Future Gas Strategy: consultation paper

AFGC SUBMISSION
Future Gas Strategy
13 November 2023
AFGC Submission | November 2023

PREFACE

The Australian Food and Grocery Council (AFGC) is the leading national organisation representing
Australia’s food, beverage and grocery manufacturing sector.

With an annual turnover in the 2021-22 financial year of $144 billion, Australia’s food and grocery manufacturing sector makes a substantial contribution to the Australian economy and is vital to the nation’s future prosperity.

The diverse and sustainable industry is made up of over 17,000 businesses ranging from some of the largest globally significant multinational companies to small and medium enterprises. These businesses contributed to an industry-wide $3.2 billion capital investment in 2021-22.

Food, beverage and grocery manufacturing together forms Australia’s largest manufacturing sector, representing over 31 per cent of total manufacturing turnover in Australia. The industry makes a large contribution to rural and regional Australia economies, with almost 40 per cent of its 271,000 employees being in rural and regional Australia.

It is essential to the economic and social development of Australia, and particularly rural and regional
Australia, that the magnitude, significance and contribution of this industry is recognised and factored into the Government’s economic, industrial and trade policies.

Throughout the COVID19 pandemic, the food and grocery manufacturing sector proved its essential contribution to Australian life. Over this time, while our supply chains were tested, they remain resilient but fragile.

The industry has a clear view, outlined in Sustaining Australia: Food and Grocery Manufacturing 2030, of its role in the post-COVID19 recovery through an expansion of domestic manufacturing, jobs growth, higher exports and enhancing the sovereign capability of the entire sector.

This submission has been prepared by the AFGC and reflects the collective views of the membership.

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AFGC Submission | November 2023

INTRODUCTION

The AFGC welcomes the opportunity to provide comment on the Australian Government’s Future Gas
Strategy consultation paper.

The food, beverage and grocery manufacturing sector actively supports decarbonisation initiatives to combat climate change and fulfill Australia's commitments under the Paris Agreement. Several food, beverage and grocery businesses operating in the country are leading the way with innovative strategies to reduce emissions throughout their supply chains.

However, when it comes to natural gas the sector is concerned about the government’s objective to decrease domestic demand without a clear plan on how to assist industry in achieving this target.
Additionally, there is concern about the present lack of viable alternatives to gas, whether due to technological or financial constraints.

The absence of a well-defined plan to aid the industry in this transition not only poses a risk of undermining its competitiveness, but also carries the potential to exacerbate the current cost-of-living pressures faced domestically by consumers. In the absence of a strategic roadmap, businesses without the human and financial capital to switch technologies may encounter challenges that lead to increased production costs and subsequently higher prices for essential goods. This, coupled with the existing economic pressures, could place an additional burden on households already grappling with the rising cost of living.

Being a trade-exposed sector, any policy that affects food, beverage and grocery manufacturers’ access to a reliable and affordable gas supply can impact their ability to compete in international markets. This is crucial given the intense competition from international competitors benefiting from lower-cost energy.

The food, beverage, and grocery manufacturing sector encompasses a diverse range of businesses with varying energy consumption profiles and distinct challenges. These challenges range from small businesses grappling with information asymmetry and a lack of negotiating power, to large manufacturers heavily reliant on gas and exposed to international trade dynamics.

This brief submission will not address all the points from the consultation paper but will focus on those that are of significance to the food, beverage and grocery manufacturing sector.

The AFGC recommends the government:

1. explores the possibility of developing a short-term targeted investment incentive. This incentive
should aim to accelerate investment in the decarbonisation of energy-intensive manufacturing
processes.
2. reintroduces industry-specific grant programs for decarbonising the sector. These types of
initiatives have been demonstrated to have ripple effects, as businesses that have benefited from
the grants evolve into repositories of valuable insights and trust within the industry, fostering a
widespread belief in the effectiveness of new technologies.
3. the government harness the Cooperative Research Centres (CRC) Program to assist industry in
the development and demonstration of pre-commercial fuel-switching technologies aiming to
incentivise the broader adoption of cleaner manufacturing processes.

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AFGC Submission | November 2023

GAS USE IN THE FOOD, BEVERAGE AND GROCERY
MANUFACTURING INDUSTRY

Consultation Questions

• Do you use any international and/or domestic forecasts to inform your outlook of the gas market?
We want your views on which scenarios best reflect the demand outlook. Are there any limitations
or additional factors impacting the demand outlook you would like to note?

