in Exhibit 8 of a recent report by BCG (Appendix 2). This analysis remains relevant until Victoria starts to ban customers from using renewable gas.

To best manage the impact of increased costs on energy consumers, network costs need to be spread amongst as many users as possible. It is critical for gas users that need renewable gas that the potential future customer base be as broad as possible. This includes customers which have the option to decarbonise via other means. While customers are able to achieve cost competitive outcomes decarbonizing via renewable gas, this remains a valid approach to supporting least cost decarbonisation of all gas customers.

Ensuring all customers who can use renewable gas have the right to choose to use renewable gas will assist in driving least cost gas networks and renewable gas supply for those customers who need it most.

3.4.c – Managing consumer impacts

What are the best support policies for the different energy consumer types?

As noted above, please consider comments provided under Question 3.3.a relating to liability and benefit from renewable gas supportive policy, in particular with respect to household customers.

Active management: Low income and at-risk of energy hardship households

If renewable gas policy measures impact households, APGA recommends providing direct support to low-income households and households at risk of energy hardship via protections similar to the Energy Bill Relief Fund.[7]

This could be achieved through providing support to energy customers which meet similar eligibility as the Energy Bill Relief Fund, and requiring energy retailers to specify charges relating to renewable gas policy obligations.

Retailers could deduct renewable gas policy obligation charges from bills for customers which have registered eligibility details with the retailer, seeking reimbursement from the Victorian government in bulk on their behalf. Alternatively, the Victorian Government could develop an online interface for customers to seek reimbursement of charges which they can identify on their bill as relating to renewable gas policy obligations.

Active management: Large industry

The majority of businesses to benefit from gas use decarbonisation via renewable gas will be large industry that may fit the RET description of an Emissions Intensive Trade Exposed (EITE) business. As such, any consideration of large industry or EITE compensation or exemptions should be issued sparingly as to not undermine the intent of the scheme.

Renewable gases will likely be the least cost gas use decarbonisation option for large industry and EITE customers which choose to maintain their gas supply throughout deployment of a renewable gas target.

Passive management: Policy supportive of a future renewable gas market at scale

Policies which support maintaining more future renewable gas customers will best support those gas customers which can only decarbonise via renewable gas, or for which it is the cheaper decarbonisation option. More renewable gas customers mean more customers to share the cost of distribution networks. Customers which do not have a choice will be negatively impacted by reduced gas network demand resulting in higher costs for their only decarbonisation pathway.

Victoria can access sufficient renewable gas production potential to supply all current gas customers (Question 3.5.b). As such, policies which allow or even support gas customers choosing renewable gas or electrification options will support lower network costs for customers which do not have a choice. Policies which ban gas customers from using renewable gases act against the best interests of customers which do not have a choice.

3.5.a – Target design

Have we captured the relevant considerations for target design? If not, what aspects are missing?

Target design is a complex task. As such, APGA will break its feedback up into points of agreement, missing points, and points requiring further consideration.

Points of agreement

APGA agrees with key considerations identified within the consultation paper around target design, including:

  • Considering renewable gases in energy units (gigajoules, terajoules, petajoules), not volumetric units (standard cubic metres), adding that this best aligns with contract carriage gas market and facilitated gas markets which currently trade in energy units.
  • Targets as quantities of renewable gas which cannot reduce, guided by percentages of current gas demand, potentially set and refined at later dates (i.e., every 5 years).

Missing points

Emissions conveyance

The consultation paper is silent on the conveyance of emissions reduction benefit to customers liable under proposed market-based policy options, although the benefit is implied in a few places. A customer which is liable to purchase and surrender a certain quantity of certificates should be provided the emissions reduction benefit associated with this liability. As this can only be achieved via amendments to Federal NGER legislation, APGA has advocated for a national renewable gas target.

APGA recommends a successful policy option (or combination of policy options) would rapidly accelerate renewable gas deployment while instating a long-term decarbonisation trajectory and avoiding unintended consequences.

Recommendations under Question 3.3.a and b are made on this basis.

Two parallel and complimentary principles that APGA recommends for successful renewable gas policy are:

  • Customers which are liable under a scheme receive the decarbonisation benefit for the quantities of renewable gas for which they are liable; and
  • Only customers which receive the decarbonisation benefit of renewable gas should be made liable for the scheme.

APGA strongly advises that the Victorian Government engages with the Federal Government on enabling NGER reporting of renewable gas emissions in line with certificates surrendered via:

·         Duplication of Section 7.4 of the NGER Measurement Determination Compilation 15 for an electricity market based method into the relevant section for gas combustion emissions reporting; and

·         Ensuring that such a method can consider certificates surrendered under potential Victorian market-based policy.

 

Holiday period

APGA recommends that a holiday period be instated in the early years of any market-based policy measure.

Schemes such as the RET and a possible market-based policy to achieve a renewable gas target suffer from certificate access and supply transparency issues in the early years of operation. In particular, small- to medium-scale industry which employ 1FTE or less to manage gas supply may struggle to source sufficient certificates early during the scheme when the market is starting to form, risking non-compliance.

