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RP1-WG1 Economic Modelling Research Roadmap Page 1

This information is provided for the confidential and exclusive use of students of RMIT University enrolled in the unit USM4547: Management in

Practice January 2021

SYSTEMS & MARKETS

RESEARCH ROADMAP Revision D prepared by N P KASTELEIN, 20 September 2020

EXECUTIVE SUMMARY FFCRC is researching the role that future fuels could play in the Australian energy supply industry, distribution networks and broader economy. This research programme will use mathematical models to analyse the role of future fuels. The work is divided into three streams.

The techno-economics stream analyses technology involved in the energy supply chain for future fuels, to provide an understanding of the status of the technology, the cost that it adds to the delivered energy price, future cost trajectory, and the ability for the technology to achieve the objective of reducing emissions. This work will be used to identify viable future fuel production, transport and storage options.

The network simulation stream analyses energy distribution networks and their behaviour. An integrated electricity and gas network model is being developed, which incorporates the production and distribution of green hydrogen. Future research may simulate other network impacts such as vehicle filling stations and distributed bio-gas production.

The macro-economic modelling stream uses economic modelling tools along with data and models from the previous two streams and information about the broader economy to create macro-economic models of Australia. This work will be used to influence planning and policy-making.

This roadmap interacts with other working groups in the FFCRC, especially the production technology and end-use appliances working groups, which will implement a portion of the techno-economic modelling stream. Additionally, research about social license and regulation (research programme 2) will also interact with the macro-economic modelling work.

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BACKGROUND The global energy industry relies significantly on fossil fuels, which are efficient at storing and supplying chemical energy that is needed across most sectors of the world’s economies. These fossil fuels are finite resources and through their consumption also increase the levels of carbon in the earth’s atmosphere. To address this, the energy industry is exploring the use of transformational technologies and fuels to move towards net-zero emissions. The impact of these fuels on the energy system and economy needs to be better understood to provide guidance to policy makers and investment managers.

Several possibilities exist for the mixture of energy resources and delivery and storage technologies that may be used in the future. Already, there has been an increased use of sustainable energy for electricity generation, correlating to a significant decrease in the cost of wind and solar power generation. The potential also remains for a carbon price or similar incentive that will result in industries limiting and capturing their carbon emissions, though this has not yet been done in Australia.

In a sustainable economy, it is expected that fuels will still be required—not fossil fuels, but rather renewable “green” fuels and/or decarbonised “blue” fuels. Fuels have the advantage that they can utilise existing infrastructure, and they contain dense energy, so they are effective for both storage and transport of energy.

The most prominent renewable fuel is hydrogen. Green hydrogen is made directly from electricity and water, and when it is consumed the waste product is water. Blue hydrogen can be made from methane with carbon capture (CC). For blue fuels, the processing and use of the captured carbon impacts the overall economics. Other renewable fuels include bio- methane and synthetic methane (syn-gas), and synthetic liquid fuels such as methanol and ammonia.

Though future fuels can use existing infrastructure, they still pose a disruption to operation of that infrastructure and existing energy markets and would cause a significant change to the economy of Australia and of the world. An energy transition of this kind will require adoption of new technologies and provision of new infrastructure.

If Australia is to be ready for a transition to renewable and decarbonised fuels, then the broader impact on the economy needs to be studied. This is so that industry and regulators can make effective decisions, such as the following end-uses:

- Understanding the benefits/costs of decarbonising gas networks compared to electrification.

- Determining the volume of hydrogen that can be injected into existing networks, and managing a conversion to 100% hydrogen.

- Reviewing the need and opportunities for long-term hydrogen storage. - Identifying opportunities for bio-gas in Australia. - Assessing plans for hydrogen hubs. - Understanding the impact of other changes that may be made to the energy industry,

such as pumped-hydro at the Snowy Mountain Scheme, new local developments, or new LNG import terminals.

- Compare transport of energy via pipelines to transport via electrical powerlines.

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RESEARCH STREAMS Research conducted by this roadmap will analyse the impact of future fuels on the Australian economy and the networks and markets that deliver energy to the economy.