The food, beverage, and grocery manufacturing sector utilises energy across various applications, including as a direct fuel source (for baking ovens, pasteurisation equipment, steam jacketed kettles and injection heaters), and for powering co-generation plants that generate on-site electricity and heat (for boilers or refrigeration systems). A substantial portion of the energy consumption in the sector is allocated to processes requiring heat. ITP Thermal, in a study commissioned by the Australian Renewable Energy
Agency (ARENA),1 provided a comprehensive breakdown of the main gas-intensive heating processes utilised in various food and beverage manufacturing sub-sectors. Table 1 shows a summary of the identified processes and the temperature requirements for each process.

Table 1. Distribution of heat shares and temperatures in Food and Beverage manufacturing

Temperature Share
Meat Industry
Hot water 40-60° 14%
Rendering/ fat melting- Gas 50-140° 40%
Hot water: cutting, deboning, sterilisation - Gas 80-90° 29%
Other- Gas various 16%
Dairy Industry
Evaporation -Gas 60° 47%
Pasteurisation- Gas 72° 24%
Drying -Gas 120° 29%
Fruit and vegetable
Boilers - Gas 40-60° 12%
Hot water low temp -Gas 40-60° 13%
Hot water med temp- Gas 60-80° 19%
Steam high temp - Gas 80-200° 28%
Ovens- Gas 250-400° 25%
Other- Gas various 3%
Beverage & malt manufacturing
Hot water: cleaning, heating, warming - Gas 40-60° 7%
Pasteurisation - Gas 60-90° 10%
Hot water: CIP, cleaning, sterilisation- Gas 60-100° 20% malt germination- Gas 15° 4%
Malt kilning curing -Gas 180-200° 13%
Beer brewing- Gas 140-210° 21%
Malt kilning and drying- Gas 180-200° 25%
Source: ARENA(2019).

Furthermore, energy-intensive applications in other food and beverage sub-sectors include activities like deep frying, steam cooking, and baking, where both temperatures and energy consumption are contingent upon the size of the facility.

1 2019. Australian Renewable Energy Agency. Renewable energy options for industrial process heat.

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AFGC Submission | November 2023

Energy consumption in the food beverage and
PJ
tobacco sector
90

80

70

60

50

40

30

20

10

-

Black coal Natural gas
Electricity Total energy
Source: ABS.(2023) Energy Account, Australia, 2020-21

In 2020-21, the food and beverage manufacturing sector used approximately 32 petajoules (PJ) of natural gas.2 Comparing this data to 2015, there has been a notable 7% reduction in natural gas consumption within the sector, marking a significant decline from the peak of approximately 42 PJ. Simultaneously, the overall energy consumption of the sector has decreased by 11% over the same period. This reduction is primarily attributed to a 14% reduction in electricity usage, driven by the sector’s sustainability commitments.

The food and beverage manufacturing sector remains committed to achieving sustainability goals. This commitment is propelled by both internal targets and evolving customer preferences. Many businesses within the sector are actively investing in on-site photovoltaic (PV) systems, which contributes to the reduction in purchased grid electricity consumption and aligns with the broader trend of adopting sustainable practices and energy efficient measures.

The AFGC engaged in consultations with its member companies to assess their expectations regarding gas demand for the upcoming year, and in the subsequent five years. While there was a consensus that gas demand is anticipated to exhibit relative stability in the short term, forecasting for the next five years proved to be more intricate. The complexity arises from the fact that most companies derive their gas demand projections from a multifaceted set of factors. These include variations in production output, fluctuations in gas prices, analysis of historical consumption and internal sustainability goals.

An additional factor heightening concerns within the sector, and complicating the ability of manufacturers to predict demand, is the prevailing volatility in gas prices, exacerbated by the uneven bargaining power wielded by certain gas retailers or brokers over companies. The latest interim report on the gas inquiry from the Australian Competition and Consumer Commission (ACCC) underscored this issue, revealing that

2 2023. ABS. Energy Account, Australia, 2020-21

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AFGC Submission | November 2023 gas prices in 2023 have surged beyond $12 per GJ.3 The ACCC expressed concern about the potential closure of operations in some industries in the short term, highlighting a substantial risk of demand destruction in the long term. The ACCC's report also drew attention to an uptick in instances where gas retailers exhibited reluctance to engage in negotiations and offered reduced flexibility in non-price terms.
This shift in behaviour among gas retailers introduces an additional layer of complexity, further impacting the sector's ability to navigate and anticipate future demand dynamics.