This challenge was solved within the RET by introducing a “holiday period”. Liable entities were not held to account to comply with the target for the first years of operation, providing sufficient room for market development. Upon the end of the holiday period, liable entities were required to maintain compliance with the scheme target at that point in time. This provided time and line of sight to obligation without penalising small to medium customers which are unable to dedicate substantial time to sourcing certificates as markets form.

Points requiring further consideration

Total gas sales figure to which the renewable gas percentage is applied

APGA recommends that a renewable gas target be based on all gas consumption by customers connected to distribution and transmission in Victoria.

The consultation paper proposes two options, both of which have disadvantages. APGA proposes a third. The current two options and a simplified comparison of advantages and disadvantages are shown in Table 2 below alongside a third option which APGA recommends.

Table 2: Advantages and disadvantages of gas sales options

Options

Advantages

Disadvantages

1.       Sales to distribution-connected customers only

·         Simple existing complete data collection avenue via retailer audited gas sales to customers

·         Doesn’t cover all gas consumed in Victoria

2.       Sales to distribution-connected customers and sales to customers directly connected at transmission level

·         Covers more gas customers

·         Proposed to be based on all gas purchases made within Victoria, which does not cover all gas used in Victoria noting substantial supply from interstate.

3.       All gas consumption by customers connected to distribution and transmission in Victoria

·         Simple existing complete data collection avenues by combining retailer audited gas sales to customers and supply to wholesale customers as recorded by AEMO

·         Covers all gas consumed in Victoria

 

Note regarding Table 6 of the consultation paper: large industrial users need to decarbonise too. If renewable gases are not a cost competitive option for large industrial users to decarbonise, a multi-decadal renewable gas target scheme as proposed within this paper will provide these customers with the time and impetus to transition to their least cost decarbonisation pathway.

Risk associated with volatile GPG load

Figure 3 of the consultation paper considers Victorian GPG. Comparing this with total Victorian gas demand over the same period shows that total Victorian gas demand is more stable than GPG demand alone (Figure 3 below). This indicates that the risk of unstable GPG demand to a renewable gas target design can be mitigated by include as much many gas customers as possible within the scheme.

There will be volatility risks associated with all users. Ensuring that future targets are unable to drop below current targets will ensure revenue security is maintained for potential producers.

Figure 3: Comparison of Victorian GPG and total gas demand

Source: APGA Analysis of Figure 3, DEECA, 2023, Victoria’s renewable gas consultation paper, and data from Australian Energy Statistics Table H

3.5.b – Target design

What are your views on:

  1. the final target year and scheme duration?
  2. target levels, including in intervening years?
  3. target design?
  4. target basis, including whether the target should be based only on distribution connected sales or include transmission (i.e. Victoria-wide) sales?

Target date

APGA agrees that the target year must provide a sufficient and realistic timeframe over which revenue certainty is sufficient for project financing. This enables industry development and cost reductions. The combination of target date and target level should take into consideration the Diffusion of Innovation curve as discussed in the Target Design section below.

Target levels including intervening years

APGA recommends a 5-10 per cent renewable gas target in 2030 for Victoria,. Beyond 2030, APGA proposes a 2035 target of 15-25 per cent.

Victoria’s current emissions reduction target commits the state to reducing emissions by 75-80 per cent below 2005 levels by 2035, and to reaching net zero by 2045. APGA considers there is no way to achieve this without a strong and ambitious renewable gas target. Given this, the extended aspirational target seen in Figure 5 of the consultation paper is insufficient.

Bioenergy Australia has identified 26 PJpa of biomethane production projects in Victoria alone – prior to introduction of advantageous policy.[8] Another 40 PJpa worth of projects have been identified in states connected to Victoria via gas pipelines.

Having identified a total 2022 gas demand of 193 PJ (Table 7 of the consultation paper), a 10 per cent renewable gas by 2030 target is achievable in Victoria, but APGA appreciates a range is appropriate to consider first in setting a target. Hence, we recommend a 5-10 per cent target (Figure 4 shows the trajectory of a 10 per cent target).

APGA is currently undertaking a CEG modelling project examining renewable gas targets with ACIL Allen and will provide more information on target levels on project completion in coming weeks.

Figure 4: Example of a10 per cent target by 2030 following Diffusion of Innovation Curve

Target design

Target design should consider the Diffusion of Innovation Curve model (Figure 5). The Diffusion of Innovation curve is approximately followed by new market entrants which enter and eventually displace incumbent market participants over time. This pathway has been followed by renewable electricity and can be followed by renewable gas (Figure 6). More information on the Diffusion of Innovation Curve can be found in Appendix 1.

Figure 5: Diffusion of Innovation curve and Diffusion of Innovation curve examples

Figure 6: Diffusion of Innovation curves for renewable electricity and renewable gas

Two key lessons can be taken from the Diffusion of Innovation model:

  1. Ramp up trajectory – a gradual increase in uptake can support higher increases in uptake later on.
  2. Support until beyond 16 per cent market share, which represents the innovators and early adopters within the market. Stopping support before this point risks the market stalling having not reached the point of early majority uptake.

