You can download the full PDF here.
30th August 2024
Todd Settle
Principle Policy Officer
Department of Climate Change, Energy, the Environment and Water
NSW Government
4 Parramatta Square
12 Darcy Street
Parramatta NSW 2150
Dear Mr Settle,
Re: Opportunities for a renewable fuel industry in NSW
The Australian Hydrogen Council (AHC) welcomes the opportunity to engage with the development of a renewable fuel strategy for NSW.
The AHC is the peak body for the hydrogen industry and our membership includes companies from across the hydrogen value chain. Our members are at the forefront of Australia’s hydrogen industry, developing the technology, skills and partnerships necessary to ensure that hydrogen and its derivatives play a meaningful role in decarbonising Australian industry.
We are pleased to see NSW investigating a renewable fuel industry, building on existing policies such as the Renewable Fuel Scheme (RFS) and the identified priority industries under the federal Future Made in Australia package. Designing the incentives across the value chain and ensuring that they are stackable will be paramount to investments landing in NSW.
What is missing in this consultation, however, is the targeted, strategic intent that NSW wants to drive this strategy. To explore the complexities and possible unintended outcomes, this submission discusses the proposed fuel mix, the objective of possible actions and support mechanisms, before touching on the design and possible implications of an expanded RFS.
The proposed fuel mix under the strategy
The covered renewable fuels under this strategy have not yet been determined, but the paper considers green hydrogen, methanol, green ammonia, biomethane, biodiesel, renewable diesel, sustainable aviation fuel (SAF), biochar and biogas. Dealing with these as discrete fuels should allow better targeted policy for each individual case. (We also note that many of the proposed alternative fuels can use green hydrogen as a feedstock, and that some stackability of the different cases for fuels will better support the overall business case for hydrogen.)
In our own discussion of the issues, we will group the proposed fuels as biofuels, renewable diesel/SAF, and hydrogen and its derivatives (methanol and ammonia).
Prioritising biofuels for near term use is a reasonable perspective. Biofuels are the transitionary step for most liquid fuel uses while electrification and hydrogen capabilities are scaled up, and they will continue to play a vital long-term role for smaller scale use. In our view, biofuels must be enabled but cannot deprioritise efforts to develop policy to electrify, use batteries, and have the infrastructure and supply for when the demand requires it.
Biofuels are of course not all the same; this is a diverse family of feedstocks with their own different emissions characteristics. One thing all biofuels have in common, besides drop-in capabilities, is natural constraints on production. Waste streams are certainly constrained, and crop requirements for land and water can reach the point where biofuel production starts to compete with food.[1] Additionally, there are implications for biodiversity and fertility of land where rising impacts of climate change are expected to already be impacting crop yield. These are finite and vital resources that need to be managed carefully and responsibly.
To add complexity, there will be competition for biofuels across the hard to abate industries, particularly in aviation and maritime, where the demand will outweigh the possible supply of biofuels. These modes of transport must strategically sequence their decarbonisation and the feedstocks each can potentially use. We need greater clarity on the natural constraints of biofuels and this is a matter not only of fuel security but also food security.
Renewable diesel and SAF (whether biofuel or hydrogen-based) have been merged in recent government consultations, but it is important to note that these are not equivalent in terms of their long-term value to Australia’s transport decarbonisation efforts. Renewable diesel is expected to have a shorter-term role, such as in heavy road transport and will be used more in regional and rural areas, for vehicles that are not yet ready for retirement, and while the technology and refuelling/recharging networks are being rolled out. Furthermore, incentivising renewable diesel could lead to the perverse outcome of delaying or undermining the transition to electrification, which is already a commercially available and governmentally subsidised technology in some transport modes. In contrast, SAF is a genuinely long-term play.
Hydrogen production and utilisation is a necessity rather than a choice, and it requires significant commitment and investment. This is because hydrogen will be the primary way to decarbonise key sectors of our economy, such as ammonia for fertilisers, iron and alumina ores, industrial processes that require high temperatures, and fuel for heavy road transport, aviation and shipping. This is how we reach net zero by 2050.
