Australia needs a new plan on gas

Minister for Climate Change and Energy, Chris Bowen, has proposed a rule change governing gas supply. Picture: Martin Ollman/NewsWire

Based on the recently closed Australian Energy Market Commission (AEMC) consultation it appears that, to his credit, Chris Bowen has finally appreciated the gas-powered generation (GPG) required for future energy security will neither build itself nor be sufficiently supplied by pure market forces.

The Minister for Climate Change and Energy instructed AEMC to consider a rule change intended to better integrate gas into the Integrated System Plan (ISP), which is the 20-year road map for the transition of the ­National Electricity Market (NEM) produced every two years by the Australian Energy Market Operator (AEMO).

The proposed rule change would require AEMO to expand analysis of gas market information in the ISP. The 2024 ISP already concludes that a total of 15 gigawatts of “flexible” gas-­powered-generation is needed to “ … back-up supply during long ­periods of ‘dark and still’ renewable droughts…”. The ISP also flags the risk of gas shortages, forecasting demand peaks that will “ … test the limitations of the current gas supply network …” and that “ … other solutions will be needed … during periods when ­delivery through the gas network is constrained…”.

Ultimately though, the ISP includes only a minimal and insufficient analysis of this critical aspect of the NEM reliability.

Understatements in the ISP, such as “ … gas supply and potentially a hydrogen alternative also need consideration…”, perpetuates the dangerous assumption that gas supply is infinitely flexible and seems to boldly assume that massive amounts of hydrogen generation, transportation and storage infrastructure will be built from scratch to provide a backup energy role.

Australia’s complacency with natural gas is somewhat understandable; for decades security of supply has not been an issue as southern state demand was covered by the world-class fields of the offshore Gippsland Basin (Victoria) and the Cooper Basin (South Australia and Queensland). However, the decline in Gippsland Basin production is outpacing any reduction in peak-day demand and winter demand and now Victoria consistently imports gas from Queensland in the winter months.

The development of the massive Queensland coal-seam gas (CSG) fields means that the overall production in the East Coast Gas Market has been higher than ever since the late 2010s. This has likely also contributed to complacency, as it is apparent to any casual observer that on aggregate Australia has a huge amount of gas and is a relatively small user for domestic purposes, so shortages seem intuitively unlikely.

Physical infrastructure such as pipelines do not care about intuition. There are real, physical limits on the ability to transport gas from Queensland to the southern states. Specifically, the Southwest Queensland Pipeline (SWQP) can transport around 500 terajoules a day of gas, which although a lot of gas, is still not equivalent to what has been lost from Longford Gas Plant output as the Gippsland fields decline.

The upshot of the production declines and the inability to move an unlimited gas volume to meet demand in the southern states is the real risk of gas shortages. The shortages are most likely during renewable droughts in the colder months where GPG is necessary for grid stability and residential gas demand for heating will be highest in Victoria. A reservation policy on Queensland exports, on its own, will not help get more gas to Victoria, given the physical system bottleneck in the SWQP.

The problem the East Coast Gas Market faces is not aggregate gas supply or average demand, but rather it’s the inability to get sufficient gas to meet demand where it’s needed, when it’s needed. Gas supply is not infinitely flexible, despite the persistence of this apparent assumption in much government policy.

Bowen’s rule change is a step in the right direction, recognising that although the ISP acknowledges these challenges, it presents no policy directions or plans to address them. If the proposed rule change progresses, the ISP may have the substance that should be expected for a 20-year road map for the NEM. However, these challenges won’t age well, and AEMO is at risk of not incorporating more detailed gas analysis into the 2026 ISP given the schedule pressure to complete work for that ISP. If the proposed gas analysis was to be surfaced for the first time during draft consultation in late 2027 for the 2028 ISP, there is every chance any ­solutions will be too little too late.

What the federal and Victorian government must consider – that the Future Gas Strategy doesn’t provide – is a shorter duration gas strategy that is specific to southern states. It could be called something catchy like the “Medium Term, Long Duration Energy Storage and Coal Retirement Support Plan”, which might help avoid ideological bickering. The plan could also address the risk of not having made sufficient progress with wind generation and transmission build-out to allow coal retirement.

This plan must, at a minimum, address the gas integration analysis suggested by the proposed AEMC rule change. Most experts agree that the analysis will conclude that it is a short list of very difficult paths that make a difference to address gas supply and demand imbalance in the southern states, with the likely options limited to materially increasing local gas supply or storage, or increasing import capacity via either pipelines or LNG import terminals.

None of the solution paths are easy or perfect, each option has unique risks and all are arguably likely to require some kind of ­capacity mechanism given the aggregate use of GPG is forecast to remain relatively low. The plan will likely have to contemplate how to define appropriate strategic reserves and look at options of total or partial state ownership of some or all elements.

By focusing on an urgent and near-term need the Albanese and Allan governments can avoid much of the consternation that came with the 2050-and-beyond-focused Future Gas Strategy. Moreover, unlike the Future Gas Strategy this plan can look at other long-duration energy storage options as alternatives to gas over the coming decade (spoiler alert – nothing’s ready for prime-time yet). The people of Sydney and Melbourne are unlikely to look kindly on the political class and the gas and power industry if efforts that match the urgency of the situation aren’t made.

David Close is a director at UQ Gas & Energy Transition Research Centre