Target basis

APGA recommends that the Victorian Government base its renewable gas target on all current gas customers.

Victoria has the opportunity to decarbonise all gas demand, reduce the risk of high network costs for remaining gas customers, and incentivise the greatest uplift in parallel renewable gas production uplift by basing a renewable gas target on all gas customers identified within Table 7 of the consultation paper.

As demonstrated above, there is sufficient supply projects already identified to support 10 per cent of total gas demand in Victoria by 2030. These projects are in development even prior to advantageous policy being put in place. As was found under the RET, APGA has no doubts that projects to commercialise more renewable gas production potential will arise once a target is in place.

Further, there is no downside if this does not occur by 2035. If a target based on all gas customers fails to be met by 2035, the Victorian government can pivot its emissions reduction strategy at this point in time.

3.6 – Hydrogen sub-target

  1. Have we captured the issues, and the advantages and disadvantages, of including a renewable hydrogen sub-target? If not, what is missing?
  2. Should there be a renewable hydrogen sub-target in any policy design?
  3. Does hydrogen have a greater role in the decarbonisation of the gas network following the announcement of recent Australian and international policies (e.g., the Hydrogen Headstart program and United States Inflation Reduction Act)?

APGA recommends using a government-funded scheme to boost hydrogen in early years of a renewable gas target.

Victorian gas customers deserve access to the least cost gas use decarbonisation opportunities. Specifying that higher cost gases be introduced before lower cost cases fails to deliver the lowest cost option for customers.

A market-based policy option will support the option of customers choosing to support hydrogen production investments via certificate purchase contracts where it suits customer needs. The pressure of a competing form of renewable gas will also spur innovation within the hydrogen sector, incentivising innovative solutions to bring the cost of hydrogen down. This could accelerate the rate of hydrogen cost reduction overall – consider the Case Study included under Question 3.1.

However, early development of hydrogen projects is worthy of support. Early hydrogen projects support the technology base move up the commercial readiness index and down the cost curve. The same is true for biomethane projects, and it a separate biomethane sub-target may be a useful consideration.

3.7 – Project eligibility

  1. Have we captured all the potential end uses of renewable gases?
  2. Have we captured the advantages and disadvantages of broad project eligibility?
  3. Should any Victorian renewable gas policy allow behind-the-meter, transport and/or electricity firming projects to be eligible?

APGA recommends broad project eligibility while ensuring that all natural and renewable gas consumed without surrendering a renewable gas certificate is deemed to have the average emissions intensity of all gas consumed in Victoria.

A fundamental principle of a market-based policy for delivering a renewable gas target is that the customers which are liable for surrendering certificates are able to access the emissions reduction benefits of doing to. This creates complexity in selecting project eligibility. In general, considering a broader range of projects enables least cost certificate generation. However, considering an eligible project range broader than only gas system connected projects creates double counting risk in emissions reporting when conveying renewable gas emissions via renewable gas certificates.

Consider a green hydrogen for behind the meter (BTM) industry use project, which may only require a $1/GJ certificate price to be economic compared to a distribution connected project which requires a higher certificate price to be economic. The low-cost transport project certificates will create lower burden for gas customers which are required to surrender certificates. However, allowing gas customers surrendering certificates to claim renewable gas scope 1 emissions of consumption alongside certificate surrender risks double counting, if the actual user of the hydrogen considers zero scope 1 emissions from hydrogen use as well.

There are three solutions to the double counting problem.:

  1. Ensure that all natural and renewable gases consumed without surrendering a renewable gas certificate is deemed to have the average emissions intensity of all gas consumed in Victoria (same approach as renewable electricity the NEM).
  2. Only consider gas transmission and distribution infrastructure connected renewable gas supply as eligible.
  3. Do not convey the scope 1 emissions of renewable gas consumption, leading to customers being liable for the costs of renewable gases without receiving the benefits.

These solutions are in order of best to worst impact to customers as well as being in order of highest to lowest complexity and effort on behalf of government. The Victorian Government needs to decide whether it wishes to put in the necessary effort to address this complexity in order to deliver the best possible outcome for Victorian energy customers.

APGA considers the third option untenable for gas customers.

BTM Production

The second option can still enable movement towards a renewable gas target and support for renewable gas production via BTM renewable gas projects. BTM renewable gas consumption reduces the total quantity of network connected gas customers, and hence reduces the total quantity of Victorian gas upon which the quantity target is based. This, alongside gas demand volatility, is why targets should be set and reset at multiple times across the period in which a renewable gas target is sought.

Direct use of renewable gases is already recognised under NGER, hence BTM customers will receive the emissions reduction benefit of renewable gas consumption. However, current examples of BTM renewable gas production indicate that this is a more expensive option than receiving renewable gases via gas infrastructure.

Interstate supply

As explored under Question 3.9.a, renewable gas certificates produced by interstate renewable gas producers should be eligible for consideration under Victorian policy. This will enable customers to access large volumes and lower average costs when complying with a market-based policy.

3.8.a – Benefits of a policy mechanism

Have we captured the co-benefits of a renewable gas policy mechanism?

