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1.1 Navigate The Energy Transition

Nations have agreed to limit global average warming to well below 2°C, and aim to limit warming to 1.5°C.1 Global warming is fuelled by greenhouse gas emissions.2 Global greenhouse gas emissions from human activities must fall to net zero by 2050 to have a 50% chance of keeping warming below 2°C.3

All Australian states and territories have committed to net zero emissions by 2050, including Victoria. Business is also increasingly pricing climate change transition and physical risks into investment decisions, including by changing corporate valuations.4

Victoria’s Climate Change Act 2017 creates a system of coordinated, whole-of-economy initiatives to achieve a net zero emissions, climate resilient state. It legislates a target for Victoria to achieve net zero greenhouse gas emissions by 2050. It also features rolling five-year targets, emissions reduction pledges, and climate change adaptation plans, while obliging all government policies, plans and decisions to consider climate change.5 In May 2021, the Victorian Government released Victoria’s climate change strategy, interim reduction targets and sector pledges,6 including commitments to source 50% of Victoria’s electricity from renewable resources by 2030.7

In Victoria, energy used to power electricity, gas and transport produces around 90% of emissions. Victoria must change the way it generates energy if it is to meet the legislated net zero emissions target by 2050.

Around 70% of Australia’s greenhouse gas emissions are either directly attributable to or influenced by infrastructure.8 About 90% of Victoria’s emissions are produced from energy used to power electricity, gas and transport. This means Victoria must change the way it generates energy to meet the legislated net zero emissions target by 2050 – from fossil fuels to clean and renewable energy sources. Emissions from electricity generation have declined since 2005, gas emissions have stayed relatively stable, and transport emissions have increased.9 An effective way to meet the net zero emissions goal is to use existing alternative solutions to reduce emissions as much as possible, and using emissions offsets for those that are more difficult to eliminate.

Energy powers Victoria’s economy, keeps homes comfortable, and underpins the technology used by a modern society. A thriving future depends on reliable, affordable and sustainable energy, including efficient and productive energy infrastructure. Climate change mitigation, technological advances and changing consumer energy sources are disrupting Victoria’s energy generation, transmission, distribution, and use. Victoria has the knowledge, technology and resolve to manage the energy sector’s transition.

Road vehicles, like cars and trucks, contribute almost 90% of transport emissions. To achieve net zero transport emissions, Victoria must adopt alternative zero emission transport technologies.

Figure 1 Victorias greenhouse gas emissions by sector 1
Figure 1: Victorian emissions by sector and energy sub-sectors, 2019

This diagram shows Victoria’s greenhouse gas emissions by sector, including the different energy sub sectors.

Source: Department of Environment, Land, Water and Planning, Victoria’s Climate Change Report 2020, p. 10

Transport emissions need to decline

Transport sector emissions grew more than any other sector emissions from 1990 to 2018, and they continue to grow.10 The direction must change to reach net zero emissions. Road vehicles, like cars and trucks, contribute almost 90% of transport emissions,11 largely from burning petrol and other fossil fuels. These internal combustion engine vehicles also produce other gases and particulates harmful to people’s health.

Even with significant investment in public and active transport, road vehicles are likely to remain the dominant transport mode in Victoria.12 Within 30 years, Victoria could have an extra 10 million road vehicle trips per day.13 To achieve net zero emissions, and the commitments in the Victorian emission reduction pledges,14 Victoria must adopt alternative transport technologies, like zero emissions electric and hydrogen vehicles. Doing so could also deliver health benefits worth over $700 million each year by the year 2046, especially for people living in dense urban areas and along major road corridors.15

Achieving greenhouse gas emission reductions relies, in part, on decarbonising the power used for these vehicles.

Zero emissions vehicles are still a relatively recent technology. Electric vehicles are the most mature and proven technology for rapidly reducing transport emissions,16 especially if paired with a decarbonised electricity sector. Hydrogen fuel cell vehicles were not available for consumer purchase in Australia as of April 2021.17

The adoption of zero emissions vehicles in Australia is significantly lagging other countries. Australia has the fourth lowest electric vehicle sales in the OECD, making up 0.7% of new vehicle sales in 2020, compared with just 4.2% globally.18

Battery electric vehicles make up around 0.1% of the total vehicle fleet in Australia. Based on current trends, and in the absence of any further policy incentives, uptake of battery electric vehicles is projected to reach only 3% of the total Australian vehicle feet, or half a million vehicles, by 2029–30.19

Encouragingly, electric vehicles are falling in price and extending the distance they can travel on a single charge.20 They are cheaper to run than conventional vehicles, and may cost the same to buy by as early as 2023.21 Nations successful at increasing purchase of zero emissions vehicles have used a mix of policy approaches. Norway is a global leader, offering incentives to buy electric vehicles, exemptions from purchase and import taxes, on-road priority for traffic lanes and ferries, penalties for more emission-intensive vehicles, and a large network of charging stations.22

The Victorian Government released Victoria’s Zero Emissions Vehicle Roadmap in May 2021. The roadmap encourages the uptake of zero emissions vehicles, including advocating that all governments work collectively to make Australia an attractive market for zero emissions vehicles and increasing consumer choices.23 This needs a mix of policy approaches. For example, the Australian Government can use importation rules and vehicle emissions standards to help accelerate adoption of zero emissions vehicles. Australia is among a small minority of countries without mandatory greenhouse gas emissions or fuel efficiency standards for cars. On average, new cars sold in Australia emitted 43% more carbon dioxide for each kilometre travelled, compared with those in Europe in 2015.24 The Victorian Government can continue to advocate for the Australian Government to use national policy changes to encourage faster uptake of zero emissions vehicles.

