Safeguard Mechanism: International Best Practice Benchmarks

Setting International Best Practice Benchmarks | Draft guidelines for consultation
Australian Petroleum Production and Exploration Association | 11 August 2023
The Australian Petroleum Production and Exploration Association (APPEA) welcomes the opportunity to provide input into the Setting International Best Practice Benchmarks draft guidelines.
The setting of International Best Practice (IBP) must strike a balance between encouraging new entrants to deploy the latest emissions reduction technologies and practices in Australia, improving the performance of Australian industry, while not being so onerous as to create a barrier to entry for new facilities. Should the latter occur, it not only risks limiting new technologies and practices from being deployed in Australia – impacting the future emissions-intensity of Australian industry – but also risks impacting energy security, investment, tax revenues, jobs, etc. if new facilities locate elsewhere.
The proposed IBP methodology risks creating extremely onerous emission-intensity benchmarks for new facilities which in-turn risks impacting future investment in Australia. To ensure the IBP methodology establishes effective, consistent, practical, robust, representative, equitable and transparent benchmarks that improve the performance of Australian industry, it is recommended:
• IBP benchmark selection is based on a the most recently built facilities and not the highest
performing facilities ever built, to ensure the benchmarks established promote the deployment
of today’s best practice technologies while reflecting the technological, commercial, and market
conditions faced by new facilities developed in Australia today.
• IBP is based on five years of data/estimates from ten to twenty five percent of global facilities
to ensure the benchmarks established are robust and representative.
• IBP is considered at a facility-level and not at a production-variable level, to avoid the risk that
the process results in a standard that far exceeds actual international facilities.
• Where insufficient facility data are available, the methodology should be extended to include a
method for estimating facility-level emissions-intensity based on metrics such as output,
technology, fuel type and usage, regulatory requirements, analogous facilities, emissions
reporting, etc.
• Australian facilities should be included in the calculation of IBP benchmarks, rather than testing
an international-only IBP against a very small sub-set of Australian facilities.
• Adjustment of IBP to Australian conditions should take into account a broad set of factors
including technical, commercial, economic, market, legal and political circumstances, and
regulatory requirements, as well as regional considerations in Australia.
• IBP benchmarks be developed in close in consultation with industry to ensure they are effective,
consistent, practical, robust, representative and transparent.
The default emissions intensity value for reservoir CO2 from new gas fields serving the domestic market should be determined based on the final IBP methodology, and not based on the default emissions intensity value for reservoir CO2 from new gas fields serving liquified natural gas (LNG) production, which was determined as part of political negotiations, and is technically and economically distinct.
APPEA and its members welcome the opportunity to provide comments and recommendations on setting IBP benchmarks and look forward to engaging further on these matters going forward.
The Australian oil and gas sector’s contribution to the economy and to reaching net zero is outlined in
Annex 1.
CONTENTS

COMMENTS AND RECOMMENDATIONS ON THE DRAFT GUIDELINES .............................. 2
The principles and policy intent of international best practice ........................................ 2
International best practice benchmarks must strike a balance ......................................... 2
Using marginal build to determine international best practice ......................................... 3
Policy intent should not be compromised due to data availability ................................... 3
The methodology for setting international best practice ................................................ 4
Ensuring a representative sample of international facilities ............................................. 4
Applying international best practice at facility-level rather than production variable-
level .................................................................................................................................... 6
Adjusting international best practice to Australian conditions ......................................... 6
Factoring in Australian facilities into international best practice ...................................... 7
Comparisons with “relevant methane standards” ............................................................. 7
The practical implementation of an international best practice methodology ................. 7
International best practice for reservoir CO2 from new gas fields serving the domestic
market ................................................................................................................................ 7
Handling of new production variables ............................................................................... 8
ANNEX 1: THE AUSTRALIAN UPSTREAM OIL AND GAS INDUSTRY .................................... 9

