26 February 2021

Infrastructure Via online submission: https://engage.vic.gov.au/victorias-30-year-infrastructure-strategy/making- submission

To whom it may concern, Victoria’s draft 30-Year Infrastructure Strategy Australian Gas Infrastructure Group (AGIG) welcomes the opportunity to make this submission on Infrastructure Victoria’s draft 30-year Infrastructure Strategy. It is important that the strategy recognise and remain open to consider all opportunities to achieve net zero emissions as required by Victoria’s Climate Change Act. In Victoria, where natural gas remains an important part of the energy mix, hydrogen represents a significant opportunity for Victoria to achieve its targets, while making use of Victoria’s extensive gas network and minimising costs. After introducing AGIG this letter will briefly outline our submission which focuses on the role of renewable hydrogen, the future of gas networks and also comments on Infrastructure Victoria’s upcoming work on the Gas Infrastructure Advice to the Victorian Treasurer. As owners of gas infrastructure in Victoria we are taking a leading role in the deployment of renewable hydrogen technologies and the development of ’s hydrogen industry. AGIG can provide valuable insights on the issues raised in the Gas Advice Terms of Reference, particularly on how the value of Victoria’s gas infrastructure can be optimised, including the extent to which gas infrastructure can be used for hydrogen. We therefore look forward to continuing and increasing our engagement with Infrastructure Victoria on these issues. About AGIG AGIG is the largest gas distribution business in Australia, serving more than 2 million customers through our networks in Victoria, , and several regional networks in and the . In Victoria, we reliably distribute gas to over 1.3 million customers through over 21,000km of distribution network. Australian Gas Networks (VIC & ) and Networks serve much of Victoria including the CBD, the eastern and south-eastern suburbs, and much of eastern and central Victoria extending north to Wodonga and east to Bairnsdale. At AGIG, we are committed to sustainable gas delivery today, and tomorrow. In 2017 we worked with Australia’s five peak gas bodies to develop Gas Vision 2050 – a pathway to achieve near zero emissions in our gas sector. We are now delivering on this Vision by deploying low carbon gas projects. Our projects include:  Hydrogen Park Murray Valley (HyP Murray Valley) proposal – A 10MW elctrolyser to produce renewable hydrogen for blending with natural gas (up to 10%) and supply the twin cities of Wodonga (Victoria) and Albury (NSW), with the potential to supply industry and transport sectors.  Hydrogen Park South Australia (HyP SA) – A 1.25MW electrolyser to produce renewable hydrogen for blending with natural gas (up to 5%) and supply to more than 700 existing homes and businesses in metropolitan . First production is expected by around April this year.