To meet the Victorian Government’s target of net zero emissions by 2050, transport sector emissions will need to decline. Increased uptake of zero emissions vehicles is needed to contribute to decreasing transport sector emissions.


Community recommendations for increasing zero emission vehicles on Victoria’s roads

In early 2021, Infrastructure Victoria shared the challenge of tackling transport emissions with a group of Victorians through a deliberative engagement process. This was the largest of its kind in Victoria, with 211 participants forming a community panel which largely represented Victoria’s diverse population. The community panel focused on answering the following question:

Victoria will not reach its emissions reduction targets with continued reliance on petrol and diesel vehicles. How should the Victorian Government support more people to adopt low or zero emissions vehicles sooner?

The panel discussed the challenges of climate change, the commitment to transition to net zero emissions by 2050, and the need for resilient, lower emission,and comfortable ways to travel. They acknowledged people are making different transport choices than in the past, technology is changing rapidly, and that Australia can build on other countries’ successes. They also recognised the different transport challenges and opportunities for different groups of people, such as older people, younger people, those living with a disability or newly arrived migrants, as well as Victoria’s geographical differences. Panel members considered fairness during their deliberations, which formed a cornerstone of their discussions.

The community panel developed 21 recommendations, including:

  • Deliver a broad community awareness and education campaign
  • End the sale of new internal combustion engine vehicles by 2030
  • Introduce planning controls requiring new developments to install charging infrastructure
  • Provide financial incentives to support the initial transition to low or zero emissions vehicles
  • Provide electric vehicle charging stations in activity and town centres
  • Advocate to local governments to change their feets to electric vehicles.

Details of the community panel deliberative engagement process and their full 21 recommendations are in Tackling transport emissions to encourage uptake of low or zero emissions vehicles sooner – community panel report. Further detail of Infrastructure Victoria’s analysis of options for encouraging zero emissions vehicles is in Driving down emissions: accelerating Victoria’s zero emissions vehicle uptake.

Electricity is leading the charge

Victoria is already reducing its greenhouse gas emissions from electricity generation, with nearly a 27% drop from 2005 to 2018.25 In 2017, the Hazelwood power station closed, reducing greenhouse gas emissions by 15 million tonnes of carbon dioxide emissions a year,26 but also removing 1600 megawatts of power from Victoria’s electricity grid. The Latrobe Valley’s three remaining coal-fired power stations generate most of Victoria’s remaining electricity emissions.27 They are forecast to close in the next 30 years,28 and will become more unreliable as they age.29 Yallourn power station is the next to close in mid-2028.30

Victoria’s central electricity challenge is managing the eventual closure of these power stations. This must be achieved while retaining affordable, reliable, low emissions replacement energy, and ensuring the Latrobe Valley has a thriving economic future. Many inquiries, reports and strategies set out the reforms required to manage the energy transition and to secure benefits for energy consumers.31

Victoria achieved its renewable energy target for 2020 of 25%. The Victorian Government has a legislated target of 50% renewable energy generation by 2030.32 The Victorian Government also released their Energy sector emissions reduction pledge in May 2021, which includes actions to transition to a low-emissions energy future.33 Its new targets support adding more renewable energy generation, which is cheaper to build than new coal plants.34 Large-scale solar and wind farms are already connecting to the electricity transmission network, accounting for 24% of the state’s total generating capacity.35 Many individual households are generating their own power using rooftop solar panels. Rooftop solar comprised 17% of generation capacity in 2020,36 and will continue growing, including from support by the Solar Homes Program.37
 Electricity networks will need to adapt to allow two-way flows of electricity, which can involve distribution networks making location specific investments to manage voltage issues.38

Victoria’s electricity transmission infrastructure has historically been configured to carry power from the Latrobe Valley power stations to places with high energy use, such as Melbourne. In some areas, weak transmission networks cannot currently carry large amounts of electricity and some renewable energy generators are already having trouble exporting their electricity.39

Future large-scale renewable energy will be sourced from places with good sun and wind resources, which are not always near existing high capacity transmission lines. Victoria will need to better coordinate new transmission and generation infrastructure to help bring new renewable electricity online in the right place at the right time.
Adopting renewable energy generation also creates new challenges for the electricity system’s stability.40 Intermittent electricity sources need complementing and stabilising with dispatchable power to reliably meet electricity demand, especially when the sun is not shining, or the wind is not blowing. For example, dispatchable resources include batteries, pumped hydroelectricity, or potentially gas-fired generators. The transition can be supported by new transmission infrastructure and power system services that improve voltage control, system strength, frequency management, power system inertia, and dispatchability.41 Victoria’s energy network connects to other states allow electricity to be shared across state borders. The National Energy Security Board, in collaboration with other energy market bodies, is working on a post-2025 market design for the National Electricity Market to support the rapid electricity transition.42 Reform areas include resource adequacy mechanisms to deliver reliable supply to customers, essential system services to manage the complexity of operations, unlocking demand side participation, and long-term arrangements to promote efficient access and use of the electricity grid.43

About 30% of Australia’s renewable energy jobs are in Victoria, largely in regional areas.44 Local communities can benefit from a more dispersed energy generation system, especially in regional Victoria. Many local councils have declared climate emergencies 45 and supporting renewable energy projects can help local governments pursue local net zero emissions targets. For instance,

Warrnambool City Council recognises the link between its climate emergency motion and its W2040 and Green Warrnambool plans.46 Constructing renewable energy projects can create jobs that support electricity supply chains and provide expert services, as demonstrated by the 30 specialist firms already operating in Barwon South West.47 Regional electricity investment can be leveraged for extra community benefits, such as developing new skills to support renewable energy industries.

Victoria has legislated a new target of 50% renewable energy generation by 2030 and is rapidly adding renewable energy generation, which is cheaper to build than new coal plants.