COMMENTS AND RECOMMENDATIONS ON THE DRAFT GUIDELINES

The principles and policy intent of international best practice
International best practice benchmarks must strike a balance
The requirement for new facilities to adhere to International Best Practice must improve the emissions- intensity of Australian industry, in line with our net zero commitments, while not presenting an undue barrier to entry for new investment. The reformed Safeguard Mechanism puts all large Australian non- power emitters on a trajectory towards net zero by 2050. As new entrants join the Safeguard
Mechanism they too must align with this objective, being the policy intent for new facilities to adhere to International Best Practice (IBP). The IBP requirement aims to send “a strong signal to investors that
Australia is serious about net zero, and new investments must support this goal.” To meet this aim, the definition of IBP needs to strike a balance between encouraging new entrants to deploy the latest technologies and practices in Australia, improving the emissions performance of Australian facilities and industry as a whole, without being so onerous that it creates a barrier to entry by making new investment uneconomic and uncompetitive internationally. Should the latter occur, it not only has the perverse effect of preventing new technologies and practices from being deployed in Australia and in- turn constraining future emissions-intensity performance gains, but also risks economy wide impacts on energy security, investment, tax revenues, jobs, etc. if these new facilities choose to locate elsewhere.
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The IBP methodology as proposed is likely to create very low emission-intensity performance benchmarks for new facilities that put future industrial investment in Australia at risk. The proposed methodology, based on as few as two global facilities, is likely to trend towards selecting outlier facilities that are not representative of the general best practice global emissions-intensity performance of industry. The selected facilities, rather than representing a true IBP, are more likely to reflect a very unique set of technical, commercial, economic, market, political, legal and regulatory circumstances within which the plant was developed – circumstances that are not likely to be directly replicable in
Australia, or potentially even within the host country. Establishing such extremely low emissions- intensity benchmarks for new entrants, risks discouraging investment in new facilities in Australia, even where they may improve the overall industry average emissions-intensity from the sector in Australia.
The impact of an overly onerous IBP benchmark selection is exacerbated by the application of a decline rate from year one. Existing facilities will be assessed based on a combination of site-specific and industry-average baselines – transitioning to industry-average by 2030 – whereas new entrants will be assessed against IBP benchmarks. The IBP then decrease annually at the prescribed baseline decline rate. This means that as IBP is proposed to be set according to the highest performing two to three facilities globally, then from year two onwards, the IBP threshold will likely require the emissions- intensity performance for new entrants to exceed that of any facilities ever constructed and any technology and processes available. With year one designated as the starting year of IBP baseline decline, even if no new facilities are built, this decline rate will compound the impact of an onerous IBP methodology. The outcome will be that either new facilities are not built or that those that are will simply have to offset their emissions above the baseline, given no onsite technologies or processes would likely be available or commercially viable to meet the required emissions reductions.
Using marginal build to determine international best practice
Basing IBP benchmarking on the principle of the global marginal build would result in a more robust, representative and transparent approach to IBP than focusing on the best performing facilities. An approach to IBP based on the best performing facilities ever built in effect seeks out the facilities that have been developed in the least representative circumstances. In contrast, focusing on the facilities that entered into operation most recently, by definition reflects the current global technical, commercial, economic, and market circumstances that new facilities will experience and need to consider. This is particularly the case for trade exposed industries. Reviewing the most recently built facilities can be expected to be a much stronger predicter of the performance of the next plant to be built globally (the marginal build) than the best performing small sub-set of facilities globally. Noting that if the best performing facilities globally represent replicable, technologically and economically leading facilities, then the best performing facilities globally and the most recently built will be largely the same.
Policy intent should not be compromised due to data availability
Accessing the data necessary to accurately and robustly establish IBP thresholds will be a challenge, however data considerations must not be allowed to distort the overarching principles and policy intent of IBP under the Safeguard Mechanism. Determining IBP will necessarily require identifying a representative selection of international facilities and determining their performance in a robust and transparent way. Ideally this would include accessing a sufficient history of reported and verified emissions data broken down in the same way as is done under the Safeguard Mechanism. In practice, accessing accurate and verified data from international facilities will be challenging, if not impossible, and disaggregating these data in the same way as under the Safeguard Mechanism is almost certainly not going to be possible.
Given this likely scenario, it would be tempting to reduce the sample size and modify the sampling process to making accessing data more practical. However, such an approach only serves to make the
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IBP process less robust and representative by both reducing the sample size and creating a likely bias towards the highest performing, least representative facilities. It also reduces the transparency by allowing for the “cherry picking” of selected facilities without a clear rationale other than data availability and potentially developing IBP benchmarks from commercially sensitive data that can’t be reviewed or tested by impacted Safeguard Mechanism facilities. This in-turn risks increasing the onerousness of the IBP determination as well as risking perceptions of inconsistencies between sectors, given the data availability in one sector may not reflect that in other sectors. Therefore, principles of representativeness, transparency, and robustness must not be compromised due to data availability.
Rather these principles must be maintained, and the methodology changed to be less reliant on the availability of data (see below).
The selection of facilities and calculation of IBP should be done in close consultation with industry. To ensure the IBP benchmarks are effective, consistent, practical, robust, representative, equitable and transparent, they should be developed in close in consultation with the sector concerned.
The methodology for setting international best practice