  1. What is missing or needs to be changed?

APGA considered there are several areas either needing amendment or missing.

Needing amendment: primary benefit

The paper states that the primary benefit of using a policy mechanism is “the increased uptake of renewable gas (where users cannot electrify).” As covered under Question 2.1.a, this can be expanded to:

The increased uptake of renewable gas for customers which:

  • Cannot electrify;
  • Can achieve lower cost decarbonisation using renewable gas compared to electrification;
  • Can choose to decarbonise via renewable gas or electrification as cost competitive options; or
  • Wish to pay a premium over electrification to decarbonise via renewable gas due to a preference based on non-economic considerations, including quality, practicality and cultural considerations.

Or put more simply - The increased uptake of renewable gas for customers which can or must choose to use renewable gas.

APGA recommends the Victorian Government recognise the primary benefit of a policy mechanism supporting renewable gas uptake as being the increased uptake of renewable gas for customers which can or must choose to decarbonise via a transition to renewable gas.

Missing co-benefit: economic benefit of reusing existing infrastructure

Victoria has tens of billions of dollars’ worth of gas infrastructure which can deliver renewable energy with little or no additional cost beyond its operation today. The economic co-benefit of reusing existing infrastructure rather than requiring upgrade or duplication of other infrastructure to deliver different forms of renewable energy has a significant positive impact on costs to customers.

Missing co-benefit: Opportunity to use lower cost energy infrastructure

Gas transmission, distribution and storage infrastructure are all lower cost compared to electricity infrastructure.[9] The opportunity to leverage lower cost forms of infrastructure reduces whole of renewable energy system cost for customers. This is particularly important with relation to energy storage infrastructure, which for renewable gas costs tens to hundreds of times less than renewable electricity. This supports the low-cost supply of firm renewable energy to energy customers – a source of ongoing challenge in the incumbent renewable energy sector.

3.9.a – Barriers to increasing the uptake of renewable gas

Have we captured the barriers to increasing the uptake of renewable gas? What is missing or needs to be changed?

APGA recognises this renewable gas paper is an important first step towards a cohesive and comprehensive renewable gas policy. The paper identifies a number of barriers to access, many of which APGA agrees. APGA would like to highlight two other barriers impeding renewable gas uptake – accuracy of information, and social licence impacts.

Accuracy of information

APGA provides the following factual updates to support the Victorian Government in making the best possible policy decisions for all Victorian energy users:

  • Transporting hydrogen in gas transmission and distribution infrastructure
  • Available renewable gas supply for Victoria
  • Lack of cost incentive to switch to renewable gases
  • Electrification as the only option for gas use decarbonisation in the home
  • Future of gas distribution networks.

Transporting hydrogen in gas transmission and distribution infrastructure

The consultation paper states:

“hydrogen cannot be directly substituted for gas into the network or existing appliances. This is due to its incompatibility with the metallurgy of those assets, manifested in pipelines by increased fatigue crack growth rates and in some cases reduced fracture resistance.”

“[hydrogen] is also incompatible with older, steel-based distribution and transmission networks beyond an initial blending limit (around 10 per cent by volume or 3 per cent by energy)”

These statements do not reflect the facts of gas infrastructure hydrogen compatibility.

Analysis published on the ARENA Knowledge Base details how gas distribution networks in Victoria are capable of converting to 100 per cent hydrogen.[10] These studies find that Victorian gas distribution networks are able to be converted to 100 per cent hydrogen for a cost that is less than 5 per cent of the current value (regulated asset base) of the network.[11]

New 100 per cent hydrogen transmission pipelines can be built today at lower cost than above ground transmission powerlines.[12] Research into converting existing natural gas pipelines to 100 per cent hydrogen service have found that the materials used in a substantial proportion of Australian gas pipelines is compatible with 100 per cent hydrogen service at 100 per cent maximum allowable operating pressure.[13]

The 10 per cent blending limit by volume identified in the study is a limit which gas infrastructure has applied to itself to ensure compatibility with existing appliances – not with its own infrastructure. This limit is also explored in more detail in the contents of the ARENA knowledgebase and in studies by the Future Fuels CRC considering higher blending limits for existing appliances. Importantly, these limits do not apply to 100 per cent hydrogen appliances.

Available renewable gas supply for Victoria

Although not specifically stated, the focus on ensuring that renewable gas supply is provided to its highest value demand is based upon a perception of supply constraint.

Victoria has access to more potential renewable gas production than current gas demand. While sources of biomethane in Victoria are estimated to be less than total Victorian gas demand, Victoria is connected to all other Australian states and territories via four gas pipelines.[14],[15] These pipelines and new pipelines like these are capable of transporting renewable gas to Victoria from interstate just as they transport natural gas to Victoria today.

Green hydrogen supply is based on Australia’s abundant renewable electricity generation capacity, only constrained by the ability to build wind and solar generation, hydrogen electrolysers and hydrogen pipelines. Considering the rapid rate of gas production deployment displayed in the Queensland LNG boom and the lower regulatory hurdles for gas and hydrogen infrastructure pipeline investment, hydrogen supply chains could represent a faster and more secure pathway to market than the NEM for variable renewable electricity.