Managing and reducing energy demand makes the task easier

Electricity infrastructure must generate and transmit enough energy to meet the highest peak of electricity demand, or risk blackouts. But as Figure 2 shows, Victoria only needs this much electricity a few times each year – usually on the hottest summer evenings when people return home and turn on their appliances, especially air conditioners. This electricity capacity lies idle the rest of the time. For instance, maximum Victorian energy demand was over 9200 megawatts in 2019, but only exceeded 7800 megawatts on 14 days – the difference being equivalent to the output of a Victorian coal-fired power plant. Reducing this peak lessens the generation and network infrastructure Victoria needs, reducing the emissions generated. Avoiding constructing more infrastructure than necessary also eases upward pressure on household energy bills.

New electricity demands will likely emerge, such as greater electrification of home appliances, and widespread adoption of electric vehicles. Extensive adoption of electric vehicles could compound electricity demand peaks if they are charged at these times, for example, if people return home from work, plug in their car and turn on their air conditioner. This magnifies the urgency of better managing energy demand. Encouraging people to charge electric vehicles during off-peak periods could potentially save around $2.5 billion in extra infrastructure investment.48

Figure 2: Victoria uses peak electricity capacity only a few times a year.

This graph shows the variation in Victorian energy demand from July 2019 to July 2020. 

Figure 2 Variation in Victorian energy demand from July 2019 to July 2020 1
Source: Australian Energy Market Operator, Aggregated price and demand data – Historical Victorian data from July 2019 to June 2020

Globally, energy efficiency is predicted to be the single largest contributor to reducing greenhouse gas emissions.

Influencing energy consumption patterns can reduce overall electricity demand and shift some demand away from peak periods. Demand management pricing rewards energy consumers with significant cost savings if they reduce their energy use or shift it away from peak periods. Smart technology can automatically help people charge zero emission vehicles off-peak, or avoid using appliances during peak periods. Pricing signals can influence household and business decisions to invest in new technologies, for instance, choosing to install rooftop solar or batteries, and selling their excess solar energy back to the grid. Better signals can also encourage them to export when the system requires it most. In the long term, better signals will help consumers take advantage of the future energy market and technological improvements.49

Beyond simply shifting energy use, using electricity more efficiently helps reduce demand overall, ultimately saving on infrastructure costs. Globally, energy efficiency is predicted to be the single largest contributor to reducing greenhouse gas emissions for the energy sector.50

Energy abatement by 2030 could come from energy effciency.51

Energy use in buildings accounts for around one-third of Victoria’s total greenhouse gas emissions,52 with heating and cooling making up over 40% of home energy costs.53 The energy efficiency of homes and buildings can lock in future energy demand, as they are long-lasting and can be difficult to change. More than half of Australia’s 2050 building stock will be constructed during the next 30 years, at prevailing energy efficiency standards.54 The rest may need retrofitting to help prevent escalating energy costs and demand. Many well-established international energy management policies, practices, and technologies have significant potential.55

Energy efficiency becomes even more important in a warmer climate, avoiding extra cooling costs and heat-related health consequences. One study found residents of 0.9 energy star rated homes in Melbourne were about 50% more vulnerable to experiencing heat stress during a heatwave compared with residents of 5.4 energy star rated homes.56 Strengthening demand management pricing provides more incentive to improve residential energy efficiency. Extensive economic research shows households respond to higher energy prices by adopting energy efficient technologies or spending more on energy saving measures.57

Future technology will shape energy options and use

During the next 30 years, new technologies will shape energy use, and generate new options to reduce greenhouse gas emissions and manage the energy system. Electric vehicles are already available and Victoria is conducting a zero emission public transport bus trial.58 New battery storage is being installed, including a

300 megawatt battery.59 The Victorian Government is also investigating the science and viability of carbon capture and storage at commercial scale.60 Victoria also has the world’s largest hydrogen demonstration project, the Hydrogen Energy Supply Chain Pilot Project.61

While the electricity and transport sectors have potential pathways for achieving net zero emissions, the future is less clear for natural gas. Burning natural gas emits greenhouse gases, meaning Victoria will need to transition from natural gas to other energy sources during the next 30 years to achieve its net zero emissions goal. This has implications for the extensive 33,000 kilometres of natural gas network infrastructure.62 Victoria is the only state where most natural gas demand is from residential and small commercial customers, who mainly use it for heating and cooking. Over 80% of Victorian households are connected to the gas network.63 Natural gas will still need to be supplied in the short to medium term, but work needs to begin now on better understanding transition pathways for natural gas and the implications for gas networks and the electricity system.

Several futures are possible. One is electrification, which could mean retiring gas networks and building more electricity infrastructure. Another possible scenario is replacing natural gas with clean hydrogen or biomethane, if technically feasible and economically competitive. This may or may not use existing gas networks for distribution.

While the cost and application of hydrogen technologies are still uncertain, they will develop over the next decade, and are acknowledged as having significant potential.64 The National Hydrogen Strategy views clean hydrogen technologies as a significant potential competitive economic advantage for Australia.65 It lays some foundations for a growing industry with many potential uses, including for heating, transport, electricity storage and generation, chemical feedstock and for export. Hydrogen could eventually be coupled with the energy, transport and water sectors.66

Infrastructure Victoria is preparing advice to the Victorian Government on the implications for gas transmission and distribution networks under different 2050 energy sector scenarios. We will report to the Victorian Government by the end of 2021. Assuming a definitive future now for Victoria’s gas networks, and immediately locking in a transition pathway, may pre-empt a better future decision. But the Victorian Government can take prudent actions now to maximise Victoria’s opportunities to reach net zero emissions and reduce the size of the risks from a large potentially stranded asset.67

Recommendations to help navigate the energy transition

Infrastructure Victoria makes the following recommendations to help manage the transition to achieve the Victorian target of net zero emissions by 2050, while retaining an affordable, sustainable and reliable energy system. They can also help support climate change adaptation (see section 1.2), improving infrastructure resilience to emergencies (see section 1.3) and regional economic development (see section 4.1).