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 Hydrogen Park Gladstone (HyP Gladstone) – A 175kW electrolyser to produce renewable hydrogen for blending with natural gas (up to 10%) and supply to the entire network of Gladstone, including industry. First production is expected in 2022.  The Australian Hydrogen Centre (AHC) – A virtual centre delivering feasibility studies for 10% and 100% blending of renewable hydrogen into towns and cities in South Australia and Victoria. Overview of AGIG’s response Our submission provides additional information particularly relevant to Recommendations 8, 9 and 10:  8. Allow new gas-free housing estates and review current gas policies;  9. Specify climate scenarios and carbon value in assessing infrastructure;  10. Strategically review climate consequences for infrastructure. The information we provide helps clarify the potential role of gas networks, the potential use of renewable hydrogen to achieve net zero emissions and the need for appropriate policy and regulatory frameworks to enable a low cost transition that addresses customers energy needs. Attachment A provides detailed information on the following issues:  We introduce the potential role for hydrogen in addressing customers’ energy needs while reducing emissions. With appropriate policy and regulatory settings hydrogen has potential to play a significant role in achieving Victoria’s emission reduction targets;  We present analysis from Frontier Economics and the Grattan Institute which suggests that replacing natural gas consumption with electricity supply is a costly approach to achieve net zero emissions in Victoria. Instead, using Victoria’s extensive gas distribution networks to deliver renewable hydrogen represents a lower cost pathway to achieving net zero emissions - a pathway that should remain open as renewable hydrogen production is deployed. We have provided information on how and where our Victorian networks will be ‘hydrogen ready’ by 2035;  We note that hydrogen can provide storage and other services to electricity networks, creating value for the wider energy system through greater coupling between electricity and gas/hydrogen networks;  We note that connection to the reticulated gas supply system for new greenfield estates in Victoria is not mandatory under the Victorian Planning Provisions. Further, any immediate decisions to prevent new connections to gas networks in Victoria would increase costs for customers by limiting future options for meeting customers’ energy needs while achieving net zero emissions; and  We introduce work underway in consultation with the Australian Energy Regulator, customers and stakeholders to consider the future of gas networks in Victoria. The future of gas is a live issue considered by industry As Infrastructure Victoria rightly points out, the gas transition will not be easy for Victoria, with Australia’s largest natural gas infrastructure network. We agree with Infrastructure Victoria that there is not enough evidence now to suggest the Victorian Government should make an immediate decision on the future of the gas network. The future remains uncertain and governments, networks and other stakeholders should allow time to fully examine the viability of renewable hydrogen. This will reduce the risk of making pivotal decisions too early and increasing costs for customers unnecessarily. Decisions made today will have implications across both gas and electricity networks and for customers and may create path dependency, locking in higher cost solutions. We note that outside of this consultation, Infrastructure Victoria has been asked by the Victorian Government to provide advice to the Treasurer on Gas Infrastructure. This advice will consider the role

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of Victoria’s gas transmission and distribution networks under a range of energy sector scenarios to achieve net zero emissions in 2050.1 This advice is timely as the future of gas is a live issue. All three of Victoria’s gas distribution networks have just begun planning and engagement for the next five-year regulatory pricing reset (called an Access Arrangement, AA, review). Through the AA review process, our industry has begun to consider the possible pathways the energy sector might take, and the actions that need to be taken today and planned for the future to deliver affordable net zero energy solutions for customers. The next AA period will commence in July 2023, with our Final Plan due to be submitted to the Australian Energy Regulator (AER) in July 2022. The future of gas networks is important in this process as the economic life of our assets is a key input in determining network tariffs. The AER has also elevated consideration of future gas market issues in their strategic priorities list.2 The elevation of this issue on the AER’s list of strategic priorities provides a pathway to develop an appropriate framework to address the issues for customers and investors, which we support. Recognising the potential interdependencies between the work of Infrastructure Victoria and the upcoming work of the AER and industry on future of gas issues, we would like to explore how these processes can complement one another and welcome the opportunity to provide inputs to Infrastructure Victoria’s Gas Infrastructure Advice. We therefore look forward to continuing and increasing our engagement with Infrastructure Victoria on these issues. Once again, I would like to thank you for the opportunity to provide a submission on the draft Infrastructure Strategy. Should you have any queries about the information provided in this submission please contact ).

Yours sincerely,

1 See: https://www.infrastructurevictoria.com.au/project/infrastructure-victoria-advice-on-gas- infrastructure/ 2 AER Draft Decision, AGN SA Access Arrangement 2021-26 – Overview, November 2020, p.12. See: https://www.aer.gov.au/system/files/AER%20-%20Draft%20Decision%20- %20AGN%28SA%29%20access%20arrangement%202021-26%20-%20Overview%20- %20November%202020.pdf