The research is divided into three research streams:

1. Techno-economics (red) – The first research stream aims to survey all aspects of the supply chain for future fuels, identifying what is possible with current technology and the factors that will affect each technology’s role in the economy, specifically: cost, technical constraints, and resources required.

2. Energy networks (green) – The second research stream aims to model existing and potential energy networks. When the outcomes of the technology review (above) is incorporated, these models can predict the delivered price of future fuels at different locations, and the relative competitiveness of alternative energy supply scenarios.

3. Macro-economy (blue) – The third research stream looks at the broader economy from a regional and holistic perspective. The aim of this research is to predict the effect on the economy as a whole that could be expected to result from changes made

APPLIANCE LIMITS, SUPPLY CHAIN MODELS, ENVIRONMENTAL BENEFIT, COST,

SECTORSUPPLY/ DEMAND, POPULATION, REGIONS, LABOUR, GDP,

ECONOMIC DATA

NETWORK CONFIGURATION, HISTORICAL DATA, FLOW BEHAVIOUR, CONSTRAINTS,

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to the energy sector. This can be used to plan a pathway of development of future fuels, and support better decision-making for potential investors.

Modelling

This research programme will primarily use modelling. A model is a mathematical representation and simplification of a real world system. Models will be used to:

• Identify key variables that have significant impacts on the viability and cost of future fuels; and

• Better understand how the real world will respond to the introduction of future fuels at different levels.

The three research streams interact. “Black-box models” from the techno-economics stream can be used by the other streams, and outputs from the network modelling stream can be used by the macro-economic stream, as represented by arrows in the diagram below. (For example, a techno-economic model may be used to develop a cost curve for a hydrogen production technology and this data could be simplified as an input-output model to be used in the network model, or a time series that could be used in the macro-economic model.)

RESEARCH OUTPUTS Outputs from the research include:

• Tools for project feasibility studies, to support investment at scale. These tools include cost estimation, prediction of environmental benefit/impact, detailed definition of technology constraints and parameters, tools to predict market impacts and tools to optimise projects.

• Viable plans to realise the full potential of future fuels in the energy supply mix. Use of the above tools will enable FFCRC to determine the relative value of different future fuel developments, and estimate the risk associated with them, to support informed optimal investment.

• Identified policy options for future fuel usage. Use of this research will enable government to determine what policy is warranted and likely to be effective, and estimate the associated economic disruption and political risk.

• Prioritisation of research. Investigating the economics of future fuels supply chains will assist the FFCRC to prioritise technology R&D.

RESEARCH OUTCOMES This research will be utilised by investors, regulators, and the other FFCRC research streams. The research outputs will support the industry to:

• Demonstrate the utilisation of future fuels to deliver affordable, reliable and decarbonised energy to consumers. Modelling will review the role that fuels could have in facilitating a transition to a decarbonised economy, meeting the three energy challenges (cost, reliability and sustainability), which tend to be trade-offs for the energy industry as it currently operates. Key elements of this focus are:

o Future fuels supporting reliability of the electricity network, and reducing cost of network stabilisation and storage. Currently a number of strategies exist for improving the electricity network’s reliability and these can add significant

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cost. Synthetic fuels offer another pathway to stabilise the grid and store energy.

o Future fuels utilising existing transmission and distribution infrastructure. A key advantage of gaseous fuels is the inventory and delivery capacity of existing networks which, if utilised, provide a significant head-start on the energy sector transition required.

• Identify domestic and international markets that will benefit from future fuels creation and export. Several countries have expressed interest in purchasing renewable energy and are working to progress the technology. Australia has such large reserves of solar energy in particular that an efficient means of transporting it could open up new export markets.

• Foster expertise of the FFCRC to support industry. While reports and models encapsulate developed knowledge, human resources and expertise is very important. The work will develop expert knowledge of Australia and Confidential

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1. TECHNO-ECONOMICS The first research stream aims to conduct a techno-economic assessment of all aspects of the supply chain for future fuels.