Recommendation 01: Accelerate consumer purchases of zero emissions vehicles

In the next two years, publish a statewide electric vehicle charging network strategy, and produce charging infrastructure design standards and payment principles. Over the next five years, monitor and review the effectiveness of financial incentives in encouraging early zero emission vehicle purchases. Commit to no longer registering new petrol and diesel vehicles in Victoria by 2035 at the latest, through increasingly stringent vehicle registration emissions standards.

Cleaner energy sources can replace the fuels that power road vehicles, which generate greenhouse gas emissions. Electricity from a decarbonising energy network, or clean hydrogen, can power new zero emissions vehicles (ZEVs).

Reaching net zero emissions by 2050 requires widespread ZEV adoption, including managing their energy demand (see recommendation 9).

Australia trails behind global leaders in adopting ZEVs. Research commonly cites three main ZEV purchase barriers: vehicle cost, charging infrastructure access, and range anxiety.68 Other countries have successfully achieved rapid ZEV uptake using financial, infrastructure, and regulatory responses focused on removing these barriers.

Encouraging faster uptake now allows Victorians to enjoy the benefits of ZEVs sooner, including faster emissions reductions and health benefits.69 It also helps avoid Victoria becoming a ‘dumping ground’ for unwanted petrol and diesel vehicles.70

The Victorian Government has published Victoria’s Zero Emissions Vehicle Roadmap to achieve faster adoption of ZEVs.71 It includes a ZEV subsidy program providing early, time-limited, targeted, one-off financial incentives to help overcome the initial cost barrier.72 It also includes a public education campaign to reduce public misconceptions and promote confidence in ZEVs.73

Infrastructure Victoria’s deliberative engagement panel recommended measures like this. Subsidies are particularly effective before ZEVs reach purchase price parity with internal combustion engine vehicles, potentially as early as 2023.74 Over the next five years, the Victorian Government should regularly monitor and review these subsidies, so they are operating effectively. Electric vehicles require charging infrastructure. The Victorian Government has committed to accelerate charging infrastructure delivery.75 It should start developing a statewide charging network strategy which considers all road users, including private vehicles, freight and commercial vehicles, in urban and regional areas. The charging strategy should include producing standards for design and placement of public charging infrastructure, and principles for smart charging and integrated payment systems, so electric vehicle owners can use any provider for charging. The charging strategy should also consider whether electricity distribution infrastructure is sufficient to meet highly localised energy demands in areas with high ZEV uptake.76

The Victorian Government should publish the statewide charging network strategy within two years. This helps provide consumers with certainty and may encourage further charging infrastructure investment by the private sector.77

Victoria’s Zero Emissions Vehicle Roadmap sets a target for 50% of new light vehicle sales to be ZEVs by 2030. The Victorian Government should reinforce this target by committing to no longer registering new petrol and diesel vehicles by 2035 at the latest. This sends a strong market signal and helps achieve the 50% sales target, and emissions reduction targets. By setting a date now, the Victorian Government can provide confidence to consumers, industry, and vehicle manufacturers to start transitioning. It should use vehicle registration rules and air quality standards to reach these targets.78 This involves sequentially imposing more stringent air quality standards for registering new vehicles over time.79 Infrastructure Victoria’s deliberative engagement panel and the International Energy Agency support this type of phased approach of increasing vehicle emissions standards towards a clear end date, and many other jurisdictions around the world use it.80

Recommendation 02: Transition government feet and freight vehicles to zero emissions technologies

Within the next five years, require all new government fleet vehicles to be zero emissions vehicles where available. Incentivise uptake of zero emissions freight vehicles through reviewing restrictions on zero emissions freight movements on freight routes.

Buses, trucks and light commercial vehicles generate more than one third of transport sector greenhouse gas emissions.81 Reaching net zero emissions by 2050 requires industry and government to widely adopt ZEVs, in addition to households. The Victorian Government funds public buses and coaches, which make up around 70% of scheduled kilometres travelled by public transport vehicles.82 The Victorian Government’s target for all public transport bus purchases to be ZEVs from 2025 will assist in reducing transport sector emissions and improve people’s health.83

Victoria’s Zero Emissions Vehicle Roadmap sets a target to purchase 400 new ZEV vehicles for the government fleet by 2023.84 In the next five years, the Victorian Government should further commit to making all new vehicles in its fleet zero emissions, where appropriate models are available. This directly increases ZEVs on Victorian roads and over time also supports a growing second-hand market. Many freight movements occur through residential areas, creating noise and pollution. Consequently, hundreds of roads have restrictions, bans and curfews to limit truck movements.85 Zero emissions freight vehicles are quieter and less polluting. Creating exemptions from some of these restrictions for zero emissions freight vehicles would incentivise faster adoption, especially where the exemptions are primarily due to noise and pollution, such as night curfews. Allowing only ZEVs on some routes could also incentivise uptake. This should only be done where appropriate and safe, noting that zero emission freight vehicles can still create safety concerns and disruption.

In the next five years, the Victorian Government should incentivise zero emissions freight vehicles by reviewing restrictions on zero emissions freight movements on roads. This particularly applies to roads leading to the Port of Melbourne, where Infrastructure Victoria has found the community impact of freight traffic could be a barrier to increasing the port’s capacity (see recommendation 63).

