AEMO has predicted shortfalls in summer electricity supplies unless action is taken to fill gap left by gas.
AEMO has predicted shortfalls in summer electricity supplies unless action is taken to fill gap left by gas. Image Credit: Taylor Bennett

Australia’s gas market is on the verge of a major supply challenge, according to a new report from the Australian Energy Market Operator (AEMO), which predicts shortfalls in both gas and coal generation during future summers.

In its latest Gas Statement of Opportunities report, AEMO has expressed concerns for the potential for gas shortages in the domestic market, as Australian gas producers increasingly seek to export gas offshore.

In its forecast, AEMO has assumed that the export market will take priority over local users, with gas being directed to overseas customers as Australian gas producers seek out higher prices in an albeit volatile overseas market for gas.

Australia’s gas market has undergone a fundamental shift over the last few years, as the construction of new export terminals in Queensland has opened up access for local producers to sell gas into the international market.

This has meant that Australian gas users, which include both industrial users as well as households using gas for heating and cooking, now compete with overseas buyers for gas.

Prices in the Asian gas market have traditionally been higher than those locally, so the option of exporting gas to countries like Japan and South Korea would been a boon for Australian gas producers, but have sent local prices soaring.

READ: Our Broken Gas Market: Australia’s attempt to have its cake and eat it too

This redirection of Australian gas to overseas users comes at a time where the local electricity market is also in a period of significant flux. AEMO had been counting on gas generators to fill the gap left by the looming exit of coal generators from the electricity market.

With lower volumes of gas available for local electricity generation, AEMO anticipates that within the next two years, that shortfalls in electricity generation will occur, potentially causing a repeat of the load-shedding events experienced in South Australia and New South Wales earlier this year.

“Gas and electricity markets can no longer be viewed in isolation, as the overall convergence of energy markets in eastern and south-eastern Australia demands a single energy view from a national perspective. It requires holistic planning across the entire supply chain to enable investment decisions to be made in the long-term interests of consumers,” AEMO Chief Operating Officer Mike Cleary

AEMO is particularly concerned about the potential for shortfalls in gas supply during the 2018-19 summer. AEMO projects reductions in the level of gas production, which would ultimately lead to shortfalls in electricity generation that would impact South Australia, Victoria and New South Wales.

In its forecasting report, AEMO concluded that additional supply would need to be found somewhere, either through increases in gas production from non-economic reserves, or the addition of non-gas generation capacity in each of the three states.

AEMO highlighted six potential options that may work to mitigate the risk of gas supply shortages, ensuring the security of electricity supply in future years.

These options included the establishment of a domestic supply reserve, ensuring that gas that would otherwise be exported, remains in Australia.

The proposal has some support across political parties. The reservation of gas production for local use is currently a policy held by the Federal Labor party, and has been recommended by Liberal Premier for Western Australia Colin Barnett, who has overseen such a reserve in that state.

The proposal, however, has been met by opposition from gas producers, who are unlikely would be keen to avoid a situation where they are forced to withhold supply from the export market and be made to sell gas into a domestic market offering lower prices.

Another option flagged by AEMO was the construction of non-gas power generation infrastructure. As recently highlighted by Bloomberg New Energy Finance, the cheapest option for new generation infrastructure in Australia is to establish new solar and wind power stations.

“Energy supply shortfalls could be mitigated in the short term by an increase in coal-fired generation and renewable energy output, combined with an uptake in technologies such as battery storage, together with increased gas production and the possibility of LNG exporters redirecting a small portion of their gas production to the domestic market,” Mr Cleary said.

The report from AEMO comes just days after the Victorian Government legislated a ban on the development of unconventional gas reserves, usually associated with fracking practises, as well as a three-year moratorium on conventional gas developments.

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