Each element of the supply chain requires a techno-economic analysis, because it will impact the delivered cost of energy and also impose practical limitations on when and how the technology can be used.

RESEARCH OBJECTIVE The objective of this research stream is to identify the following three aspects of each technology solution:

• Cost – what is the contribution of the technology to delivered energy cost? • Performance – what is the efficiency, availability, reliability, scalability, etc. of the

technology? • Technology readiness level (TRL) – how advanced is the technology and how is it

projected to develop? • Environmental benefit – how effective is the technology in addressing the objective

of ‘net zero’ emissions? • Application – How would the technology be used? What parameters limit/define the

potential application of the technology? Consequently, how may it be applied in an Australian context?

• Infrastructure needs – What infrastructure is required by the technology? Can existing infrastructure be re-purposed, or is new infrastructure needed?

• Competitiveness – What are the alternate technologies against which it competes, how does it compare?

OUTPUTS AND IMPLEMENTATION Techno-economic modelling in this stream delivers discrete information about energy technologies. Outputs consist of the following:

1. Dissemination of status updates. Informing industry about production technologies and other parts of supply chain (transport, storage and use) regularly on the FFCRC website or knowledge sharing hub.

2. Industry simulation software to assess techno-economics of future fuels supply chains.

3. Cost data for fuel production, transport, storage and use for integration in systems, market and economy wide modelling

These technologies are like ‘Lego blocks’. They can be combined in various configurations with consideration of location-specific information about Australia (e.g. the location of feed-stocks and markets) to deliver overall solutions for the economy. The objective of the other two research streams is to piece these Lego blocks together.

4. Identification of technology and cost hurdles to inform technical RD&D.

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THREE SUB-STREAMS The techno-economic work itself is divided into three sub-streams, appealing to three different sets of expertise, and covering the whole supply chain, as depicted in the two figures below. The three sub-streams are:

A. Production & processing, relating to research conducted by the Production Technology Working Group,

B. Transport & storage, and C. Consumption, relating to research conducted by the End-use Appliances Working

Group.

SUPPLY CHAIN

RESEARCH STREAMS

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HYDROGEN TECHNOLOGY CONSTRAINTS

WASTE, EFFICIENCY

PROCESS - QUALITY FILTRATION, DRYING

PROCESS - STATE LIQUIFY, COMPRESS

DISTANCE, VOLUME, FREQUENCY, FLOW CAPACITY, DESTINATIONS,

LOSSES

TRANSPORT PIPELINES, VEHICLES (TRUCK/ SHIP),

POWERLINES

VOLUME, PRESSURE, DENSITY, CYCLING FREQUENCY,

STATE & QUALITY, LOSSES

STORAGE VESSELS & TANKS, DEPLETED RESERVOIRS/

SALT CAVERNS, PIPELINES, other

CAPTURE, QUALITY BYPRODUCTS

CO2, OXYGEN, WATER, BRINE, other

QUALITY, PRESSURE, EFFICIENCY PROCESS

ELECTROLYSIS, STEAM REFORMATION, etc.

LOCATION, AVAILABILITY, QUANTITY FEEDSTOCK

METHANE, WATER

LOCATION, AVAILABILITY, QUANTITY

HEAT / RADIATION

ELECTRICITY GRID, SOLAR, WIND, other

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SUPPLIERS MARKETS CONSUMERS

2. ENERGY NETWORKS

BACKGROUND The energy sector uses a variety of infrastructure to deliver energy to consumers. The electricity network and the gas network are a central part of this, involving fixed infrastructure. Large volumes of energy are also trucked and shipped as liquid fuels, especially for the use of the transport sector.

Delivery of energy through this network infrastructure is controlled by energy ‘markets’, in which producers and consumers agree on a delivered energy price and volume.

The purpose of this research stream is to study how energy networks might operate with renewable fuels included. A significant challenge emerges from interaction of the electricity market with the gas market when green fuels are made from electricity, which is the topic investigated by the first project initiated under this research stream.

