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.
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.
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.
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).