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Attachment A Hydrogen in the future energy supply mix We believe it is useful to begin by introducing some of the potential benefits of renewable hydrogen for Victoria. The benefits and potential applications of hydrogen are broad and will emerge more fully as projects (like those outlined in our letter above) are delivered and demonstrated. Gas Vision 2050, released in 2017, reflects the ambitions of key organisations in Australia’s gas sector to play a role in Australia’s low carbon future.3 The report showed that gaseous fuels have a pivotal role to play to 2050 and beyond, and outlined the wide range of potential applications for hydrogen. The National Hydrogen Strategy notes that blending of hydrogen in gas distribution networks is one of several actions “to scale up the industry and activate markets”. The Strategy also recognises the ability of hydrogen to replace natural gas in existing networks and make a significant contribution to emissions reductions. For national decarbonisation targets, growing evidence shows that hydrogen is a cost-effective way to achieve zero emissions in replacing existing uses of natural gas.4 These uses include for household energy, particular heating and cooking, and for hard to abate sectors like industry and heavy-haulage transport. In Victoria, the role for hydrogen blending is particularly important as natural gas comprises a significant portion of the State’s energy consumption and plays a significant role in providing winter heat. The Grattan Institute found that “Victoria’s large household winter gas heating load means that switching small-user gas loads would have significant effects on its electricity system” and that switching to electricity would increase emissions over the next decade.5 Therefore in Victoria, there is a particularly strong case for policy and regulatory change to encourage the development of renewable hydrogen and its use in gas distribution networks. We recognise that if Victoria is to meet its emission reduction targets we need to focus on large-scale decarbonisation of our Victorian distribution network. We are actively pursuing these innovative opportunities through hydrogen and biomethane projects, like the Hydrogen Park Murray Valley (Hyp Murray Valley) project proposal currently being considered by the Australian Renewable Energy Agency.6 HyP Murray Valley would be the first renewable hydrogen project in Victoria and an important first step in establishing a hydrogen industry in the State. Australian Gas Networks (AGN) – part of AGIG – is partnering with ENGIE to develop Hyp Murray Valley. A 10MW electrolyser in Wodonga will provide a 10% blend of renewable hydrogen to around 40,000 residential, commercial and industrial gas customers in Wodonga and Albury, as well as electricity grid support services and oxygen. This project will be Australia’s largest renewable hydrogen project and provide a stepping stone to the decarbonisaton of Victoria’s entire gas network.

3 Energy Networks Australia, Gas Vision 2050, See: https://www.energynetworks.com.au/projects/gas- vision-2050/ 4 COAG Energy Council, Australia’s National Hydrogen Strategy. See: https://www.industry.gov.au/sites/default/files/2019-11/australias-national-hydrogen-strategy.pdf 5 Grattan Institute, Flame out, the future of natural gas, November 2020, p. 47. See: https://grattan.edu.au/report/flame-out-the-future-of-natural-gas/ 6 https://www.agig.com.au/media-release---hydrogen-proposal-in-albury-wodonga

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Hydrogen represents the least cost pathway to achieving emissions reductions from natural gas Growing evidence shows that hydrogen is a cost-effective way to achieve zero emissions in replacing existing uses of natural gas. A recent analysis by Frontier Economics determined that an “Electrification” scenario, whereby almost all end-use natural gas consumption is replaced by electricity supply, is the costliest approach to reach net zero emissions from the stationary energy sector by 2050.7 Figure 1 illustrates that a decarbonisation strategy that utilises existing gas infrastructure will be significantly cheaper than the full Electrification scenario. These results, for Australia as a whole, are even stronger in Victoria, where renewable hydrogen blended into distribution networks is a significantly cheaper replacement than electrification because of electricity network augmentation and storage requirements. Figure 1: Net cost of decarbonising gas by scenario

Source: Gas Vision 2050, p.8

The Frontier Economics work produced similar results to an analysis previously undertaken by Deloitte and AGIG. This work similarly found that decarbonisation of the gas sector through adoption of hydrogen technology would be 40% less than full electrification and decommissioning of the gas sector. Based on these analyses, it is clear that hydrogen (and other renewable gases) should form a key part of the potential energy mix considered in the climate scenarios envisaged in Recommendation 9 of the Draft Infrastructure Strategy. Electrification is often assumed to be the best pathway without full account of the costs and lost opportunities that near-term electrification might create.