The methodology for setting IBP aims to create benchmarks that are effective, consistent, practical and robust. To achieve this, the methodology too must be effective, consistent, practical and robust but also representative, equitable and transparent, and establish IBP benchmarks that encourage new entrants that strengthen Australia’s emissions reduction performance. The IBP methodology proposed is likely to create very low emission-intensity performance benchmarks for new facilities that risk being ineffective in striking the balance between improving performance while not creating a barrier to entry.
Further the proposed methodology, which includes selecting a very small sample size of international facilities based largely on data availability, risks creating inconsistencies between industries and becoming untransparent, and is very unlikely to deliver an IBP threshold that is representative of the technologies that are currently being deployed around the world.
Ensuring a representative sample of international facilities
When identifying potential best practice facilities, assessing the most recently developed proportion of all facilities – i.e. the most recently built ten to twenty five percent of facilities – is a more robust and consistent approach for establishing IBP representative of current best practice. In order for the IBP to be representative, the sample size of facilities must be appropriately sized, and the sampling methodology must be such that the facilities selected represent the best practice based on currently technical, commercial, economic, and market factors. To be representative, a sample size that represents a proportion of all relevant facilities – rather than a fixed number of facilities – would be more appropriate and would accommodate different sectors which may have vastly different numbers of facilities. In this regard, a sample size of ten to twenty five percent of all global facilities should be considered. As discussed above, it would also be more representative if these ten to twenty five percent of facilities were the most recently built, rather than the ten to twenty five percent highest performing facilities. By selecting the most recently built facilities, it avoids the need to establish a performance standard across all global facilities i.e. to inform the selection of the highest performing.
The IBP should be based on at least five years of data from a sufficiently large sample size of facilities – two years of data from two to three facilities is insufficient to determine a robust and representative
IBP. When establishing default industry emissions intensities under the Safeguard Mechanism five years of data from fifty percent of all Australian facilities is considered necessary to establishing a robust and representative a value, taking into account facility-to-facility and year-on-year performance variability.
When looking at establishing a robust and representative sample of a much larger number of international facilities, a larger number of facilities (although smaller proportion of total facilities) and at least as many assessment years is necessary. The proposed use of a sample size of two years of data from as few as two facilities, creates a significant risk that the IBP benchmarks established are not
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representative or robust. Even with the additional check that the facilities’ annual production is at least ten percent of the relevant Australian production, it in no way ensures a sufficient sample size is used given Australian production will in many cases be a small fraction of global production.
The identification of best practice facilities must exclude those facilities that have been built based on non-representative, non-replicable conditions. The exclusion of “pilot or demonstration plants”, “highly subsidised production” and “plants under construction or being commissioned” is welcome. For “highly subsidised production” this must also consider the legal and ownership structure of the facility in question as well as the commercial, economic and market context of the facilities. A facility owned by a large state-owned entity can be developed based on a different set of criteria to a plant owned privately.
Similarly, a gas processing facility with access to a CO2 offtake agreement or suitable CO2 storage site in close proximity, or close to shared CO2 transport and storage infrastructure, is in a very different circumstance to a gas processing facility that has to operate in isolation.
Selection of best practice facilities that report in accordance with Safeguard Mechanism production variables is welcome but may have practical challenges. The intention to select best practice facilities with emissions data that is “consistent with relevant international reporting standards” and production data that is “consistent, in material respects, with Safeguard production variables” is welcome although may not be practical. Given data availability is likely to be a challenge, consideration needs to be given in advance to clear and transparent processes for developing IBP with limited data.
The use of “reasonable estimates and assumptions” for identifying representative facilities needs to be clearly defined in advance of the application of the methodology to maximise transparency, fairness and consistency. Given it is already well understood that there are likely to be practical challenges in identifying representative facilities, including identifying facilities with sufficient data available, a clear and transparent process for estimating values where data isn’t available, with clear and transparent assumptions, should be provided as part of the methodology development process. If such processes, estimates and assumptions are applied on a case-by-case, production variable-by-production variable basis, it risks impacting the transparency and consistency of the process and of the benchmarks it establishes (see below).
Addressing expected data availability challenges.
The methodology must be robust and representative, even if insufficient data are available in some or all sectors, with methods and assumptions for estimation made clear and transparent in advance of the methodology being applied. As mentioned previously, the overarching principles and policy intent of
IBP under the Safeguard Mechanism must not be distorted by a methodology that is dependent on significant data from international facilities – that may be hard to access outside Australian operating conditions. Rather, a methodology must be established that delivers robust and representative IBP benchmarks through a combination of data access and emissions-intensity estimation. Such an approach will allow the IBP to utilise a sufficient sample size of facilities – i.e. ten to twenty five percent of global facilities – to establish robust and representative benchmarks.
To accommodate the need for performance estimation, the methodology must be extended to include a method for estimating facility emissions-intensity based on a higher-order of data which is more likely to be available. Such higher-order data is likely to include metrics such as output, technology, fuel type, fuel usage, regulatory requirements, analogous facilities, emissions reporting, etc. This level of data is more likely to be accessible in public and commercial facility databases. The methodology should then outline clearly and transparently, how an emissions-intensity value will be derived from these data, including what assumptions will underpin the calculations and their validity. Such estimation methods are used across the National Greenhouse and Energy Reporting framework and the Safeguard
Mechanism so can be done in a way that is robust and transparent.