Recommendation 03: Augment electricity transmission for renewable energy and resilience

Support augmentation of critical electricity transmission infrastructure by 2027‒28 to accommodate new renewable energy generation and improve network resilience and reliability through interconnection with other states.

The electricity market is evolving from centralised coal-fired power generation to a highly diverse system dominated by renewable energy. However, Victoria’s electricity transmission networks are designed to take power to consumers from coal-fired generators in the Latrobe Valley. The Yallourn coal-fired generator is set to close in 2028,86 and the other two in the late 2040s.87 Many renewable energy projects are planned in other areas of regional Victoria88 with good wind and solar resources.

Some regional transmission networks are already experiencing significant congestion, which will become more common.89 The transmission infrastructure in these places is not designed for high generation volumes, or to accommodate the technical requirements of renewable energy generation.90 Victoria needs new transmission infrastructure to improve capacity and unlock the potential of renewable energy resources.91 New transmission infrastructure should align with high concentrations of renewable energy, such as in priority Renewable Energy Zones92 (see recommendation 4) where large-scale renewable energy can be efficiently developed. Figure 3 shows candidate zones in Victoria for large-scale renewable energy projects identified by the Victorian Government. Appropriate and timely transmission augmentation will leverage investment in renewable energy projects, support jobs,93 and enhance system resilience and reliability.

The Australian Energy Market Operator (AEMO) is responsible for planning Victoria’s transmission network. Through its Integrated System Plan for the National Electricity Market, AEMO has identified two critical transmission extensions for Victoria: Victoria – New South Wales Interconnector (VNI) West and Marinus Link.94 Both projects provide access to, and support, renewable energy development in Victoria and assist in meeting the net zero emissions goal. The integrated system plan should continue to guide Victoria, alongside using transparent infrastructure assessments to support affordable, sustainable and reliable development.

The VNI West project will increase electricity sharing with New South Wales and improve access to the Snowy 2.0 pumped hydro project.95 AEMO has identified two route options for VNI West, which are shown in Figure 4. The Victorian and Australian governments are underwriting early works to support a route that leverages a Renewable Energy Zone in Victoria’s north-west and improves grid resilience against outages. The VNI West project should be delivered by 2027–28 in advance of the Yallourn power station closing, but the timing and scope should be reviewed if project costs are above $2.6 billion.96 The Victorian Government may need to consider expediting land use planning and development approval processes to meet this timing.97 The project will need significant coordination with the Renewable Energy Zone location and cooperation between governments.98

The Marinus Link project is a second, and potentially third, underground and undersea cable between Victoria and Tasmania that would access Tasmania’s hydroelectricity. Three projects totalling 1.7GW have been shortlisted within the Battery of the Nation project to proceed to feasibility studies. The Victorian Government can assist by progressing design and approvals processes to support the project being shovel-ready by 2023–24, allowing the first cable to be delivered by 2028–29. This project should

be delivered no later than 2036–37.100 Cost recovery and allocation issues will need to be resolved before the project proceeds.101

Figure 3 Potential renewable energy zones in Victoria 300dpi
Figure 3: Potential renewable energy zones in Victoria.
This figure is a map showing potential renewable energy zones in Victoria.

V1 – Ovens Murray
V2 – Murray River
V3 – Western Victoria
V4 – South West
V5 – Victoria Gippsland
V6 – Central North Victoria

Source: Department of Environment, Land, Water and Planning
Figure 4 Potential future transmission lines for Victoria 300dpi 2

Figure 4: Potential future transmission lines for Victoria. This figure is a map showing the potential routes for the new VNI West transmission line between Victoria and New South Wales, and the Marinus Link transmission line to Tasmania.

V1 – Ovens Murray
V2 – Murray River
V3 – Western Victoria
V4 – South West Victoria
V5 – Victoria Gippsland
V6 – Central North Victoria

Source: Australian Energy Market Operator

Recommendation 04: Identify and coordinate Renewable Energy Zones

In the next year, identify Renewable Energy Zones, especially in the state’s north-west, and continue their development over the next 10 years.

To meet the legislated goal of net zero greenhouse gas emissions by 2050, Victoria’s coal-fired power must be replaced by renewable energy, dispatchable energy, and adequate power system services. Victoria has about 7.8 gigawatts (GW) of existing or committed wind and solar generation and 2.3GW of hydro generation, with almost 16.3GW of projects lodging connection enquiries since 2019.102

A major challenge in the energy transition is coordinating generation development and transmission infrastructure for a reliable, sustainable and affordable electricity supply. Renewable energy investments are geographically disparate, making it difficult to create beneficial economies of scale without some government coordination.103 Parts of the electricity transmission network are already experiencing significant congestion,104 limiting the amount of renewable energy that can be transmitted, and preventing new generators connecting. This will worsen without new transmission investment (see recommendation 3). Renewable Energy Zones mark out areas where significant large-scale renewable energy can be efficiently developed. AEMO supports Renewable Energy Zones because they:

  • Reduce the need to build transmission into new areas
  • Cut project connection costs and risks
  • Optimise the mix of generation, storage and transmission investment
  • Realise benefits of scale
  • Promote regional expertise and employment.105

Of the six zones AEMO has identified for Victoria,106 the Murray River zone in Victoria’s north-west is forecast to see significant new generation by 2040.107 It can be aligned with proposed new transmission infrastructure that will better interconnect Victoria and New South Wales (see recommendation 3).

The Victorian Government is providing significant funding to develop Victoria’s Renewable Energy Zones, supported by a new body called VicGrid to actively plan and develop them.108 VicGrid should identify the most appropriate locations for these zones in the next year, coordinated with transmission infrastructure. A strategic land use assessment would identify more specific locations for renewable energy generation, taking into consideration other land uses, such as agriculture, and potential environmental, cultural and community impacts. This helps streamline land use planning and environmental approvals to encourage faster investment and align the Renewable Energy Zones with transmission development.