The diagram below shows a number of energy markets that utilise infrastructure networks to deliver energy in Australia.

LIQUID FUELS MARKET HYDROCARBON

CONSUMERS

LIQUID HYDROCARBON FUELS

BATTERIES / OTHER STORAGE

RENEWABLE ENERGY

* ELECTRICITY SPOT MARKET

ELECTRICITY CONSUMERS

ELECTROLYSIS > GREEN HDYROGEN

HYDROGEN CONSUMERS

HYDROGEN MARKET RENEWABLE ENERGY

HYDROGEN INJECTION IN GAS NETWORKS

METHANE > BLUE HYDROGEN *

GAS CONSUMERS NATURAL GAS MARKET GAS SOURCE

CO2 CONSUMERS

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RESEARCH QUESTIONS Each network that is modelled will address case-specific research questions, but the following high-level questions will be relevant generally to the network models:

• What is the capacity of the network? • How will the network constrain suppliers and consumers? For instance, constraints

on hydrogen blend percentage, or constraints due to intermittency. • What is the optimal configuration of the network? • What new versus existing infrastructure is needed? • What is the cost of the network?

RESEARCH METHOD This research stream will create models that simulate the behaviour of energy networks. Where applicable, the models will initially be used to simulate the operation of existing networks, and validated against data. Subsequently, the models will be used to assess potential modifications to the network.

Network modelling will follow the following process:

1. Literature review – review of existing models, modelling method and available datasets.

2. Operational model – create a model that simulates the function of the network. For models that can operate in real-time with market data, this can be used for operational decision making.

3. Planning optimisation – add functionality to the model to optimise planning processes. The model can then be used to assess hypothetical changes to the network, and develop optimal proposals.

4. Model refinement – review the model with stakeholders and potential users and ensure it captures all variables that are relevant

5. Commercialisation – commercialise the model, finalising how it can be delivered to end-users.

IMPLEMENTATION Outputs of this research include:

1. Industry software/models - The integrated electricity and gas network model developed under this project is state-of-the-art, providing computation speeds and functionality significantly exceeding what is commercially available. The end-goal of this research is to provide a model that can be purchased by network operators and by proponents who wish to undertake network planning and develop business cases for specific green hydrogen developments.

2. Use-cases and pre-feasibility studies – The developed models will be used to identify project opportunities in Australia and to support industry proponents in optimising their proposed projects.

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NETWORKS The following networks have been identified that may be modelled, with the impacts of future fuels:

• Electricity transmission network, with hydrogen generation from curtailed electricity • Gas transmission networks, with distributed hydrogen injection • Gas transmission/distribution networks, with distributed bio-gas injection • Pure hydrogen transmission/distribution network for 100% hydrogen applications • A network of hydrogen refuelling stations for the transport sector

Curtailed renewable generation is likely to be the lowest-cost energy resource for green hydrogen and possibly the first to become economical as the technology costs for green hydrogen reduce. For this cause, making a business case for creation of green hydrogen from curtailed energy is a high priority for the FFCRC. Confidential

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3. MACRO-ECONOMIC MODELLING The third research stream studies the likely effect on the whole economy from various future fuels scenarios. This is aimed at identifying an ‘optimal’ pathway to develop future fuels, and factors likely to influence this pathway. What is ‘optimal’ will be a path that delivers on the high-level objective to decrease net emissions, while working with (rather than against) market forces to the greatest extent. This in turn requires the least government interference and may remove controversy and political risk from policy-making.

This research is important to determine the role that future fuels could take in the energy industry, and what infrastructure would support that change.

The following figure is an overview of the macro-economy, noting the link to the other two research streams:

BACKGROUND Currently, the role of hydrogen is not being considered in energy market modelling and decision making, and policy rules are not supportive of renewables due to their intermittency.

In the world of infrastructure, each new development “locks in” a technology or supply chain, and every time a new supply is “locked in”, alternative energy options are “crowded out” of that market.