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Applying international best practice at facility-level rather than production variable-level
The IBP must be considered at a facility-level and not at a production variable-level to avoid the risk that the process results in a standard that far exceeds actual international facility performance. In practice many facilities globally may elect to initially deploy a particular technology as part of their emissions reduction efforts e.g. technological or process improvements, carbon capture, use and storage (CCUS), renewable energy, or energy efficiency. This may mean that no facility currently has all these technologies and approaches deployed. Therefore, if IBP is considered at a production variable-level – aggregating the lowest emissions-intensity production variables from different facilities – it may set a standard for IBP that includes process improvements, CCUS, renewable energy and energy efficiency, which may far exceed actual best practice from any actual facility operating globally. Selecting a large sample size of facilities i.e. ten to twenty five percent of global facilities, and averaging each production variable across these facilities should ensure a sufficient sample size for each production variable while also avoiding creating unrealistic aggregated IBP performance thresholds.
Adjusting international best practice to Australian conditions
When adjusting IBP to Australian conditions, a broader set of factors should be considered including technical, commercial, economic, market, legal and political circumstances, and regulatory requirements. There are a range of factors that influence the viability of facilities globally. This is particularly the case for outlier facilities that advance technical and operational performance of a sector.
These are likely to include a range of technical, commercial, economic, market, legal and political factors, as well as regulatory requirements. Therefore, when adjusting IBP emissions intensity for
Australian conditions, these factors must all be considered. For example, adjustment for Australian conditions should account for the policy and commercial context in which facilities operate e.g. state- owned entities in Norway or Qatar are operating under significantly different circumstances to a private entity in Australia. If all these factors are not taken into account, it risks creating unachievable standards that cannot be replicated in Australian conditions.
The proposal that IBP shouldn’t be adjusted “for a lack of technology or skills in Australia because, given demand, technology and skills could be procured or developed” overlooks the logistical, political and commercial realities of establishing new industrial facilities in Australia. Technology and skills are globally transferable, but at a cost. For many sectors, Australia is an isolated market relative to North
America, Europe or Asia and as such can be constrained with respect to access to technologies and skills.
By not taking into account technology and skills availability in Australia, the proposed methodology risks making the IBP benchmarking process more onerous than Australian markets can meet, pushing up cost of operation in Australia and decreasing Australian industry competitiveness. The outcome of such an approach is to discourage new entrants from establishing in Australia, and instead may lead to them being established in markets with greater access to technology and skills.
When adjusting for Australian conditions, consideration should be given to how conditions vary in
Australia on a reginal basis, otherwise the approach risks distorting the market in favour of one state/region over another. Conditions for new entrants vary significant across Australia, including availability and characteristics of resources, access to abatement technologies such as geological storage, and market, policy and regulatory environments. As such, what is technically and commercially viable and achievable in one region of Australia may not be viable or achievable in another. It is also overly simplistic to suggest that industry should move to where the conditions are most supportive of reaching IBP emissions intensity. For example, domestic gas production on the east coast is not interchangeable with domestic gas production on the west coast, given no east-west interconnection.
If the IBP is set in a way that favours one region over another then this may result in insufficient production in the region with the less favourable conditions – e.g. higher CO2 gas, limited availability of geology for CO2 storage or unfavourable climate – or at a minimum increase the cost of production in