VicGrid should be an ongoing steward of Victoria’s Renewable Energy Zones by supporting transmission development, coordinating investments, and facilitating community engagement. It could include approaching the market for registration of interest and engaging with communities, local governments and land holders. VicGrid could also include examining the potential for industry co-location to create local jobs.109 New South Wales is progressing its approach to coordinating Renewable Energy Zones,110 to which Victoria can look to adapt for local conditions. Decisions on the final location of priority Renewable Energy Zones should only proceed or be sequenced on credible signals that investment is likely.

Recommendation 05: Require 7-star energy-rated new homes by 2022, and increase afterwards

Require all new homes to achieve a minimum 7.0-star NatHERS rating (or equivalent) by 2022, increasing towards 8.0 stars (or equivalent) by 2025, either through the National Construction Code or Victorian regulations.

Minimising energy demand will make the energy transition easier to achieve. Australia will build an estimated 7 million extra homes in the next three decades.111 Building them to high energy efficiency standards has multiple benefits. They lower energy bills,112 improve health,113 reduce greenhouse gas emissions,114 increase home values,115 and save money on energy infrastructure.116 Infrastructure costs are the largest component of Victorians’ electricity bills.117

Peak energy demand determines the size of Victoria’s energy infrastructure. Extra peak energy demand on the network requires extra infrastructure. For example, running an air conditioner at peak times could add $1200 to $1550 to the cost of the electricity network.118 Since December 2010, electricity prices have increased over 50%.119 More energy efficient homes means heating and cooling appliances do not need to work as hard, reducing the need for more infrastructure. Inefficient new homes lock in extra energy use. Retrofitting homes is generally more expensive than building to higher standards in the first place. While building to a higher standard can have an incrementally higher construction cost, these are offset by lower running costs. For example, an evaluation of the 6.0-star energy rating found an annual private return on investment of 11% each year.120

Energy efficiency standards work. Using the National House Energy Rating Scheme (NatHERS), the average Victorian home built before 1990 achieved around 1.6 stars, while those built from 1990 to 2005, following the introduction of mandatory standards, achieved an average of 3.1 stars.121 New homes in Victoria achieve an average 6.3 star rating,122 but few 7.0 star homes have been built.123 Achieving a 7.0 star NatHERS rating through smart design does not add significantly to construction costs.124 It can reduce energy bills by 30%,125 and each 1.0 star improvement may add around $9,000 to the value of a home.126

The Australian Building Codes Board is finalising the new energy efficiency standard for new homes to introduce a minimum 7.0-star NatHERS standard (or equivalent). If agreed nationally, the changes to the National Construction Code will take effect from September 2022.127 The Victorian Government supports this change,128 but if it does not proceed nationally, it should incorporate a 7.0-star rating into Victorian building standards. A three-year delay in raising energy efficiency standards could add $2 billion to electricity bills and cost $720 million in extra infrastructure nationally.129 The Victorian Government should strengthen compliance and enforcement to support the implementation of the standards. This was a major theme during our consultation.130

Some local governments have actively encouraged new homes to be built over 7.0 stars,131 such as the 8.2 stars rated Nightingale apartments in Brunswick.132

In some circumstances this requires using new technology and design changes to a home’s orientation and layout.133 Planning reforms to incorporate environmentally sustainable development objectives can work in tandem with better energy efficiency.134 The Victorian Government should continue working on the national Trajectory for Low Energy Buildings to increase the mandatory energy efficiency standard further towards 8.0 stars (or equivalent) in the next round of National Construction Code changes taking effect in 2025, or independently incorporate higher requirements in Victorian building standards. Work should begin on a regulatory impact statement from 2022.

Recommendation 06: Mandate a home energy disclosure scheme

In the next five years, develop an energy efficiency disclosure scheme for home sales, to overcome information barriers and encourage energy efficiency improvements to existing homes.

Existing homes in Victoria have an average energy rating of 2.1 stars, compared with newer homes which have a much higher average rating of 6.3 stars.135 If a family reduced peak energy use by 1kW – about enough to run a small oil heater – almost $1000 in electricity infrastructure investment would be saved.136

However, owners of existing homes have few incentives to invest in energy efficiency, and the value of these improvements cannot be easily conveyed to buyers. Similarly, buyers cannot easily identify which homes have low energy running costs.137 If owners and buyers are provided with information on the energy efficiency of homes, it can influence their decision on which home to buy or whether to upgrade.

The Victorian Government should develop a mandatory disclosure scheme to inform prospective buyers about the energy efficiency of residential properties. This could build upon existing programs such as the Victorian Residential Efficiency Scorecard and the Victorian Energy Upgrades program. A disclosure scheme can inform and incentivise better housing market performance and will complement strengthened minimum energy efficiency standards for rented homes (recommendation 7). An education program could accompany the scheme, so people can understand the energy information provided.

Several stakeholders expressed support for a disclosure scheme and offered variations of how it could be designed.138 Victorian-specific analysis of costs and benefits will help refine the design of a mandatory disclosure scheme. The benefits of a mandatory disclosure scheme can be substantial. National modelling to 2050 estimated an economic benefit of $1.2 billion from a disclosure scheme for detached houses alone, saving the equivalent of 6.2 million homes’ annual energy use.139 Any scheme would need effective compliance and monitoring for success.

Such a scheme does not force homeowners to undertake upgrades,140 but they can do so where cost-effective. Energy efficiency upgrades can increase the value of a home, with a review of international studies suggesting that where a disclosure scheme is in place, more energy efficient homes have a 5% to 10% higher sale price.141

Recommendation 07: Strengthen minimum energy efficiency standards for rented homes

In the next three years, increase minimum energy efficiency standards to reduce energy use and costs in rented homes. During the next 15 years, keep updating these standards to reflect new cost effective measures, and improve renters’ ability to make home energy efficiency improvements.