Aligning a renewable fuels industry to benefit NSW’s vision
As we note above, the paper appears to lack a clear objective for the NSW Government’s strategy.
To develop a clear intent for the strategy, we would make the following recommendations on the design and execution of the policy mix:
- Align with the Sustainable Finance Taxonomy’s categorisation. While we are supportive of a renewable fuel strategy and a diverse range of fuels will have a role to play in decarbonisation, it is important to note that each has a different timeline and emissions abatement. As NSW develops the policy framework surrounding the chosen renewable fuels, we ask that the incentives and sequencing considerations with the Australian Sustainable Finance Institute’s Sustainable Finance Taxonomy.[2] This work is still in development, but it currently proposes to categorise investment opportunities as either transitionary or green. The objective here is to avoid greenwashing, utilising the short-term options alongside long-term, net zero solutions, but phase out the transitionary option so that it doesn’t negatively impact full decarbonisation.
- Design and scale incentives based on their relative decarbonisation potential. If NSW is aligning this fuel strategy with its commitment of net zero by 2050, transitionary and future state parameters will need to be built into the framework. This will translate to any incentive for a transitionary fuel requiring a sunset clause, mandatory review date or phased reductions, so they do not unnecessarily delay the full decarbonisation of industries. Furthermore, any incentives could be scaled corresponding to the emissions abatement value, much like how low carbon fuel standards are designed.
- This strategy should support target decarbonisation pathways where there is not an alternative solution and avoid undermining electrification. This categorisation should be determined based on collaboration with current government modelling on what alternative solutions are available (or conversely, are not available) for each use case. In this, the ‘hard to decarbonise’ label should be disaggregated, firstly into what is ‘hard to electrify’ and will require molecules, which can then be mapped into pathways, timeframes and technologies. The Australian Government’s Net Zero 2050 Plan that is being developed out of the sectoral plans should provide the baseline for the optimal shares of different fuels required, including the expected volumes, efficiencies between sectors, and any natural parameters.
- Collaborate on a national feedstock and utilisation strategy. In its recent submission to the low carbon liquid fuels consultation, the National Farmers’ Federation called for a national feedstock strategy,[3] and in this renewable fuels strategy discussion paper, the NSW Government suggests that a hierarchy of fuel needs could be developed. To develop the optimal policy pathway, we agree that Australia needs a stronger understanding of what fuels are expected to be necessary to offset carbon emissions, at what volumes and by when. Each jurisdiction should work with the Australian Government to model the capabilities, needs and timelines. This includes masterplanning for the inflection point where biofuels will be expected to switch to e-fuels, and how this will be managed through policy.
- Maximise the effectiveness of the strategy by amending any contradictions in the existing policy infrastructure. If the objective of the strategy is to build a renewable fuel industry in NSW, then the NSW Government should review any existing policy that will limit this transition. This includes that renewable fuels are competing with incumbent industries that are directly subsidised by other parts of government. For example, the federal diesel rebate is a valuable policy that is undermining the transition to renewable fuels, and will continue to do so if this is not amended or supplementary policies facilitate decarbonisation across industries. As Australian governments allocate budget to incentivise the production and uptake of renewable fuels, the jurisdictions should work together to redirect subsidies so as to not undermine the efficiency and effectiveness of public funds. Furthermore, to build the optimal policy infrastructure, a strong and rigorous Australian carbon border adjustment mechanism (CBAM) should be established to avoid the perverse outcome of parallel imports of cheaper, more emissions intensive materials undercutting Australia’s decarbonisation investment and efforts. NSW should support the establishment of an ASEAN level CBAM in Australia (extending to renewable fuels such as hydrogen and its derivatives), both to strengthen regional investment partnerships and initiatives aimed at increasing friendshoring in critical sectors and to increase the likelihood of successful industrial decarbonisation.