7 Frontier Economics, The benefits of gas infrastructure to decarbonise Australia, 17 September 2020. See: https://www.energynetworks.com.au/resources/reports/2020-reports-and-publications/the- benefits-of-gas-infrastructure-to-decarbonise-australia-frontier-economics/

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Existing gas distribution networks are increasingly ‘hydrogen ready’ At this point we think it is worth clarifying the existing future capability of our networks to deliver hydrogen. Victoria’s extensive gas distribution networks can play a significant role in achieving net zero emissions by delivering hydrogen and other renewable gases. As outlined above, a decarbonisation strategy that utilises existing gas infrastructure will be significantly cheaper than the full Electrification scenario. We note that existing gas distribution networks that have already been upgraded to polyethylene pipes or equivalent are already suitable for transporting hydrogen (‘hydrogen ready’). These networks are listed in Attachment B. The replacement of remaining old cast-iron pipes and unprotected steel mains with new polyethylene pipes, is already underway across all major Australian gas distribution networks including in Victoria. This important program is primarily driven by safety and operational reasons and aims to significantly improve the integrity of the network. This mains replacement work has the added benefit of making gas distribution networks hydrogen ready, but will have to occur anyway. Most network equipment is already able to operate with small volumes of hydrogen (around 10%) blended into natural gas. Most distribution pipelines will be converted to polyethylene pipes by 2035, allowing the wide-scale transport of hydrogen gas in the medium to lower pressure distribution pipelines.8 Hydrogen can create opportunities for greater coupling between electricity and gas networks In considering Recommendation 3 to identify and coordinate renewable energy zones, we note that hydrogen can provide storage and other services to electricity networks, creating value for the wider energy system through greater coupling between electricity and gas/hydrogen networks. Electrolysers will be consumers of electricity, while hydrogen fuel cells can act as electricity generators. Vehicles add a further opportunity for storage and management of energy markets. While the long- term interactions between electricity and gas networks will take time to emerge, it is important we begin to recognise the potential for investment in one sector to reduce the costs in another particularly in light of the development of Victoria’s Renewable Energy Zones. Projects like HyP Murray Valley will help to demonstrate the potential value of these services for hydrogen production, renewable electricity generation and electricity markets, which will complement the development of Victoria’s Renewable Energy Zones.

8 Deloitte Access Economics, Decarbonising Australia’s gas distribution networks, November 2017, p. 33. See: https://www.energynetworks.com.au/assets/uploads/054496_tg_decarbonising_australias_gas_networ k_final.pdf