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this region relative to the region with more favourable conditions. Such a circumstance creates a market distortion which negatively impacts different regions of Australia, without furthering the aims and objectives of the Safeguard Mechanism.
Factoring in Australian facilities into international best practice
Australian facilities should be included in the calculation of IBP, rather than the proposed approach where IBP calculations are compared with the top ten percent of Australian facilities, which only adds to the risk of benchmarks that are unrepresentative. Should Australia have one large facility that represents ten percent of Australian production and is also an international outlier with respect to emissions intensity, this step risks disproportionately weighting the IBP outcome towards a single facility. Rather, to ensure the robustness and representativeness of the IBP benchmarks established, all
Australian facilities should be considered as part of the selection of the ten to twenty five percent of facilities used to calculate the IBP. If Australian facilities are particularly high performing, then this would have the effect of bringing down the IBP value. The only comparison between IBP and Australian facilities that is necessary is to ensure that the IBP value is lower than the default industry average. If
IBP is higher than the Australian default industry average – based on five years of performance of fifty percent of facilities – then it is reasonable, robust and representative to determine that Australian industry is the determinant of IBP.
Comparisons with “relevant methane standards”
It is unclear why “relevant methane standards” should be factored into all fossil fuel production variables when they are largely based on CO2-equivalence and as such represent a broader metric than just methane emissions – “relevant methane standards” should apply only to the relevant methane- only fossil fuel production variables. All oil and gas production variables are measured in CO2- equivalence and relate to physical CO2 emissions, with some potentially relating to CO2 emissions in combination with other greenhouse gases. Given that no oil and gas production variables will be solely based on methane emissions, it is unclear why or how these will be compared to “relevant methane standards”. Accordingly, it is recommended that this step be clarified to specifically refer to the relevant methane-only fossil fuel production variables.
The practical implementation of an international best practice methodology
International best practice for reservoir CO2 from new gas fields serving the domestic market
The default emissions intensity value for reservoir CO2 from new gas fields serving the domestic market should be determined based on the consistent, equitable and transparent methodology for establishing
IBP, and not based on the default emissions intensity value for reservoir CO2 from new gas fields serving liquified natural gas production. The default emissions intensity for reservoir CO2 from new gas fields serving liquified natural gas (LNG) production of net zero was established without adequate or industry- wide consultation. It is essential that default factors for new gas fields serving the domestic market are determined through an analytical, robust, transparent, consistent, equitable and representative methodology for establishing IBP – as will be the case for all other production variables for new facilities.
The requirement for net zero should therefore be considered as a policy requirement and not IBP and should not be used as a precedent for reservoir CO2 from new gas fields serving the domestic market.
Further, the treatment of natural gas and the separation of reservoir CO2 for LNG is technically and economically distinct from the treatment of natural gas and the separation of reservoir CO2 for the supply of gas into a domestic natural gas pipeline network. The CO2 specifications for domestic gas pipelines also differ compared to the CO2 specifications for LNG production. To emphasise this point, there is no CCUS project anywhere in the world associated with natural gas produced solely for a