Without supply constraints in the long term, Victoria has the opportunity to develop policy on the basis of cost competitiveness, rather than scarcity. Doing so could enable customers to decarbonise their energy demand through renewable gas uptake; avoid picking winners and losers; and mitigated the risk of unintended consequences.

High cost of renewable gas

The consultation paper references the high cost of hydrogen and biomethane.

Statements of high cost are often made with relation to natural gas costs, the nearest fossil fuel alternative. As renewable gases are deployed to decarbonise gas use, not perpetuate fossil fuel use, the Victorian government should consider renewable gas cost comparisons with the next least cost renewable energy option instead – for example, with electrification. Once this comparison is made, the low cost or cost competitive nature of renewable gases becomes apparent for customers which can choose to decarbonise via renewable gas or electrification.

Lack of cost incentive to switch to renewable gases

The consultation paper references a lack of cost incentive to switch to renewable gas.

It is not the case that there is no incentive to switch to renewable gases – rather, the cost incentive to switch to renewable gases is impeded by Federal legislation.

Emissions reporting under NGER will consider renewable electricity certificates under a market-based method for electricity emissions reporting. This is not the case for renewable gas. As renewable gas uptake is only relevant in the context of emissions reduction, a lack of Federal legislation recognising the emissions reduction impact of purchasing renewable gases impedes customers from realising the cost incentive to switch to renewable gases, especially when the emissions intensity of contracting more expensive renewable electricity is recognised.

Electrification as the only option for household gas use decarbonisation

The consultation paper notes in a number of places that electrification is the lower cost option for gas use decarbonisation in the home.

This is not the case. As detailed in APGA’s submission to the Federal Senate Inquiry into Electrification (Appendix 2), renewable gas can be cost competitive with electrification for gas use decarbonisation in the home.

Future of gas distribution networks

The consultation paper states:

the future of the reticulated gas distribution network is uncertain, as there could be a rapid change in its utilisation this decade”

“that increasing numbers of gas users leaving the gas network to switch to electricity may also result in a diminishing pool of users still connected to the gas network”

While the contents of these statements are possible, they are only a credible threat to customers when the inaccuracies addressed within this section are not corrected.

In infrastructure can’t transport hydrogen; if there is not enough renewable gas to go around; if renewable gas is a high cost decarbonisation option; and if electrification is the only option for gas use decarbonisation in the home; then the future of gas distribution networks is uncertain. Fortunately for Victorian gas customers, none of these things are true.

Analysis by BCG (Appendix 3) considers reduced network use in the context of gas use decarbonisation in the home. Exhibit 8 demonstrates the cost competitiveness of all-electric and renewable gas decarbonisation of homes, and considers an increased network cost reflecting 50 per cent reduction in household gas users. This reduction does not significantly move the bar.

Consideration of interstate renewable gas supply

Past Victorian government papers considering renewable gas supply have exclusively focused on renewable gas supply from within the state. Victoria has access to renewable gas supply from interstate, just as Victoria has access to renewable electricity supply from interstate, and just as Victoria has access to natural gas supply from interstate as well.

Victoria is supplied natural gas via four interstate pipelines today. These pipelines can provide access to renewable gas produced in all states bar Western Australia. This markedly increases the renewable gas supply opportunity for Victoria and removes the need to consider renewable gas on a supply constrained basis. Further, by accessing more renewable gas from more states, Victoria has the opportunity to access more lower cost renewable gas options as well.

APGA recommends that the Victorian Government does not limit its renewable gas options by basing policy on in-state renewable gas production options alone.

Social licence impacts

The renewable energy industry conversation has been dominated by renewable electricity for some time, including the idea that “electrifying everything” is the solution to the complex decarbonisation challenge. While this consultation demonstrates that the Victorian Government recognises this is not the case, this narrative still prevails.

The Victorian Government can avert social licence risks which may arise around the renewable gas sector by publicly supporting renewable gas production in Victoria. Public-facing government support for renewable gases can help to ensure that Victorians remain supportive of renewable gases and could serve to counter incorrect assertions of greenwashing facing renewable gas producers and users. The least cost pathway to net zero emissions for Victoria is put at risk by unfounded greenwashing accusations.

Renewable gas supply chains can also help address broader renewable energy supply chain social licence issues. Being inherently underground infrastructure, hydrogen pipelines have the potential to transport renewable electricity converted into hydrogen through regions in which powerlines are fiercely opposed. The lower cost of this infrastructure, in particular the opportunity to store energy within this infrastructure, could allow a cost competitive dispatchable renewable electricity outcome from hydrogen GPG. It could also allow a lower cost direct hydrogen use outcome, compared to powerlines and battery energy storage systems while addressing social licence concerns.

APGA recommends that the Victorian Government support the social licence of renewable gas in the Victorian community.

3.10.a and 3.10.b - Certification and administration

  1. Have we captured the key certification and administration issues?
  2. What options exist for a Victorian-based scheme for renewable gas production and how could this align with and/or complement the GO scheme once legislated?

