Everything you wanted to know about an RGT (but were afraid to ask)

Earlier this year, ACIL Allen released ‘Renewable Gas Target: Delivering lower cost decarbonisation for gas customers and the Australian economy’, a study modelling the economic effects of a national Renewable Gas Target (RGT). Here, the APGA’s Jordan McCollum discusses the study and the proposed RGT.

How important is a national Renewable Gas Target (RGT) to net zero targets? Won’t major gas users decarbonise to meet their obligations under the Safeguard Mechanism?

An RGT is critically important to achieving net zero gas use emissions by 2050, because the Safeguard Mechanism Facilities only represent a fraction of gas emissions, and a fraction of gas-using facilities monitored under the National Greenhouse and Energy Reporting (NGER) Scheme.

additional policy is required to meet net zero

There is no other policy actively driving gas emissions down today, so additional policy is required to meet net zero - what policy could deliver this was the subject of this study, and the study found that an optimised renewable gas target achieved net zero at a lower cost than forcing customers to electrify everything possible.

A key word there is "national". The ability for biomethane in particular to be shared between the states in all scenarios was key to the study’s findings and makes a strong case against taking a state-by-state approach to gas use decarbonisation.

The report says that any utopian ‘Theoretical Efficient Policy’ is likely to run aground on political sensitivities around carbon pricing.What are the practical policy approaches can decarbonise the gas sector?

The theoretically efficient policy (TEP) scenario was a modelling exercise in perfection from which we could test model validity through sensitivities and then build from to analyse actionable policy scenarios. Of course, the most practical policy approach to any decarbonisation challenge is national economy level carbon trading - this is what the TEP scenario most closely resembles.

the climate wars killed any political will to pursue broad based carbon trading

Unfortunately, the climate wars killed any political will to pursue broad based carbon trading or pricing which would deliver outcomes similar to the theoretically efficient policy scenario.

As such, policy makers are set the unenviable task of figuring out how to deliver positive change without unintended consequences. Luckily, they have a wealth of examples to learn from. For example, comparing carbon pricing policies with winner-picking policies at home and abroad shows that the less interventionist a policy is, the lower likelihood of unintended consequences.

This tends to be the case with less interventionist policy as customer choices are allowed to drive market outcomes, hence markets tend to deliver economically efficient outcomes in line with all factors, not just the factors that policy makers can work into their chosen policy. Not only is this backed by decades of economic research and analysis, and is central to the value the ACCC puts on competitive markets, but it's backed up by this report.

when we take away customer choices by forcing customers to electrify everything possible, costs increase

ACIL Allens’ analysis shows that when we take away customer choices by forcing customers to electrify everything possible, costs increase as some customers which could have decarbonised for less are forced onto a higher cost option. This inefficiency then spreads through the economy as customers have less money to spend on other things, reducing overall GDP.

An RGT avoids all this because it allows customer choice across renewable gas and renewable electricity options. Despite being named after renewable gas, an RGT never prohibits customers from choosing electricity - that choice always remains and many customers are modelled as taking that choice under the RGT scenario.

An RGT doesn’t force customers onto renewable gas, rather it only forces customers off of natural gas by requiring a proportion of gas supply to be renewable. If that doesn’t work for the customer, then they're able to choose electricity instead.

In this way an RGT as a policy is similar to carbon pricing as it enables the customer to choose which option works for them while at the same time reducing emissions. Of course, this is expected to support an increase in renewable gas production similar to what was seen with renewable electricity production through the Renewable Energy Target.

What are the wider impacts of an RGT beyond the gas sector?

A national RGT would reduce the cost of electricity decarbonisation as well.

Currently, AEMO's central Step Change scenario assumes all residential gas customers will electrify. This is because it assumes residential customers are prohibited from using 100% hydrogen appliances and would have to pay 4x to 6x the cost of biomethane anticipated by ARENA reports - neither of which are reasonable assumptions.

As a result, AEMO's ISP is projecting a need to invest in new electricity transmission, electricity storage, and customer funded energy storage resources sufficient to meet the demand of 100% residential gas electrification.

An RGT would reduce at least some of this cost to decarbonise the electricity system by shifting load from a future electricity supply chain to a future renewable gas supply chain - much of which is already in the ground.

Importantly, the load profile for residential gas indicates peak demand in the morning and evening, exacerbating the need for electricity infrastructure and storage capacity. On the other hand, gas infrastructure with its in-build intraday storage is perfectly suited to these variable loads.

Did any of the study results surprise you?

A few, yes. In particular, the fact that on a percentage basis the model chose to electrify residential gas customers the least, indicating that from an economic standpoint, residential gas customers are a “hard to decarbonise sector” regardless of how simple it may be to switch a gas appliance for an electric appliance.

residential gas customers are a “hard to decarbonise sector” regardless of how simple it may be to switch

Also, one scenario showed that 100% commercial gas demand would electrify. Knowing that some commercial gas customers have no electric alternative indicates that future models would need to break down commercial gas use further to consider broader sub-sector appliance availability assumptions.

Lastly, that the theoretically efficient policy scenario didn't use any of the limited, high cost offsets that the model allowed access to from 2050 onwards. These only started to appear once we moved away from this scenario to consider more restrictive market conditions, indicating another reason to aim for less interventionist policy - more intervention required more offsets where in a perfect world, gas use decarbonisation could be achieved through renewable gas and renewable electricity alone.

ACIL Allen was engaged by the Australian Pipelines and Gas Association Ltd (APGA) and Energy Networks Australia (ENA) to model the economic effects of a national Renewable Gas Target (RGT). The full report can be found here: https://apga.org.au/renewable-gas-target