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Connection to the gas network in Victoria is not mandatory Regarding recommendation 8 in the Draft Strategy – to allow new gas-free housing estates and review current gas policies - we think it is important to clarify the current situation. The draft strategy suggests that to help reduce network expansion, the government should amend the Victoria Planning Provisions (VPP) to clarify that gas distribution infrastructure is not required in new greenfield housing estates. In our view, VPP Clause 56.09-2 does not mandate that a reticulated gas supply system must be provided to all new greenfield housing estates. VPP Clause 56.09-2 states that “where available, the reticulated gas supply system must be designed in accordance with the requirements of the relevant gas supply agency and be provided to the boundary of all lots in the subdivision to the satisfaction of the relevant gas supply agency.” The language of this provision makes clear that the requirement is that where a gas reticulation network is available, it must be designed in accordance with the requirements of the relevant gas supply agency. This is not a requirement that gas reticulation must be provided in all subdivisions to all lots – rather it is a requirement only if there is a gas reticulation network (a choice open to developers). The difference with the equivalent electricity provision is notable – the absence of the opening clause “where available” means that an electricity supply system is a requirement of all subdivisions and must be available to all lots therein. Further, the objectives of the VPP Clause 56.09-2 makes it clear that that the provision aims “to reduce greenhouse gas emissions by supporting generation and use of electricity from renewable sources.” On this issue we believe it would be appropriate to replace the word “electricity” with “energy” to further encourage renewable energy from all sources. The potential for new subdivisions with 100% renewable hydrogen networks is currently being actively considered for deployment in 2020s. We also note that the Victorian Gas Distribution System Code requires gas distributors to connect customers to their network, only upon a request of a customer.9 Our approach to all new developments conforms with this understanding of the VPP and Distribution System Code. The fact that many new housing developments in Victoria continue to include gas reticulation is more likely based on customer preferences for gas heating and cooking in particular. In considering net zero emissions we should look to address customer preferences by seeking zero emission gaseous fuels that have many of the same qualities as natural gas (comfort, convenience, direct heat). In Victoria customers are free to choose their source of energy today and should have this choice in the future. If customers like the benefits of gaseous forms of energy, it is incumbent on energy providers and governments to find solutions that meet their needs while achieving net zero emissions. This is precisely why we are making investments in renewable hydrogen and other renewable gases. Any plans to grow our gas networks will be informed by an extensive engagement program as part of our AA review to ensure it is capable of being acceptance by our customers and stakeholders. We recognize that the future remains uncertain. But in the context of uncertainty governments, networks and other stakeholders should allow time to fully examine the viability of renewable hydrogen and other options for achieving net zero emissions. This will reduce the risk of making pivotal decisions too early, increasing costs for customers unnecessarily. Decisions made today will have implications across both gas and electricity networks and for customers and may create path dependency, locking in higher cost solutions.

9 Clause 3. See: https://www.esc.vic.gov.au/electricity-and-gas/codes-guidelines-and-policies/gas- distribution-system-code

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In addressing emissions in the near-term, our analysis10 shows that gas is currently a lower-carbon choice for our Victorian customers compared to electricity delivered via networks, as electricity in Victoria is generated primarily by brown coal. While this comparison with natural gas will change over time, gas distribution networks provide a lower carbon option today and viable pathway to net zero emissions that should remain open.

Potential framework in considering the future of gas networks We note that outside of this consultation, Infrastructure Victoria have been asked by the Victorian Government to provide advice to the Treasurer on Gas Infrastructure. This advice will consider the role of Victoria’s gas transmission and distribution networks under a range of 2050 energy sector scenarios to achieve net zero emissions.11 This advice is timely as the future of gas is a live issue. Our industry has begun to consider the possible pathways the energy sector might take in various forums, particularly within the context of upcoming AA review processes. Our Victorian gas distribution networks are subject to full economic regulation by the Australian Energy Regulator under an approved access arrangement. This means we must periodically submit an AA proposal specifying pipeline reference services and the price and non-price terms and conditions on which we offer our reference service over a five-year period. To approve an access arrangement, the AER makes regulatory decisions on the revenue that we can recover from our customers. The National Gas Law and Rules (NGL and NGR) provide the regulatory framework governing gas transmission and distribution networks. In starting to think about the future of gas networks, the critical starting point for consideration is that of the energy consumer of the future, the competitive ecosystem that he or she will find themselves in and the opportunities that could be available to consumers within these ecosystems. Electricity and gas networks, and aspects of them that change as these ecosystems evolve, such as renewable

10 Comparison of annual running costs for natural gas and electrical appliances are based on average household consumption in Melbourne and Adelaide, using Origin Energy standard tariffs as of 1 January 2020. Emission comparisons are calculated using the Department of the Environment and Energy, National Greenhouse Accounts Factors Report July 2019. 11 See: https://www.infrastructurevictoria.com.au/project/infrastructure-victoria-advice-on-gas- infrastructure/