Guarantee of Origin (GO) Scheme shortcomings and preferable certificate design

APGA recommends that Victorian Government policy does not rely solely upon the GO Scheme.

The design process of the GO Scheme has consistently put the interests of hydrogen exporters ahead of the interests of potential domestic renewable gas consumers.[16] The current and fourth round of GO Scheme consultation still fails to support renewable gas certification on equal grounds to renewable electricity. In each successive consultation, the domestic gas industry has highlighted issues with the scheme which fail to cater to the needs of domestic energy customers. These issues have not been addressed in the latest consultation round, continuing to fail domestic energy customers.

In brief, potential domestic renewable gas customers need:

  • A well-to-gate (“well-to-production gate”) system boundary option for hydrogen and other renewable gases to allow for equal standing relative to REGO in domestic trading context. Otherwise, equally priced renewable gas will be disincentivised by the more complicated certificate requirements.
  • Certificates to convey the necessary information for domestic customers to report Scope 1 emissions of combustion under NGER Measurement Determination emission reporting methods. Otherwise, the certificates are meaningless in a domestic context.
  • Hydrogen and renewable gas certificates must be issued in energy units, not mass units. Otherwise, certificates will not be aligned with existing domestic gas trading markets.
  • Biomethane certification in the immediate term.

The GreenPower Renewable Gas Certification Pilot does not contain any of these flaws, making it a much more suitable foundation for a domestic renewable gas certification scheme consistent with the intent of a renewable gas target.

As a thought experiment, consider how the above GO Scheme design features would have impacted the RET:

  • A requirement to track electricity generation from source to user (‘well to user’ design boundary) would prevent LGCs produced in one state being considered in another once interconnector volumes were reached. This would have excluded off grid renewable electricity from generating LGCs.
  • Certificates would not provide sufficient information to demonstrate that the energy was generated in such a way as to produce zero Scope 2 emissions under NGER legislation. This would have undermined the voluntary LGC market and made the new NGER Measurement Determination market-based method irrelevant.
  • Issuing certificates in a non-electricity industry unit such as newton meters (Nm) would have impeded trading alongside the electricity market despite being able to be converted to MWh via a linear conversion.
  • Only issuing certificates to wind and not solar would have impeded renewable electricity market development.

Administrative consideration for emissions double counting

As identified in its response to 3.7.b and 3.7 c, enabling gas customers to gain the emissions reduction benefit of renewable gases alongside surrendering certificates risks double counting of emissions where the scheme considers non gas network connected production. Addressing this requires administrative consideration.

5.1.a – Australian policies and schemes

Do you think measures taken in other jurisdictions are an effective way of increasing the uptake of renewable gas? If so, what can Victoria learn from these other jurisdictions?

Please see commentary on Guarantee of Origin and GreenPower Renewable Gas Certification Pilot in under Question 3.10.a and 3.10.b above. APGA notes that the GreenPower Pilot is currently restricted to commercial and industrial customers, and households cannot presently benefit from this scheme.

The most impactful measure used to increase uptake of renewable energy in Australia to date is the RET. Lessons learned from how the RET enabled renewable electricity uptake are directly applicable to how renewable gas uptake could be increased via a renewable gas target and should also be considered alongside other measures noted in this section of the consultation paper.

The closest renewable gas supportive policy amongst other Australian jurisdictions to the market-based policy proposed within the consultation paper is the New South Wales Renewable Fuels Scheme (RFS). APGA has highlighted advantages and disadvantages in the RFS in engagement with the NSW Government,[17] including:

  • Advantages
    • Market-based certificate scheme
    • Project agnostic allowing for access to least cost certificates
  • Disadvantages
    • Does not consider biomethane
    • Does not convey emissions reduction to gas customers liable for the scheme, resulting in customers paying more for energy without receiving the associated emissions reduction benefit.

5.2 – interaction with the Safeguard Mechanism

  1. Should a Victorian renewable gas target and/or certificate be additional to an ACCU (or the proposed new Safeguard Mechanism Credits)?
  2. To what extent would, for current gas distribution companies, the Safeguard Mechanism create an incentive to implement renewable gas?
  3. Is it likely that any Victorian Safeguard-regulated company would develop renewable gas production projects to meet their Safeguard obligations? How might a Victorian renewable gas scheme assist in this regard?

ACCUs

The Victorian Government must be specific about which ACCUs are being referred to, in particular with relation to biomethane production. Biomethane production may be eligible for ACCU generation based on two ends of the production process:

  • Biomethane production can reduce emissions by redirecting biomass otherwise decomposing in open atmosphere into a closed process in which greenhouse gas emissions are captured; and
  • Biomethane production can reduce emissions by displacing otherwise combusted natural gas in natural gas infrastructure, reducing emission of fossil-based carbon dioxide. Hydrogen production should be able to produce ACCUs in the same manner.

Only generation of ACCUs for the latter of these emissions reductions risks double counting of emissions reduction when occurring in parallel with a renewable gas target certificate scheme. Further, double counting is only the case where customers are able to have the emission reduction benefits of the renewable gas target certificates which they surrender convey the emissions intensity of renewable gas.