Rented homes comprise around 29% of Victorian homes.142 Rented homes are typically less energy efficient than owner-occupied properties.143 Better energy performance in rental homes saves money for renters, helps reduce emissions, and decreases demand on infrastructure.

Improving the energy efficiency of rented homes often requires changes agreed by the property owner, who typically manages the property using an agent or property manager. Barriers, such as insecure tenancies and an uneven power dynamic with the property owner, can prevent renters from securing upgrades to their homes.144 Despite renters feeling relatively well informed of changes that could minimise their energy bills, they may feel disempowered to approach the property owner to implement them.145

Many property owners are aware of the bill savings, positive environmental impacts and investment benefits of energy efficiency upgrades.146 They can be willing to make small changes without increasing rents or selling the home.147 However, studies have found property managers, the conduit between many renters and property owners, are less aware of energy efficiency benefits.148 People told us of a strong desire for better quality rental housing, but they also didn’t want improvement costs to have detrimental impacts.149

Changes to the Residential Tenancies Act 1997 made in 2018 introduced minimum standards for rental homes, including the power to include better energy and water efficiency requirements.150 These currently contain only very basic standards, such as requiring a minimum 2-star heater.151 Renters can make limited modifications without permission, such as installing temporary window films for insulation, reduced heat transfer or privacy.152 They must seek permission to modify the home for draughtproofing, but this cannot be unreasonably refused.153 Property owners have discretion in allowing other changes, like installing ceiling insulation, solar panels, more efficient appliances, or air conditioning.

The Victorian Government announced it will introduce further changes, proposing the introduction of minimum energy efficiency standards for rental homes covering insulation, draught sealing and hot water.154 It should strengthen these minimum standards in the next three years to improve the energy performance, affordability, and climate readiness of rental homes. National modelling of minimum energy efficiency rental standards for detached housing estimated net benefits of over $2.3 billion, if commenced in 2025. This could cumulatively save around 229.2 petajoules of energy by 2050 and help avoid or defer infrastructure investment.155 This modelling assumed only 25% of cost-effective actions were taken, such as ceiling, wall and underfloor insulation and window covering upgrades to improve performance.156

There are different ways to implement minimum standards, such as by specifying minimum standards for specific home features, or a holistic assessment of the entire home, such as star ratings or the Victorian Government’s Residential Efficiency Scorecard. The best option can be determined in a regulatory impact statement.

The Victorian Government should also improve renters’ ability to discuss and negotiate improvements above minimum requirements with property owners. Existing incentive programs can be built upon, including examining options to improve property management practices,157 or targeting incentives to lower-cost rental properties, with appropriate protections. These minimum standards also apply to social housing, which also requires improvements (see recommendation 94).158

Recommendation 08: Make Victorian Government buildings more energy efficient

Generate energy savings in existing owned and leased Victorian Government buildings through energy efficiency upgrades. Set and report against energy efficiency targets for the next five years to support delivery of energy efficiency outcomes, then review with a view to set a longer-term energy efficiency target.

Buildings account for around 20% of Australia’s energy use and 18% of Australia’s greenhouse gas emissions.159 Energy savings from more efficient appliances and dwelling improvements saved 0.8 terawatt hours in 2018–19 across the national electricity market.160 Given their high energy use, also making existing non-residential buildings more energy efficient can significantly reduce energy demand.

The Victorian Government owns or leases many buildings. Past programs and targets have produced limited results in reducing energy use. Victorian Government buildings used the same amount of energy in 2019–20 as 10 years earlier.161

The Victorian Government has committed to achieving a minimum 5-star energy efficiency rating from 2021 and a 6-star rating from 2025 for new government buildings.162 It is also continuing the Greener Government Buildings program,163 which had a 2020 target to reduce government office emissions by 30% below 2015 levels.164 The Victorian Government should continue to generate energy efficiency savings in its existing buildings through energy efficiency upgrades. This would reduce emissions and building running costs, improve climate resilience of public buildings,165 and avoid extra energy infrastructure investment. Projects that deliver multiple benefits should be prioritised for funding, such as improving social housing (see recommendation 94).

The Victorian Government should set energy efficiency targets for the number of existing public buildings it will upgrade in the next five years, and report on progress annually. This increases transparency on progress, for example by measuring and reporting on the energy consumption and cost of the buildings. Following this, an achievable longer-term energy efficiency target should be set for all its public buildings.

One estimate suggests Victoria could generate a net economic benefit of nearly $200 million by increasing energy efficiency for existing government-owned or leased office buildings.166 Other public buildings produce benefits too. For instance, energy efficiency upgrades and renewable energy at the National Gallery of Victoria, regional health services, primary and secondary schools, and public transport facilities is creating $1.7 million of savings annually on energy bills and abating 9,805 tonnes of greenhouse gas emissions.167 By taking action, the Victorian Government can demonstrate leadership for the commercial sector, while also providing visibility of benefits to the many people who use or visit government buildings.

Recommendation 09: Encourage demand management pricing to reduce peaks and optimise distributed energy

In the next 10 years, optimise use of existing electricity infrastructure by encouraging demand management pricing.

