AEMC Reviews the Regulatory Frameworks for Hydrogen and Renewable Gases
Fast Facts.
On 21 October 2021, the Australian Energy Market Commission (AEMC) published a Consultation Paper on the Review into Extending the Regulatory Frameworks to Hydrogen and Renewable Gases. This followed agreement by Energy Ministers in August 2021 that the national gas regulatory framework should be amended to bring biomethane, hydrogen blends and other gas blends within scope.
There are a range of related processes underway. The Victorian Government, for example, submitted a Rule Change request to the AEMC on 8 September 2021 to amend the National Gas Rules to enable the participation of distribution connected production and storage facilities (for natural gas and other gases) in the Victorian Declared Wholesale Gas Market. AEMO is currently reviewing relevant procedures and jurisdictional officials are reviewing energy laws and regulations.
Submissions to the AEMC’s Consultation Paper closed 2 December 2021. The next step is the publication of a Draft Report by the AEMC on 31 March 2022, with submissions closing 12 May 2022. Following this, the AEMC will publish its Final Report on 8 September 2022 with recommended changes for approval by Energy Ministers by 14 November 2022. This will include draft Rules for consultation.
For gas network providers, these changes will enable more strategic conversations and planning towards the transition to hydrogen.
For gas and electricity retailers, now is the time to engage on what hydrogen blending might mean for customers. There are a range of consumer issues to be considered, including the cost of piping blended gas to homes which customers may not be willing to bear.
Background
In August 2021, Energy Ministers agreed that the national gas regulatory framework should be amended to bring biomethane, hydrogen blends and other renewable methane gas blends within scope and that amendments should initially focus on ensuring that:
Regulatory barriers do not restrict proposed investments in projects involving the supply of natural gas equivalents; and
Existing regulatory arrangements and protections continue to work as intended.
This has become pressing because a number of trials of natural gas equivalents will commence in 2021 and 2022, and there is currently uncertainty as to whether the NGL, including the definition of natural gas, poses barriers to these trials. The AEMC's review is therefore part of a suite of reviews that are being conducted concurrently to enable the NGL, NGR, NERL and NERR to be extended.
Concurrent to these reviews, the AEMC is also undertaking a Rule change process to assess a request, by the Victorian Minister for Energy, Environment and Climate Change, to amend Part 19 of the NGR to incorporate distribution connected facilities into the Victorian declared wholesale gas market (DWGM).
The AEMC’s Consultation Paper considers whether:
Economic regulatory arrangements for gas pipelines need to change – for example how ring-fencing arrangements might work, and the rights of gas suppliers supplying blends and new gases when seeking to connect to pipelines;
Market transparency mechanisms are adequate – for example, the current reporting obligations for the Bulletin Board, Gas Statement of Opportunities and Victorian Gas Planning Report;
How facilitated gas markets might need to evolve – for example, potential changes to registration categories, settlement, and any changes for the allocation and trading of natural gas equivalents and constituent gases;
Impacts on regulated retail markets – for example, potential changes to registration categories, and how settlement, metering and billing might be impacted;
Any impacts on consumer protections – for example, managing issues relating to pricing, notification requirements and billing data; and
Whether the regulatory sandboxing framework could be used to support trial projects using natural gas equivalents.
These issues are explored below.
Key Issues
Economic Regulation
The AEMC consider that most elements of the existing gas regulatory framework could be applied without amendment including:
Constituent gas service providers having similar rights to connect to pipelines; and
Extensions of ring-fencing provisions which would prohibit joint distribution and retailing unless exemptions are sought.
New matters being considered relate mainly to the period of transition, for example whether service providers should be required to publish information on the type of gas their pipelines are licensed to carry and any plans they have to transition to another gas.
Market Transparency Mechanisms
The AEMC has proposed that:
The facilities and activities associated with the supply of natural gas equivalents will be treated in the same manner as their natural gas counterparts for the purposes of the transparency mechanisms; and
The AEMC would be given the power to make Rules to extend the transparency mechanisms to constituent gases and their related facilities and activities.
Evolution of Gas Markets
The AEMC considered two broad approaches:
Facilitate the trading of natural gas equivalents, or
Continue to trade only natural gas through the relevant facilitated market, and implement separate market arrangements for natural gas equivalents (such as in relation to blending) downstream of the facilitated market.
The AEMC is undecided on the way forward. It will consider and consult on registration categories, offsetting unaccounted for gas (UAFG), other settlement and allocation issues, metering and heating values, gas specifications, and the management of blending constraints.
On the latter, the current regulatory frameworks make no provision for assigning responsibility for the creation of a natural gas equivalent blend which is consistent with the revised gas specification. The AEMC has proposed that this responsibility be placed on either the party operating the blending facility and/or the shippers or participants who are commercially responsible for the natural gas blend produced, or for the DWGM and associated distribution systems, to assign the operational role to AEMO.