This opens to two circumstances:

  1. If customers can convey the emissions intensity of renewable gases when surrendering renewable gas target certificates, then renewable gas production facilities should have the option to either produce renewable gas target certificates or ACCUs.
  2. If customers are unable to convey the emissions intensity of renewable gases when surrendering renewable gas target certificates, then there is no double counting risk of producing ACCUs at the same time as renewable gas target certificates. Hence, renewable gas production facilities should be allowed to produce renewable gas target certificates and ACCUs.

The first circumstance is most beneficial for Victorian energy consumers.

APGA recommends that renewable gas production facilities should at least have the option to either produce renewable gas target certificates or ACCUs.

Safeguard Mechanism and Safeguard Mechanism Credits

APGA considers that surrender of Victorian renewable gas target certificates would influence the emissions reported by an NGER reporting entity. As the Safeguard Mechanism and Safeguard Mechanism Credits (SMCs) are based upon emissions reported under NGER, SMCs would and should be able to be produced by Safeguard Mechanism Facilities which reduce reported emissions to a level below its Safeguard Mechanism Baseline by wholly or in part surrendering sufficient Victorian renewable gas target certificates.

APGA does not see this as double counting under the basis provided within the Safeguard Mechanism design for in scheme creation of Safeguard Mechanism Credits.[18]

APGA anticipates that it is likely that a Victorian regulated under the Safeguard Mechanism would develop renewable gas production projects to meet their Safeguard Mechanism obligations. This is because contracting renewable gas supply in the short term will cost less upfront than replacement of non-end-of-life gas consuming assets.

A Victorian renewable gas scheme could assist Safeguard Mechanism Facilitates using renewable gases to comply with their safeguard mechanism obligations by:

  • Ensuring that the NGER Measurement Determination is amended to include a market-based method for gas consumption emissions reporting, similar to the electricity market-based method under Section 7.4 of the NGER Measurement Determination; and
  • Ensure that the Federal Government allows Victorian renewable gas target certificates to be recognised as conveying the emissions intensity of renewable gases under a market-based method for gas consumption emissions reporting within the NGER Measurement Determination.

5.3 – Victorian water corporations – renewable gas opportunities?

APGA defers to the expertise of renewable gas producers on this topic.

5.4 – US Inflation Reduction Act

APGA defers to the expertise of renewable gas producers on this topic.

 

 

3        Appendices

Appendix 1: Diffusion of Innovation and renewable gases

Originally appeared in The Australian Pipeliner, May 2023[19]

As advocates for the transition to renewable gases, we often talk about the ability to reach net zero gas in Australia by 2050. But what does reaching net zero gas actually mean?

Having come leaps and bounds in researching the production, transport, storage and utilisation of renewable gases like hydrogen and biomethane, we know that we have the tools necessary to achieve a net zero gas system domestically in Australia. However, the path ahead of us is still a little less clear.

Luckily, renewable gases aren’t the first new technology to embark on a gradual takeover of an existing market. Thanks to the experience of the motor vehicle, the internet, smart phones and even renewable electricity before them, the pathway of renewable gases to transition Australia’s gas supply chain to net zero gas isn’t as murky as one may think.

Like new technologies past, renewable gases are anticipated to follow what is referred to as Diffusion of Innovation Theory. The Theory observes that most new technologies will follow, at least approximately, a normal distribution s-curve when taking over an incumbent market –referred to as the Diffusion of Innovation Curve.

Figure A2. Diffusion of Innovation curve and Diffusion of Innovation curve examples

Approximations of the Diffusion of Innovation Curve have been seen across most new technologies which have developed across the past century. This is also true of the Australian renewable electricity industry. With 20% adoption by 2020 under the Renewable Energy Target (RET), this positions the renewable electricity industry on the curve to achieve net zero for the existing electricity market by 2050 (Fig 3).

Whether by accident or design, targeting 20% uptake played a significant role in putting renewable electricity firmly on the trajectory to full market takeover. The 20% mark is well above the combined Innovators (first 2.5% of uptake) and Early Adopters (next 13.5% of uptake). By ensuring uptake enters the Early Majority portion of the Diffusion of Innovation Curve, the RET ensured that renewable electricity uptake would continue even after the target had been met.

Renewable gas advocates can take advantage of this knowledge to plan out the renewable gas Diffusion of Innovation Curve required to achieve net zero gas by 2050. As per the electricity sector, targeting 90% renewable gas production by 2050 will be considered equivalent to achieving net zero, and 2025 can be considered as a reasonable point in time to start targeted renewable gas development.

The application of a Diffusion of Innovation Curve between 2025 and 2050 can be seen in Figure 4. By following this renewable gas uptake trajectory, rather than a straight line or some other form of trajectory, Diffusion of Innovation Theory suggests Australia should deliver net zero gas by 2050.