TECHNOLOGY FEEDSTOCK

Production Storage & Transport

Consumption

MOTIVE

QUALITY OF LIFE ENVIRONMENTAL BENEFIT

PRODUCTIVITY LABOUR FORCE PARTICIPATION

PROSPERITY

ENERGY POLICY PRICE

MACRO-ECONOMY

Industry sectors Export markets

Regions / locations Change process

ENERGY DEMAND

CARBON PRICE

ENERGY COST

TECHNICAL CONSTRAINTS REGULATION

SUPPLY NETWORKS

Electricity network Gas network

Liquid fuels supply

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Several existing large energy supplies in Australia – primarily coal-fired power stations – are nearing the end of their design life, and others have recently been decommissioned, so a large amount of the current power supply has to be replaced imminently. Also (especially since the South Australia black-out) energy infrastructure and security has been a high priority of public debate in recent years; pressure has been applied to energy infrastructure owners to boost the security and reliability of their supply. Large network interconnects have been proposed (such as NSW-SA interconnect).

Consequently, decisions made over the coming few years will “lock in” infrastructure and set the energy supply paradigm for the next few decades. This may present a rare opportunity for future fuels to become part of the energy industry.

RESEARCH QUESTIONS The scope of macroeconomics research is very broad. The high level questions are as follows:

• Where does demand for future fuels come from? – Considering known domestic sectors, growth sectors, and imports/exports,

• How competitive are future fuels to meet the demand? • Where are future fuels supplied from? – What energy resources stand out as

candidates for supply of future fuels, e.g. solar, wind, off-shore wind? • How can the economy transition? – What is the time and process to transition the

economy to a new energy supply paradigm? A different mechanism would be required for a fast compared to a slow transition.

• What are the barriers to adoption of the new energy supply paradigm? • What constitutes effective policy settings to support a transition? • How will other industry changes, such as increased imports or other large-scale

projects, affect the case for future fuels?

The research will critically analyse national strategies and develop recommendations about policy settings. The work will analyse the investment climate, risks and strategies for businesses in relation to potential energy transition. This work also interacts with research programme 2, which is investigating social acceptance and regulatory frameworks.

IMPLEMENTATION The research will be utilised by government and investors. The following range of deliverables are anticipated from this research stream:

1. “End-user friendly” models and datasets to allow for analysis of economic impact of hydrogen on different sectors of the economy (regional specific)

2. Viable decarbonisations plans for different sectors of the economy and regions, including application of the modelling tools for specific case studies to assess project viability.

3. Policy briefing papers and ‘Hy-lights’ (short position papers) to inform public policy and debate

In addition, the research will develop expertise, which can be used for individuals to provide targeted advice to decision-makers.

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1 EMERGING HYDROGEN

2 GLOBAL HYDROGEN

RESEARCH METHOD This project uses computable general equilibrium (CGE) models of the Australian economy. A CGE model is used to simulate supply and demand relations over time. At the end of each simulation period (one year) the market is required to close. ‘Shocks’ are introduced to the model to consider the relative impact of different changes that might be realised.

Preliminary

The first phase of this work will develop the CGE model of the Australian economy, and assess high-level scenarios, based on varying the level of ambition for decarbonisation and the extent of involvement of hydrogen as part of the solution:

60% REDUCTION NET-ZERO

LEVEL OF CO2 REDUCTION BY 2050

Sector analysis

The next phase of the macro-economics is to gain a refined understanding of key sectors of the economy that may transition to the use of hydrogen, and analysing the economics of each sector to understand the process by which it could transition and opportunities for future fuels and existing infrastructure to influence outcomes.

This work will focus on industries that are large energy consumers, where there is known technology available to effect a transition to future fuels.

The following sectors have been identified as potential research topics:

• Transport sector – The transport sector, including freight and private vehicles, consumes a large amount of energy in the form of liquid fuels.

• Industrial and manufacturing sector – Industry and manufacturing consume and use energy in a broad range of forms and methods, including a number of discrete large- scale users.

• Mining – The mining sector is a geographically constrained sector involving heavy infrastructure for mining, transporting and processing. Hence this sector has been a driving force in a lot of infrastructure development in Australia.

