Victoria is running out of gas. It’s a massive policy fail.

For several years, the Australian Energy Market Operator has been calling for urgent investment. Yet, the silence from governments and industry has been deafening. This is not good enough.

The root cause – falling supply of gas from the offshore Gippsland Basin – has been steadily getting worse. The risk of shortfalls when falling supply coincides with poor seasonal and weather conditions is clear. Only a few months ago, high demand for winter heating, a coincidental wind drought across southern Australia, and a water drought that limited power supply from Hydro Tasmania forced AEMO to call on industrial consumers to prepare to reduce their gas use. Ultimately, this was not required.

Winter shortfalls are likely to become annual, and last longer, until gas demand falls significantly.

Traditional, market responses have not worked. The next steps are hard but necessary. They require concurrent and co-operative action to reduce demand and increase supply.

Demand-side responses will be essential but won’t be enough:

• Substantial electrification of residential and commercial gas demand to reduce carbon emissions is already assumed but is a political challenge for the Victorian government.
• Switching industrial gas use to electricity depends on the availability of alternative technologies, and replacing gas-based equipment is costly.
• Reducing gas consumption for power generation is an option, but this option will diminish as more coal generators are closed and gas is needed to back up increasing renewables.
• Peak demand response – where big users agree to reduce their demand at peak times if requested – will help, but the mechanisms to make this happen in the gas market are not as developed as in the electricity market.

New gas supply such as local resources, increased storage, or pipelines will be too small or too financially risky:

• Existing, committed and additional local gas projects are insufficient.
• Other projects are at the early stages of development or may not be viable or get approvals.
• Additional storage capacity is coming, but it is modest and will not help as the shortfalls move from being seasonal to year-round.
• Some pipeline capacity expansion is already happening, but it is incremental, and new pipelines face stranded-asset risks.

From these possibilities, the best solution during the next five to 10 years is a combination of shipping LNG from other parts of Australia into local import terminals, active demand response, and a clear strategy to reduce gas use to the important backup role it will have in a net zero economy.

Of course, this won’t be easy. The LNG terminal component is the most urgent and complex element. Squadron Energy’s terminal at Port Kembla may be able to deliver gas to Victoria by 2026, but customers have been so far unwilling to commit to firm commercial agreements. Other potential terminals in Victoria, including Viva Energy’s proposal at Geelong, are at least a couple of years further off and face considerable local opposition.

The best way to deliver the LNG terminal solution is through some form of commercial agreement between gas retailers, industrial consumers, terminal operators, gas producers, and traders. So far, bringing the parties together has been too hard. Alternatively, governments will have to intervene via some combination of underwriting the costs of the terminals, and market direction through AEMO. The industry would be well-advised to try harder.

The global outlook suggests falling LNG prices in the next few years. Whether that happens or not, the existing government-gas industry arrangements under the Domestic Gas Security Mechanism and the $12 per gigajoule price cap will need to be revisited.

Two further government actions are necessary. The first is to create an effective demand-response mechanism in the gas market, operated by AEMO and like the Reliability and Reserve Trader mechanism in the National Electricity Market. The second is to re-work the Future Gas strategy to provide clarity on the future role of gas in the transition to net zero, including co-ordination of degasification plans with states and territories.

A gas-rich, wealthy country unable to supply gas to its major population centres is a massive failure of policy. A failing energy supply jeopardises public support for the energy transition, by calling into question governments’ competence to manage it.

The solution is far from simple, but it is required and doable. Governments and industry must co-operate to deliver the combination of “least-worst” options that reflect the urgency and reality.

It is time to act. Too much is at stake.