Electricity infrastructure is typically designed and built to service peaks in demand that occur only a few days a year.168 Peak demand has been growing faster than average electricity consumption for several years,169 but new technologies are changing how homes use electricity, and sometimes create more electricity demand. For example, while rooftop solar and energy efficiency measures have reduced energy demand from the grid, greater use of electric vehicles will increase demand.170 The potential for electricity to replace some gas use may also add to future peak demand.171

Energy consumers share electricity distribution network upgrade costs in their electricity bills. This means consumers with flat-tariff electricity bills pay the same amount for electricity infrastructure to service demand peaks, regardless of their electricity use pattern. Consumers who do not contribute to high peak electricity use subsidise those who do.172 This provides little incentive for high peak users to moderate their consumption, driving up costs for everyone.

To manage electricity demand and better use existing infrastructure, the Victorian Government should encourage pricing reforms to better signal the costs of using the infrastructure. Our research shows that people respond to electricity prices when altered to influence behaviour, and technology such as smart home devices can automate household responses for an even larger effect.173 Demand management pricing, sometimes known as ‘cost reflective pricing’, encourages people to reduce their peak energy use, or shift it to off-peak periods.

The potential infrastructure savings from demand management pricing are significant. Improving existing tariffs nationwide to better manage demand could generate over $16 billion in network savings,174 avoiding extra infrastructure costs in the long term, and ultimately translating to lower electricity bills. Improved pricing helps integrate distributed energy resources into the system. Paired with complementary energy market reforms, it can facilitate more consumer participation in energy services. For example, people with home rooftop solar and batteries could be incentivised to export energy when needed, and store it when it is not.

This provides network-wide benefits, and still allows people to recoup their investment costs.175 Encouraging demand management pricing can also help manage the extra energy demand from widespread adoption of electric vehicles (see recommendation 1). Research for Infrastructure Victoria’s Automated and Zero Emissions Vehicles Infrastructure Advice estimated encouraging electric vehicles to charge off-peak could save $2.5 billion in new infrastructure costs.176

To create the conditions for more comprehensive demand management pricing, the Victorian Government should support continued tariff reform beyond existing commitments,177 and encourage existing customers to switch to demand management pricing. Only 17% of Victorian households are currently using variable tariff electricity plans.178 Improving the energy efficiency of homes will also assist Victorians to reduce overall energy use and make off-peak electricity use more effective (see recommendations 5, 6, 7, 8 and 95).

Working with energy distributors and retailers, the Victorian Government should help monitor and address any equity issues arising from changes. This may include adjusting energy concessions or other measures so that all consumers, including low income households, can share in the benefits of new technologies and potential cost savings from demand management measures.

Recommendation 10: Confirm gas policies and pathways to reach net zero emissions and allow new gas-free homes

Within a year, respond to Infrastructure Victoria’s Advice on Gas Infrastructure, including by considering the trajectory to transition natural gas to reach net zero emissions by 2050. This allows gas network planning changes after 2025. Adjust policies so they do not encourage or embed future residential natural gas use.

Victoria has Australia’s largest natural gas infrastructure network.179 Direct combustion and fugitive emissions make up over 20% of Victoria’s greenhouse gas emissions, largely from natural gas.180 Embedding long-term natural gas use does not align with Victoria’s 2050 net zero emissions target.

Uniquely, Victoria’s network-supplied gas demand is largely from residential and small commercial customers, rather than industry.181 Near-term natural gas use is forecast to decrease,182 but some residential use is projected to increase slightly, driven by connections for new homes in Melbourne’s growth areas and regional towns that will likely continue installing mainly gas appliances.183 Some industrial gas uses are difficult to replace, but residential uses can be electrified.184 For example, ‘The Cape’ in Gippsland is an example of a gas-free Victorian housing estate.185 Many Australian homes have never been connected to natural gas.

We do not yet know if maintaining a long-term Victorian gas network will be viable or necessary. Ultimately, the net zero emissions target means the natural gas network will be largely retired or used for transporting another fuel, like clean hydrogen or biomethane. A blend of natural gas and clean hydrogen could produce slightly less emissions without significant distribution network modification.186 But clean hydrogen is not ready for mass distribution,187 and does not necessarily require a fixed distribution network. It could also be transported by road or rail or manufactured on site.

Meanwhile, expanding existing natural gas networks further embeds future emissions, and could produce a larger potentially stranded asset. The Victorian Government should change policies to avoid encouraging gas network expansion, or further embedding residential natural gas use.

For instance, the Victorian Government should amend planning regulations to clarify that greenfield housing estates188 and urban renewal precincts do not require new gas infrastructure.189 These planning regulations have likely caused new developments, like the Quandong Precinct in Wyndham,190 to construct expensive gas networks. Some local governments support gas-free homes and buildings. For example, the City of Yarra has pledged to switch its buildings from gas to renewable energy.191 Another local government told us that growth area gas infrastructure requirements are ‘cost prohibitive’,192 and a third identified planning barriers to all-electric redevelopment precincts.193 Other policies also embed gas usage, such as requiring gas-boosters for solar hot water systems,194 or subsidising gas hot water systems.195

The Victorian Government should publicly consider natural gas transition pathways that align with Victoria’s net zero emissions target. This weighs up future trade-offs, while signalling future changes to industry. For instance, fully converting gas appliances to electricity takes advantage of electricity decarbonisation but requires significant electricity network upgrades.196

The Victorian Government has asked us for advice on Victoria’s gas infrastructure by December 2021.197 This complements its proposed gas substitution roadmap, which will include aspirational natural gas displacement targets for 2025 and 2030.198 Our advice will outline the gas infrastructure implications of different pathways to net zero emissions. The Victorian Government should respond to our advice within a year and use it to converse with industry and communities to confirm the policy direction. More detailed work should start on pathways for retiring or repurposing gas networks to keep future options open. This allows more flexibility for adapting gas network infrastructure plans after 2025, which aligns the Australian Energy Regulator’s 2028–2032 regulatory period. This is the five-year pricing period which approves new investments in gas infrastructure.

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