ALTERNATIVES TO GAS IN THE FOOD, BEVERAGE AND GROCERY
MANUFACTURING INDUSTRY

Consultation Questions

• Are there alternatives that your business can use instead of gas (for example electrification,
hydrogen, biomethane or circular economy inputs)? What barriers exist to using these alternatives?
How can the substitution of gas be accelerated?

Considering the diverse range of processes in which gas is consumed in the food, beverage and grocery manufacturing sector there exist a number of potential alternatives for mitigating gas demand. These alternatives span from harnessing solid waste for bioenergy to employing geothermal heat, specifically in the meat processing subsector. The heat-intensive nature of the sector renders it particularly well-suited for the adoption of these technologies or processes. However, it is crucial to note that the maturity level of these alternatives vary significantly, with some being more advanced in development and implementation than others.

After consulting with member companies, the AFGC has identified electrification as one of the primary alternatives either currently under exploration or listed for consideration in the short term. Alongside electrification, FMCG manufacturers are contemplating or planning to explore other alternatives, including the adoption of hybrid systems or programs focused on enhancing the efficiency and insulation of their heating processes.

Nevertheless, the viability and competitiveness of these alternative solutions centre on factors such as the comparative pricing on the new processes against gas, along with the cost associated with the necessary infrastructure changes for implementation. Members emphasised that while there are potential alternatives for decarbonising their manufacturing process and transitioning away from natural gas, not all options are commercially viable enough to warrant the associated risks.

The hesitancy to embrace alternative technologies is primarily rooted in two key factors: the lack of maturity in certain technological applications, which are yet to be widely proven in the industry, and the financial constraints due to the current commercial environment.

32023. Australian Competition and Consumer Commission. Gas inquiry 2017-2030. Interim report. January
2023.

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AFGC Submission | November 2023

Considering most gas-intensive processes are integral to the core of food and beverage manufacturing, any fluctuations in the heat delivery system can lead to alterations in product quality, as well as causing disruptions in the supply chain, ultimately impacting the final consumers of the product and the overall competitiveness of the business.

On the flip side, the financial aspect of transitioning to alternative technologies is a significant consideration for businesses in the sector. Members have emphasised that the considerable capital expenditure (capex) associated with these assets requires meticulous consideration, leading to extended timelines for budget approval. Securing funding, even when successful, does not guarantee a swift transition, as a significant portion of the machinery is sourced from overseas. The critical role of this machinery in production, coupled with its extended usable life ranging from 10 to 20 years, underscores the need for businesses to attain a high level of certainty before committing to an investment of this scale.

The food, beverage and grocery manufacturing sector faces the challenge of operating in one of the world's most highly concentrated retail markets, where two major supermarkets wield substantial influence over commercial negotiations. Over the past decade, a significant gap has emerged between the rate of input cost increases and subdued prices at supermarket shelves. While food and grocery manufacturers have attempted to absorb or mitigate these cost increases through efficiency measures, this has often come at the expense of investment in innovation, resulting in margin deterioration and affecting the capacity for large capital investments.

While several companies actively explore viable ideas, with some already conducting tests or piloting alternatives to reduce gas consumption, there is a prevailing consensus that this transition will likely require time and collaboration between the government, academia, and industry to expedite the adoption process.

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AFGC Submission | November 2023

POLICY RECOMMENDATIONS

Consultation Questions

• What factor/s influence your willingness to adopt electric appliances or processes? How could
governments support small businesses to decrease gas consumption?
• What other opportunities exist to decarbonise your supply chains?

In contrast to the detailed program for the electrification of household appliances,4 there seems to be a limited focus on developing a similar program to the electrification of industry. Acknowledging the pivotal role of government support in decreasing gas consumption, the introduction of financial incentives, such as tax benefits and grants, can act as catalysts for businesses to adopt cleaner energy technologies.
Nevertheless, a more concerted effort is required to formulate and implement a structured program that not only recognises, but actively addresses, the unique challenges faced by industry, facilitating a smoother transition towards alternative technologies.

Given the challenges faced by food, beverage and grocery manufacturers in the domestic market, hindering their willingness to invest in new plant and equipment, the AFGC recommends that the government explores the possibility of developing a short-term targeted investment incentive. This incentive should aim to accelerate investment in the decarbonisation of energy-intensive manufacturing processes. The implementation of targeted tax incentives would significantly alleviate the financial burden associated with the initial capital investments required for the adoption of alternative technologies.