- Collaborate with Australian governments on the interoperability of incentives and reporting requirements. Support mechanisms that are progressed through this strategy should ideally be stackable with existing state and federal incentives (such as the federal Hydrogen Production Tax Incentive) to maximise the effectiveness. This interoperability should extend to streamlining access and reporting pathways for Australian schemes (such as the federal Guarantee of Origin Scheme), utilising similar methodologies and processes to decrease administration burden.
To put these design recommendations into practice when considering the possible mechanisms and actions, the transitionary and future state framework from the Sustainable Finance Taxonomy can assist in the design of the strategy’s policy mix. This includes the various suggestions regarding transition planning, infrastructure assessments and managing market risks. More specifically, as noted in the consultation, the NSW Government could investigate the utilisation of its government procurement and purchasing requirements lever. By committing to being the first customer, the government creates demand, supports the order book of nascent Australian companies, and reduces risk and uncertainty for subsequent buyers and investors. However, to avoid any perverse outcomes of locking in transitionary fuels beyond their necessity, this would need to be targeted at the future state – assisting the commerciality of zero emissions pathways.
A significant challenge in establishing a renewable fuels industry is on the demand side, where the NSW Government should have a role in driving fuel switching. Initiatives addressing demand should be long term, transparent, sequenced based on modelling, and incentivised based on emissions reduction. This could be through mandates, purchase targets, or low carbon fuel standards, but should be based on the feedstock and utilisation modelling, transitionary and future state categorisation, and NSW strategic intent. However, many of the available policies would be optimally designed for a nationally harmonised approach, so should be discussed in conjunction with colleagues in the states, territories and Australian Government.
Conserving the objective of the Renewable Fuel Scheme through expansion
The RFS has been a progressive and ambitious state policy that works to enable investment into hydrogen. The RFS was established under the Energy Security Safeguard and the NSW Hydrogen Strategy in December 2021, with the intention of incentivising the production of green hydrogen in NSW. Through this policy, the NSW Government’s strategic intention to establish a green hydrogen industry was very clear and targeted, but this is at risk of being diminished.
The policy infrastructure in Australia has shifted since this foundational RFS was proposed, most notably by the FMIA and the Hydrogen Production Tax Incentive. While these policies will positively impact the economics of hydrogen, there is still a notable gap in price parity which will be assisted by stackable, targeted policies such as the RFS, strengthening NSW as an attractive location for investments to land.
Since late last year, the NSW Government has been discussing the possible expansion of the RFS to cover additional renewable fuels, such as methane, ammonia, methanol, kerosene, diesel, liquified petroleum gas and ethanol. By increasing the coverage in this way, the RFS can better support the NSW Government’s broader net zero approach, and we believe this to be sensible.
However, this would introduce competition into the RFS, which might then result in fuel choices that do not meet the strategic intent of the government to develop individual fuels. This is particular problem where we need to develop the market for hydrogen, which we know is required for net zero, but will be more expensive than the alternatives.
If the scheme is to be expanded, safeguards would need to be implemented to ensure that the prospect and support for hydrogen in NSW is not fundamentally constrained or completely undermined.
The hydrogen industry needs long lead times to become economic. The original RFS is the type of policy that can lay the foundations for the long-term success of the green hydrogen and derivatives industry. Noting especially that this policy only considers hydrogen through electrolysis as the eligible production pathway because of its emissions abatement, it would be counterproductive to allow the same level of benefit to other fuels that may have existing supply chains at scale, lower costs and higher emissions thresholds. Any incentives should be in proportion to their emissions reduction and align with the objectives and ambitions of NSW.