Figure A3. Diffusion of Innovation curves for renewable electricity and renewable gas

Now that we know that this is the trajectory that the renewable gas industry must meet to achieve net zero gas by 2050, the question that remains is – how do we get on this trajectory? While we know that the renewable gas industry will develop in line with the Diffusion of Innovation Curve, what is not certain is the timeframe in which this will unfold.

This is why a Renewable Gas Target is so critical to gas use decarbonisation in Australia. A Renewable Gas Target of 3.5% by 2030 and 20% by 2035 can ensure that renewable gas deployment develops beyond the Innovators and Early Adopters phases of the Diffusion of Innovation Curve prior to 2035. By doing to, renewable gas deployment will be on a trajectory which aligns with net zero gas by 2050.

By observing how new technologies diffuse into existing markets and how the RET ensured that this occurred in a timely manner for renewable electricity, we have the opportunity to ensure that renewable gas deployment doesn’t just follow the Diffusion of Innovation Curve, but that a Renewable Gas Target is set that aligns with achieving net zero gas by 2050 in Australia.

 

 

Appendix 2: The role of gas infrastructure in Australia’s energy transition

 

Report by Boston Consulting Group

June 2023

Attached

 

Appendix 3: Inquiry into household electrification

 

APGA submission to Senate Economics References Committee

September 2023

Attached

 

[1] APGA, Climate Statement, available at: https://www.apga.org.au/apga-climate-statement

[2] APGA, 2020, Gas Vision 2050, https://www.apga.org.au/sites/default/files/uploaded-content/website-content/gasinnovation_04.pdf

[3] Future Fuels CRC: https://www.futurefuelscrc.com/

[4] ENEA Consulting, 2021, Australia’s Bioenergy Roadmap, https://arena.gov.au/assets/2021/11/australia-bioenergy-roadmap-report.pdf

[5] Please refer to Bioenergy Australia’s submission to the Victorian Renewable Gas Policy.

[6] Please refer to Bioenergy Australia’s submission to this consultation process for more details of the 26 PJpa of biomethane production projects identified in Victoria.

[7] DEECA, 2023, Help paying your bills, https://www.energy.vic.gov.au/for-households/help-paying-your-bills

[8] Please refer to Bioenergy Australia’s submission to this consultation process for more details of the 26 PJpa worth of biomethane production projects identified in Victoria.

[9] APGA, 2021, Submission: Victorian Gas Substitution Roadmap, https://www.apga.org.au/sites/default/files/uploaded-content/field_f_content_file/210816_apga_submission_to_the_victorian_gas_substitution_roadmap_consultation_paper.pdf

[10] ARENA, 2023, Knowledge Bank Resources for the Australian Hydrogen Centre, accessed September 2023, https://arena.gov.au/knowledge-bank/?keywords=Australian+Hydrogen+Centre

[11] Australian Hydrogen Centre, 2023, 100% Hydrogen Distribution Networks: Victoria Feasibility Study, https://arena.gov.au/assets/2023/09/AHC-100-Hydrogen-Distribution-Networks-Victoria-Feasibility-Study.pdf

[12] GPA Engineering, 2022, Pipelines vs Powerlines: A Technoeconomic Analysis in the Australian Context available at https://www.apga.org.au/sites/default/files/uploaded-content/field_f_content_file/pipelines_vs_powerlines_-_a_technoeconomic_analysis_in_the_australian_context.pdf

[13] APA Group, 2023, Parmelia Gas Pipeline Hydrogen Conversion Technical Feasibility Study,
https://www.apa.com.au/globalassets/our-services/gas-transmission/west-coast-grid/parmelia-gas-pipeline/3419_apa_public-pipeline-conversion_v6.pdf

[14] ARENA, 2021, Australian Biomass for Bioenergy Assessment 2015-2021, https://arena.gov.au/projects/australian-biomass-for-bioenergy-assessment-project

[15] AEMC, 2023, Gas pipeline register, https://www.aemc.gov.au/energy-system/gas/gas-pipeline-register

[16] APGA, 2021, Submission: Hydrogen Guarantee of Origin scheme for Australia Discussion Paper, https://www.apga.org.au/sites/default/files/uploaded-content/field_f_content_file/apga_submission_-_hydrogen_guarantee_of_origin_scheme_discussion_paper.pdf; APGA, 2023, Submission: Australia’s Guarantee of Origin Scheme, https://www.apga.org.au/sites/default/files/uploaded-content/field_f_content_file/230203_apga_submission_-_guarantee_of_origin_scheme.pdf

[17] APGA, 2023, Submission: NSW Renewable Fuels Scheme, https://www.apga.org.au/sites/default/files/uploaded-content/field_f_content_file/230125_apga_submission_-_nsw_renewable_fuels_scheme.pdf

[18] DCCEEW, 2023, Safeguard Mechanism Reform, https://www.dcceew.gov.au/sites/default/files/documents/safeguard-mechanism-reforms-factsheet-2023.pdf

[19] McCollum J, 2023, Why a renewable gas target is critical to gas use decarbonisation, The Australian Pipeliner 197, https://www.pipeliner.com.au/why-a-renewable-gas-target-is-critical-to-gas-use-decarbonisation

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