A new report out by by Alison Reeve, Tony Wood, Hamish McKenzie, Ben Jefferson from the Grattan Institute.
For more than a century, gas has been deeply enmeshed in the Australian economy. It heats our homes and cooks our food, generates electricity, fuels industry, and brings in export income.
But in the past decade, this has started to change. As Australian households and businesses search for cheaper, cleaner, and more efficient fuels, they are using less gas.
Governments have largely ignored this decline, and have failed to plan for it. As a result, new problems are emerging: electricity networks are under strain, backup generation for the power system is not being built fast enough, gas bills are rising, and manufacturers are closing.
And yet, the use of gas will need to decline even faster to meet emissions-reduction targets. The energy transition is also a transition for gas – from a widespread fuel to one that occupies some vital but small niches in a mostly-electrified economy.
Without action, gas use will continue to decline, but the process will be costly, chaotic, and inequitable. Governments must take control to both accelerate and manage the gas transition.
First, governments should implement policies to methodically and predictably reduce gas use across the economy. This includes setting phase-out dates for the use of gas in households, using the Safeguard Mechanism to encourage industrial decarbonisation, and reforming the electricity market to properly price both the emissions costs and the reliability value of gas. Policies to fix forecast gas shortages should put demand reduction ahead of increased supply.
Each sector will move at a different pace, depending on its options. Even in a mostly-electric economy, there will still be some residual demand for gas. To meet this demand, Australia will need supplies of renewable gases such as biomethane and hydrogen. Governments should drive their development with targeted grants, finance, and a demand-side obligation.
A declining gas market will need to be managed very differently, to avoid sky-rocketing prices for consumers and stranded assets for gas network owners. Governments should reform pipeline regulation to facilitate progressive decommissioning.
The role of gas-powered electricity generation is also changing. It is running less often, but is increasingly valuable as a backup during rare renewable energy droughts. The federal and state governments should use upcoming reforms to the wholesale electricity market to remove financing barriers for new gas-powered generators.
Less demand for gas means more demand for electricity. Without integrated planning, consumers and taxpayers are exposed to the risk of over-investing in gas and under-investing in electricity infrastructure. Gas and electricity system planning should be integrated to keep infrastructure costs low, and ensure the electricity network can handle increased demand from gas-to-electric switching.
While LNG producers are riding high at the moment, they face a future of being high-cost producers in a shrinking market as other countries move to reduce their reliance on high-cost and imported energy sources. For as long as the LNG industry lasts in Australia, governments should ensure it pays its share of tax, cleans up after itself, and keeps its emissions under control.
Australia is at a critical juncture in energy policy. The decisions made now around gas will have lasting ramifications. The gas transition will not get easier or cheaper if we wait. The choice is between chaotic and inequitable, or steady and fair. It’s time to move.
Download the report
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