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electricity, storage and renewable hydrogen, should be considered in the context of these consumer opportunities. The nature of the future energy ecosystem and the benefits which it might bring to consumers if they are allowed to explore opportunities as they develop are uncertain at this point in time, and likely will be for some time. We think renewable hydrogen presents a viable pathway (electrolysers are falling in price and alongside balance of plant costs are likely to drop further as economies of scale and technological progress play out). Nonetheless, we accept that customer decisions, cost pathways and a range of other factors remain uncertain. For this reason, it is vital that policy create options and flexibility, rather than destroying it by picking winners. As outlined above, prematurely restricting the use of gas networks would remove a choice for customers as to where they get at least some of their energy from. Customers can and some will choose electricity, but maintaining choice provides greater competition and security – directly to customers, and for the market more generally in delivering storage, reliability, security and zero emissions to energy system as a whole. This is the starting point we have taken in our SA AA review, where we need to propose investment plans to the regulator for our long-lived assets. Our proposal to the AER will include a process which creates flexibility for our consumers.12 We have done this because we realise that, just like policymakers, decisions we and the AER make now about our network can impact on the flexibility our customers have in the future. For this reason, we are very mindful of creating, and not inadvertently limiting, options for consumers as we plan investment. We understand the AER is also mindful of the importance of maintaining flexibility for future energy consumers, and the long-reaching consequences of the regulatory decisions it makes today. For this reason, it has elevated consideration of future gas market issues in their strategic priorities list.13 We are engaging on these issues with the AER, and would welcome the opportunity to engage further with Infrastructure Victoria as the draft strategy and Gas Infrastructure Advice proceeds. At this stage, we would like to reiterate that the key focus should be on maintaining flexibility and creating opportunities for consumers as an energy ecosystem evolves, one that is quite likely to be very different from that which exists at present. Policymakers, regulators and networks must endeavor not to limit opportunities for consumers by picking solutions they think are best now, at a time of high uncertainty.

12 See https://www.aer.gov.au/system/files/AGN%20-%20Attachment%209.6%20- %20Future%20of%20Gas%20-%2013%20January%202021.pdf 13 AER Draft Decision, AGN SA Access Arrangement 2021-26 – Overview, November 2020, p.12. See: https://www.aer.gov.au/system/files/AER%20-%20Draft%20Decision%20- %20AGN%28SA%29%20access%20arrangement%202021-26%20-%20Overview%20- %20November%202020.pdf

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Attachment B

Table 1: AGIG (sub or regional) distribution networks with no cast iron or uncoated steel mains – Vic Outer Melbourne Victoria – Outer Melbourne

Mornington Peninsula and Epping Berwick towns

Healesville Clyde Narre Warren

Mernda Cranbourne Officer

Whittlesea Hampton Park Pakenham

Donnybrook Lyndhurst Yarra Glen

Upper Yarra Valley Network Gembrook (Woori Yallock to Warburton)

Table 2: AGIG (sub or regional) distribution networks with no cast iron or uncoated steel mains – Vic Regional

Victoria – Regional

Bairnsdale Kyabram Tatura

Benalla Longwarry Tongala

Beveridge Maffra Trafalgar

Broadford Merrigum Traralgon

Chiltern Mildura Wallan

Churchill Moe Wandong Heathcote Junction

Cobram Morwell Wangaratta

Darnum Rosedale Wangaratta East

Drouin Rutherglen Warragul

Echuca Sale Wodonga

Euroa Seymour Yarragon

Kilmore Shepparton Yarrawonga

Koonoomoo Tallarook Lang Lang

Korumburra Leongatha Inverloch

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Wonthaggi

Table 3: Expected completion of low-pressure mains replacement

Low- pressure Low- mains to be pressure Anticipated Starting % replaced Network replaced at mains completion Year to date start of replaced to year programme date (km) (km)

Australian Gas Networks – Melbourne 2011 1,149 916 80% 2022 and inner suburbs

Multinet Gas Network - Melbourne 2003 3,196 1,319 41% 2033 inner eastern suburbs

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