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domestic market, other than where the CO2 is used for enhanced oil recovery.1 In addition, domestic- focused and onshore gas production in Australia tends to be low-CO2 where CCUS is not applicable and few, if any, abatement technologies are available. Therefore, the application of a net zero default emissions intensity on reservoir CO2 from new gas fields serving the domestic market in no way represents international best practice for domestic gas production. Counter-intuitively, it also risks punitively impacting low-CO2 fields and ultimately would add to the cost of domestic gas supply for
Australian households and businesses while exacerbating the risk of forecast domestic supply shortfalls.
Handling of new production variables
If a facility shifts to a new production variable as part of their emissions reductions pathway it is counter- productive to discourage this through the application of more stringent IBP performance requirements.
It is likely that some facilities under the Safeguard Mechanism may pursue a change in production variable as part of their emissions reduction pathway. An example may be a natural gas production facility that changes part of their production to low-carbon hydrogen from natural gas with CCUS. Such an action would have a significant impact on the emissions-intensity from the facility, relative to their baseline and should be encouraged by the Safeguard Mechanism both through the need to meet baseline emissions reductions as well as through the opportunity to generate Safeguard Mechanism
Credits. However in this example, the proposed approach would result in the facility going from being measured against the default industry average for natural gas production and processing to being measured against IBP for hydrogen production.
The proposed approach, therefore, where the use of a new production variable would automatically trigger the requirement to adhere to IBP, would undermine this incentive and ultimate risk leading to higher emissions than would otherwise be the case.
APPEA and its members welcome the opportunity to provide comments and recommendations on setting IBP benchmarks. APPEA and its members would also welcome additional consultation and engagement to establish a practical transparent methodology based on the recommendations provided.

Yours sincerely,

Samantha McCulloch
Chief Executive

1 International Energy Agency CCUS Projects Explorer (accessed 2 August 2023)
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ANNEX 1: THE AUSTRALIAN UPSTREAM OIL AND GAS INDUSTRY
The Australian oil and gas industry has invested well over $400 billion in the Australian economy undertaking exploration and developing natural gas production, transport, liquefaction and export facilities over the last decade.
This investment will deliver returns for Australia for decades to come, through increased gas supply for
Australian customers, export revenue, jobs, and in payments to governments in royalties and taxes – nearly $65 billion2 in payments have been made to government over the last decade.
LNG is now Australia’s second largest export commodity after iron ore, with export revenue of more than $91 billion in 2022-23.3 As well as providing a significant return to the Australian economy, this
LNG export industry is also a key enabler of domestic gas supply.
The oil and gas industry supports 80,000 jobs directly and indirectly in Australia and hundreds of thousands more in manufacturing.
Investment in new gas supply for the east coast market is critical to the ongoing functioning of a stable, reliable electricity market and affordable domestic gas supply while the broader energy market transitions through the closure of coal-fired power generators, the construction and grid connection of new renewable projects and the implementation of storage or peaking capacity to firm renewables.4
The industry is pivotal to reaching net zero, supporting the transition away from coal, providing the firm dispatchable energy required to unlock our renewable energy potential, and powering Australian industries across the economy. The industry is also central to delivering step-change technologies including CCUS and low-carbon hydrogen.

2
See Media Release: Oil and gas industry helps bankroll public services despite pandemic challenge | APPEA and Historical-Summary-2019-
20.pdf (appea.com.au) for more information. Over and above this, Australia’s LNG exporters are set to almost triple their financial contribution to the public this financial year, forecasted to pay an extra $9 billion to federal and state governments. New preliminary forecasts released in October 2022 revealed the gas export sector is estimated to pay around $13 billion during 2022-23 – up from $4.8 billion forecast for last financial year (see Media Release: LNG exporters forecast to pay extra $9 billion to governments as tax and royalty collections almost triple | APPEA for more information).
3
See Office of the Chief Economist - Resources and Energy Quarterly - September 2022 (industry.gov.au) for more information.
4
For example, the Australian Energy Market Operator’s (AEMO) recent 2022 Integrated System Plan (available at AEMO | 2022 Integrated
System Plan (ISP)) confirmed the long and enduring value of natural gas partnering with renewables with the report finding (page 57):
“Peaking gas-fired generators will play a crucial role as significant coal-fired generation retires, as an on-demand fuel source during extended periods of low VRE output, and to provide power system services for grid security and stability and High renewable output and high demand – gas is needed to meet the demand peaks just after sunset, and to keep going through the night to cover wind variability.” See Media Release:
'Crucial' role for gas powering electricity grid for decades: AEMO report | APPEA for more information.
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