• Household and small business – Households and small businesses use reticulated electricity and gas networks for energy. In this sector, fuel transition competes with full electrification as alternative transition pathways to a net-zero emissions future.

4 EXTENSIVE ELECTRIFICATION

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• Energy supply and distribution sector – Energy supply and distribution are the main topics of the other research projects of the FFCRC. This also is a sector that can be analysed in the macroeconomics stream.

• Energy export - Australia exports energy in the form of Coal and LNG. A transition to synthetic fuels could impact the export sector, and provide an opportunity for exporting Australia’s significant renewable energy ‘reserves’.

• Feed-stocks and by-products –Feedstocks and byproducts of future fuel production processes will impact the economics of future fuel production. These include water, carbon dioxide (particularly for “blue” fuels) and oxygen, which have existing supply chains and deliver to existing markets (food, medical, industrial).

RESEARCH PLAN

Research plan The above detail on research questions provides the basis for creating a research plan for the economic modelling roadmap.

The research has been divided into three work streams:

1. Techno-economics a. Production and processing, linked to sub-committee 1.2 b. Storage and transport, c. End-use / consumption, linked to sub-committee 1.3

2. Energy networks and markets modelling 3. Macro-economic modelling

This plan is likely to be subject to change; the roadmap will be reviewed through the life of the FFCRC as research outcomes provide an improved understanding of the issues.

Current activities FFCRC have already commenced research in the following areas:

• Techno-economic modelling of production and processing • Techno-economic assessment of underground storage • Energy network modelling of electricity-gas integrated model • Initial macroeconomic modelling (phase 1) to develop a CGE model of the Australian

economy

Next steps The following are immediate steps that the FFCRC can commence:

• Techno-economics of above-ground storage and transport (pipelines, vessels, liquefication)

• Techno-economic modelling of end-use for network conversions. (The end-use subcommittee has completed technology research, but without overlaying cost analysis)

• Identify economy sectors to subject to a deeper analysis

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BLUE HYDROGEN PROCESSES UNDERGROUND GAS

STORAGE GAS FUEL – TYPE B

APPLIANCES GAS NETWORK –

HYDROGEN INJECTION HOUSEHOLD AND SMALL

BUSINESS

CO2

ENERGY EXPORT

PROJECT ASSESSMENT FRAMEWORKS

INDUSTRY PROJECT SUPPORT

VIABLE PLANS FOR TRANSITION

POSITION PAPERS / POLICY ADVICE

PRODUCTION & PROCESSING

TECHNO-ECONOMICS

STORAGE & TRANSPORT

END-USE

NETWORKS

MACRO-ECONOMICS

POLICY / INVESTMENT ANALYSIS

NETWORK / MARKET MODELS ENVIRONMENTAL BENEFIT TECHNOLOGY READINESS

LEVEL COST MODELS AND

DATASETS

INDUSTRIAL & MANUFACTURING

PRIORITISE R&D

DEFINE TECHNOLOGY

INITIAL CGE MODEL

TRANSPORT

ELECTRICITY NETWORK GAS FUEL – TYPE A

APPLIANCES ABOVE-GROUND GAS

STORAGE & TRANSPORT

GREEN HYDROGEN PROCESSES

END-USE APPLIANCES WORKING GROUP RESEARCH

PRODUCTION TECHNOLOGY WORKING GROUP RESEARCH

MINING 100% HYDROGEN

NETWORK

FUTURE LIQUID FUEL USES ELECTRICITY STORAGE &

TRANSPORT

BIO-METHANE

FEEDSTOCKS & BYPRODUCTS

VEHICLE REFUELLING NETWORK

FUEL CELLS AND VEHICLES

PIPELINES

CARRIER FUELS

ENERGY SUPPLY & DISTRIBUTION GAS NETWORK –

BIO-GAS INJECTION

GAS FUEL – INDUSTRIAL USERS LIQUID STORAGE &

TRANSPORT PROCESSING FOR CHANGING

STATE/QUALITY

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