Retail Market Issues
The AEMC has identified a need to consider retail market registration provisions as well as registration categories, and changes to settlement and balancing arrangements. The latter will be important given that the injection of constituent gases into distribution systems has the potential to distort settlement. New market rules and procedures will be needed to both ensure that constituent gas injections are taken into account when determining the allocation and settlement of natural gas between users in the network, and to balance injections and withdrawals from the system on a comparable basis.
The AEMC has also foreshadowed that metering arrangements will need to be amended to ensure consumers are charged correctly. This includes measurement and testing of gas chromatographs to ensure they can measure the heating value of natural gas equivalents, and changes to metering requirements to ensure that gas monitoring systems on distribution systems can accurately measure the energy content of natural gas equivalents at different times and locations.
Consumer Protections
Natural gas equivalents will fall within the definition of natural gas under the NGL, and therefore the definition of energy under the NERL. This means that existing consumer protections under the NERL and NERR will apply to the sale and supply of natural gas equivalents to customers, and that the contracts between a retailer and small customers, and between a distributor and a customer, would apply to the supply of a natural gas equivalent as if it were natural gas.
Other issues to be dealt with during the review include:
How any differences in the physical properties of natural gas equivalents compared to natural gas are dealt with;
How the difference in the price of natural gas equivalents compared to the price of natural gas will be dealt with; and
How the risk that customers could be supplied with gas that is unsuitable for use in their appliances, if they are supplied with natural gas equivalents instead of natural gas, will be dealt with.
On the issue of price, the AEMC has noted that a retailer may wish to increase the prices it charges to customers connected to a distribution system that has transitioned to supply a natural gas equivalent because the constituent gas has a higher cost gas than natural gas. There are some restrictions around this; the NERL and NERR impose obligations on retailers regarding variations to standing offer prices and tariffs payable under market retail contracts. The AEMC is considering whether retailers that are changing prices because of the transition to the supply of a natural gas equivalent should be required to disclose this.
Regulatory Sandboxing
If the regulatory sandbox arrangements under the NGL and NERL are extended to natural gas equivalents and constituent gases, persons or bodies that propose to undertake trial projects would be able to seek trial waivers or trial Rule changes to test approaches in relation to the sale and supply of a natural gas equivalent to customers (a change of product trial), or to the facilities and activities relating to constituent gases that make up a natural gas equivalent. A change of product trial may give rise to a potential gap in the provisions relating to customer opt-outs under regulatory sandbox rules. The AEMC is considering whether the NGR and NERR need to be amended to reflect that a retail customer cannot opt out of a change of product trial, to ensure that trials are able to continue where approvals have been previously granted.
Our Insights
This Review is the thin edge of a much larger wedge, as regulatory and policy institutions begin to seriously consider the implications of a transition from natural gas to hydrogen in an orderly and transparent way.
Implications for Gas DNSPs
It is important to note that gas distribution companies, although they are the greatest proponents of green hydrogen distribution presently, neither sell nor use green hydrogen. Their business is the transportation of a commodity, and the lifetime of the commodity presently being transported, at least at its current cost point, is limited.
For Gas DSNPs, this review provides the first step in a long process of transitioning from natural gas to green hydrogen supply to customers through the natural gas distribution system. Rennie Partners sees this as part of a broader existential challenge for the gas distribution sector. In our view, net zero 2050 or 2070 commitments will inevitably bring with them carbon prices, which will in turn impose cost (through one mechanism or another) on natural gas customers.
Put simply, if gas distribution to the residential market is to be viable post 2050, gas distributors require adoption of blended gases by customers as soon as possible.
Implications for Retailers
For hydrogen or blended gas to be commercially viable, customers will need to require it for some use, and then see value in it relative to their existing options of meeting that need. When this occurs, they will seek to procure it from retailers.
Household customers use either electricity or natural gas for cooking and heating. Over the longer term, there are two issues that need to be considered. The first is whether households will see blended gas in the same way they see natural gas, particularly if a cost impost is imposed with that choice. The second is whether customers will value green gas over green power. There is a question as to whether households will pay for green gas which involves renewable power being used to produce hydrogen, to be piped to a household for use in gas appliances, rather than using electrical appliances which use distributed power made from that same renewable power.
For industrial customers, the choices are similar although bounded slightly by the ability to substitute in production processes. Put simply, some industries need hydrogen as part of the production process (for example glass making). Others use natural gas but could switch to blended gas or hydrogen without significant difficulty. At issue therefore is whether blended gas through the gas network can be supplied at the same cost as natural gas currently, and the cost of substitution.
On balance, Rennie Partners see the review being undertaken by the AEMC as positive. Allowing blended gas into the gas networks is a positive decision and will ensure that those investments that can be made are not held back by regulation. Ultimately, however, there is a commercial choice to be made by the customer between the commodities that are supplied by pipeline, and those supplied by power lines, and the cost of each. It will be important to ensure through the review and subsequent processes that these choices are not made for the customer through the development of subsidisation frameworks.
For more information, contact Simone Rennie at srennie@renniepartners.com.au
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