Hydrogen-specific targets
Without an incentive such as a robust hydrogen-specific target under the RFS, there would be significant reduction in the value of this scheme. The RFS alone is not going to provide price parity for the hydrogen industry in NSW, but a diluted version of the scheme with a single target for all renewable fuels would undermine the original strategic intention. This would also necessitate more additional supports for the hydrogen industry than would be required under the initial concept of the scheme. Should the scheme be expanded, there should be individual targets for the various fuels that can contribute to NSW (and Australia’s) decarbonisation commitments. While there may be perceived efficiencies and simplicity in combining targets, this can lead to perverse outcomes by favouring over-compliance in cheaper, higher emissions options beyond their necessity, and undermining long term, net zero solutions. Separating these should lead to more effective and targeted emissions abatement, while also allowing NSW to determine the appropriate timelines for each.[4] In this, renewable diesel should also be separated from SAF to ensure that aviation is set up for success.
Furthermore, considering that biogenic fuels are closer to price parity, the RFS team could consider inclusion only in the short term to accelerate decarbonisation efforts, before phasing these out of the scheme. We are supportive of the expansion as long as it does not undermine the support for hydrogen; it is integral that the key mission of the RFS is not diluted by the inclusion of additional fuels.
Liable parties
Prior to this proposed expansion, the only liable parties were to be gas retailers and gas consumers that do not use a retailer. The AHC has previously advocated that using gas retailers as a means to socialise costs with gas users could have negative impacts, as this cost would be an unwelcome addition to household utility bills, particularly in a cost-of-living crisis. Even if the ultimate bill amounts are very low (which we understand they would be for hydrogen developments for some time) this could have a negative impact on the social licence of hydrogen. Should the scheme proceed this way, the RFS and NSW Government should be very clear in the process, flow-down and communication requirements of liable parties about the costs of the scheme.
If the scheme is to expand into additional fuels, then the AHC would be supportive of additional liable parties to support the transition. We caution against all costs being borne solely by households.
Recommendations
- Align the renewable fuel strategy with the Sustainable Finance Taxonomy’s categorisation of transitionary and future state pathways.
- Design and scale incentives based on their relative decarbonisation potential.
- Support target decarbonisation pathways where there is not an alternative solution and avoid undermining electrification.
- Collaborate on a national feedstock and utilisation strategy with the Australian Government.
- Maximise the effectiveness of the renewable fuel strategy by amending any contradictions in the existing policy infrastructure.
- Collaborate with Australian governments on the interoperability of incentives and reporting requirements.
- If the renewable fuel scheme is to be expanded to additional fuels, safeguards would need to be implemented to ensure that the prospect and support for hydrogen in NSW is not fundamentally constrained or completely undermined. This involves developing separate targets for each renewable fuel, including splitting renewable diesel from SAF, and maximising the scheme’s value to decarbonise, by incentivising fuels in proportion to their emissions reduction values and phasing out transitionary fuels.
- The renewable fuel scheme and NSW Government should be very clear in the process, flow-down and communication requirements of liable parties about the costs of the scheme, especially if this is likely to reach households.
If you wish to discuss any element of this in further detail, please contact me at [email protected].
Yours sincerely,
Natasha Cerexhe
Policy Manager
Australian Hydrogen Council
[1] CSIRO (2023) Sustainable Aviation Fuel Roadmap, https://www.csiro.au/en/research/technology-space/energy/sustainable-aviation-fuel.
[2] Australian Sustainable Finance Institute (2024) Taxonomy Project, https://www.asfi.org.au/taxonomy.
[3] National Farmers Federation (2023) Low Carbon Liquid Fuels – A Future Made in Australia: Consultation Paper, 2 August, https://nff.org.au/submission/low-carbon-liquid-fuels-a-future-made-in-australia-consultation-paper/.
[4] For example, Pavlenko and Zheng (2024) discusses the efficiencies of coupling sectors for a low carbon fuel standard in the United States, but ultimately finds that this leads to over-compliance in renewable diesel to meet aviation sector targets rather than effectively incentivising second generation renewable fuels. See
Pavlenko, N. & Zheng, S. (2024) ‘Evaluating the potential role of a National Low-Carbon Fuel Standard to support sustainable aviation fuels’, International Council on Clean Transportation, January, https://theicct.org/wp-content/uploads/2024/01/ID-30-–-Aviation-LCFS-working-paper-letter-20225-fv.pdf.