Furthermore, the AFGC recommends exploring the reintroduction of industry-specific grant programs for decarbonising the sector. For instance, as part of the 2011 Australian Clean Energy Future Plan, the government introduced the Clean Technology Investment Fund (CleanTech). This program, which ran from 2012 to 2014, provided financial grants to manufacturing facilities to transition to cleaner technologies. A 2017 study for the Office of the Chief Economist within the Department of Industry,
Innovation, and Science revealed that the program resulted in a 10 percent reduction in manufacturing emissions as firms switched to cleaner technologies.5 Moreover, the study demonstrated that the
CleanTech program had a broader impact, not only on companies that received grants but also on those exposed to other companies that did.

Industry-specific grants can therefore serve a dual purpose, acting as catalysts for the direct adoption of cleaner technologies through financial assistance and, concurrently, exerting a broader influence across the industry. This influence operates as a ripple effect, as businesses that have benefited from these grants evolve into repositories of valuable insights and learnings. Through the sharing of their experiences,

4 The Australian Government has committed $1.3 billion for the Household Energy Upgrades Fund to create low-interest loans for improving energy performance.

5 2017. Bakhtiari, S. Clean Technology, Regulation and Government Intervention: The Australian Experience.

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AFGC Submission | November 2023 challenges, and successes, these businesses actively contribute to building trust within the broader industry, fostering a more widespread belief in the effectiveness of cleaner manufacturing processes.

Furthermore, the AFGC recommends that the government harness the Cooperative Research Centres
(CRC) Program to assist industry in the development and demonstration of pre-commercial fuel-switching technologies. This approach aims to incentivise the broader adoption of cleaner manufacturing processes.

Established in 1990, the CRC program serves to foster collaboration between industry and the research sector.6 This well-established program possesses the potential to act as a catalyst for encouraging the widespread uptake of cleaner technologies. As previously discussed, given the substantial capital costs associated with investing in and trialling more efficient methods of manufacturing products, coupled with the high expense and long lifespan of these critical assets, there is hesitancy to adopt technologies that have not been widely used in the sector.

The government, by enhancing the already established R&D framework and networks embedded in the
CRC program, can exploit networks for testing new technologies aimed at decarbonising the industry. A similar example of such an initiative is seen in the UK, where the Department of Business, Energy &
Industrial Strategy collaborated with industry and academia to develop feasibility studies for the creation of technically- and commercially-viable electric ovens for use in the biscuit sector.7 This program's objective is to share results with potential vendors to aid in the development of suitable solutions for the industry.

Given the CRC program's successful operation spanning almost three decades across various industries, the government should leverage the accumulated knowledge and expertise for testing new and cleaner manufacturing processes and developing comprehensive plans to facilitate the decarbonisation of
Australian industries.

CONCLUSION

In conclusion, the food, beverage, and grocery manufacturing sector in Australia stands at a critical juncture, actively supporting decarbonisation initiatives while grappling with uncertainties surrounding the reduction of natural gas consumption. The sector's commitment to combating climate change aligns with global efforts, but the lack of a well-defined plan for transitioning away from gas raises concerns that extend beyond environmental impact.

The challenges faced by businesses in this sector, ranging from technological constraints to financial limitations, require a strategic and supportive approach from the government. The potential risks include not only compromising the industry's competitiveness on the global stage, but also exacerbating domestic cost-of-living pressures for consumers.

62021. ACIL Allen. Cooperative Research Centres Program: Impact Evaluation, prepared for the Australian
Government Department of Industry, Science, Energy and Resources.

72022. 42T. Industrial Fuel Switching Feasibility Study. Project zap- electrification of biscuit production, prepared for the Department of Business, Energy & Industrial Strategy.

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AFGC Submission | November 2023

Exploring alternatives to mitigate gas demand presents a promising avenue, with various technologies showing potential in specific subsectors. However, hesitancy prevails due to the varying maturity levels of these alternatives and financial constraints within the current commercial environment.

Recognising the pivotal role of government support, the introduction of financial incentives such as tax benefits could serve as catalysts for businesses to adopt cleaner energy technologies. A structured program tailored to the unique challenges of the sector is imperative to a smoother transition towards alternative technologies.

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