To support the development of hydrogen and renewable gas industries in Australia, Australia’s Energy Ministers have agreed to amend the national gas regulatory framework, in order to bring hydrogen blends, biomethane, and other renewable methane blends within its scope. This reform is necessary, as the National Gas Law currently applies only to “natural gas”, which is defined as a substance that includes “naturally occurring hydrocarbons, or a naturally occurring mixture of hydrocarbons and non-hydrocarbons, the principal constituent of which is methane.” While this definition allows for blending low concentrations of hydrogen into existing gas networks, it cannot apply to pure hydrogen (which is not a hydrocarbon) or gas blends not principally composed of methane.
Following this decision from the Energy Ministers in August last year, the Australian Energy Market Commission (AEMC) and Australian Energy Market Operator (AEMO) were jointly charged by jurisdictional officials with identifying amendments needed to the national framework. Reform proposals were subject to initial consultation in October and November 2021, with further consultation from March to May 2022.
A consultation draft of the National Energy Laws Amendment (Other Gases) Bill 2022 (Draft Bill) has been released, with proposals to amend the National Gas Law (NGL), National Gas Regulations (NGR), National Energy Retail Law (NERL) and National Energy Retail Regulations (NERR). A summary of the proposed amendments is set out below.
New definition of “covered gas”
The key change is to introduce a new definition of “covered gas” into the NGL. A “covered gas” will be:
(a) “primary gas”, being natural gas, hydrogen, biomethane, synthetic methane, or any gas prescribed as a primary gas by Regulations;
(b) a “gas blend”, being primary gases that have been blended together; or
(c) a gas or blend of gases, prescribed as a covered gas in a particular state/territory by state/territory regulation.
This approach differs from the previous proposals to distinguish between natural gas equivalents, constituent gases, and other gas products. Instead, primary gases are listed in the NGL, with flexibility for the list to be added to over time.
There is no intention in the Draft Bill to give a definition of “hydrogen”, even though hydrogen in chemistry is 100% H2 atoms, while hydrogen produced from electrolysis or steam methane is approximately 98.99% H, with a balance of O2. It is likely that any definitions around purity level for hydrogen will be a matter for the Australian Standards.
The Draft Bill proposes that references to “natural gas” in the NGL are replaced with references to “covered gas”. This extends the existing frameworks in the NGL to the new covered gas industry, meaning that:
- pipelines transporting a covered gas fall within the scope of the NGL; and
- the ring-fencing arrangements for pipeline service providers are extended so that a pipeline service provider cannot carry on the business of producing a primary gas or purchasing or selling any covered gas. The existing restrictions on producing, purchasing or selling a processable gas (essentially that gas which is not suitable for consumption and needs to be processed) continue to apply.
Given the customer protection framework in the NERL and NERR assumes a relatively mature retail market, the Draft Bill proposes amendments to extend the NERL not to all covered gases, but to “natural gas and natural gas equivalents”, although there is flexibility for other covered gases to be added in future.
The state/territory jurisdictions retain responsibility for safety and technical regulation of relevant gases.
Pipeline access
The proposed amendments mean that the existing pipeline third party access regime under the NGL will apply to pipelines transporting covered gas. This is intended to encourage competition and minimise the risk of inefficient infrastructure duplication for pipelines carrying hydrogen and renewable gases.
This will have the effect that a hydrogen producer under the national framework would have recourse to the pipeline access regime when negotiating access to a hydrogen pipeline and distribution pipeline. Due to the extension of the ringfencing arrangements for pipeline service providers, the hydrogen producer would also be competing on an equitable basis with other producers in the area, as the pipeline service provider would be prohibited from producing hydrogen, unless they obtain a ring-fencing exemption under the NGR.
The Draft Bill also includes a process for state/territory jurisdictions to exempt from parts of the NGL a pipeline as a remote pipeline. This is defined as a pipeline transporting a covered gas other than natural gas or a natural gas equivalent, where it is not a cross border pipeline, or part of the interconnected gas system.
Blending
A key issue considered in the proposed reforms is how to address blending of primary gases and the separation of primary gases into its constituents (deblending). A distinction has been drawn between:
- an “in-pipeline blending service”, which occurs by means of direct injections of a constituent gas into the pipeline; and
- a “blend processing service”, which occurs by means of a stand-alone blend processing facility, with blending occurring before the product is injected in the pipeline.
The Draft Bill introduces the concepts of “blend processing facilities”, “blend processing services” and “blend processing service providers”, separate from pipelines and pipeline services. It introduces a light handed third party access regime for blend processing services. This includes:
- a new prohibition on preventing or hindering access to blend processing services;
- a requirement for blend processing service providers to negotiate in good faith with users and prospective users, with power for the AEMC to make Rules for a negotiation framework or an access dispute resolution mechanism if required;
- ring-fencing and associate contract arrangements, similar to those applying to pipeline service providers; and
- provision for rules to be made for exemptions from the minimum ring-fencing and approval of associate contracts provisions, consistent with the approach for pipelines.
In contrast, any in-pipeline blending service (if permitted by state/territory technical regulators) would be a pipeline service, and the pipeline service provider would be subject to the pipeline third party access regime and the same form of regulation that applies to the pipeline.
Regulatory sandboxing
Regulatory sandboxing is a framework which allows market participants to test innovative concepts under relaxed regulatory requirements with appropriate safeguards on a time-limited basis. The Draft Bill proposes to amend the regulatory sandboxing provisions in the NGL and NERL so these are available for relevant covered gases.
Next steps
The NGL and NERL are schedules to Acts made by the Parliament of South Australia, as the lead legislator for the national energy laws and are applied in each Australian state/territory that adopts the national law by application acts, in those jurisdictions. Changes to the NGL and NERL must be agreed by all Energy Ministers before being introduced into the Parliament of South Australia.
Following consultation, the intention is for Energy Ministers to be presented with legislation for final agreement in mid-2022. These changes to the national gas framework (taking into account any amendments to the Draft Bill after consultation) are intended to take effect from 2023, after the South Australian parliamentary process.
What about WA?
The NGL applies in all states and territories, except Western Australia. A modified version of the NGL applies in Western Australia, with the state only adopting the economic regulation of pipeline provisions under the National Gas Access (WA) Act 2009 (WA). Western Australia has a separate Energy Coordination Act 1993 (WA) for its regulated retail markets. The proposed changes in the Draft Bill would only apply in Western Australia to the extent adopted under the applicable Western Australia legislation.
For more information, please contact HopgoodGanim’s Resources and Energy team.