Put Gas Expansion On The Policy Scrapheap

Recent reports of a looming gas shortage in eastern Australia and proposals for dealing with it are based on out of date supply-side thinking, in which constraints can only be solved by more investment in infrastructure.

This mid-20th century worldview ignores the cheaper, lower environmental-impact possibilities of strategic demand management, fuel switching and end-use efficiency measures.

Cutting gas use for the few days a year when the supply is constrained can be much cheaper than building new gas wells or expensive infrastructure.

New coal seam gas wells in NSW, new pipelines and strategic gas reservation schemes should all be at the bottom of the policy heap, to be brought out only after everything else has failed to keep homes heated, roasts roasting and industry turning out plastics, glass and fertilisers.

In the age of a greenhouse constrained world, consideration of any of these should be seen as a substantial policy failure, brought about by a lack of learning from past energy infrastructure mistakes.

The first question that should be asked is: are there ways that the demand can be modified to meet the available supply?

Least-cost planning has been routinely applied to electricity industry planning for more than three decades. Billions of dollars of expenditure in generation, transmission and distribution infrastructure have been avoided by the reduction in energy demand resulting from encouraging investments in improved end-use equipment efficiency and the use of renewable energy.

Further, by providing financial or regulatory incentives, particularly to industry, to interrupt operations or to switch to another fuel during short periods of supply constraint, the need for even more over-investment in new infrastructure has been eliminated.

Many aluminium smelters around Australia are rewarded with a lower electricity tariff in return for offering the capability to be interrupted when the system needs the extra power that is freed up when their pot lines are turned off.

What has worked effectively around the world for electricity supply planning for more than three decades should now be urgently applied to the Australian gas industry.

The Australian Energy Market Operator's (AEMO) 2013 Gas Statement of Opportunities (GSOO) predicts shortfalls in NSW during the peak demand periods of the winter months, beginning in 2018.

AEMO is the body charged with operating the electricity and gas networks of eastern Australia. It issues annual Statements of Opportunity for both energy sectors, identifying shortfalls and opportunities for investment in new infrastructure.

Despite NSW Energy Minister Chris Hartcher's hysterical warnings of shortages hitting half a million households, the constraint periods starting in 2018 are, according to the AEMO, initially:

"relatively short-lived… MSP linepack [ie. the ability to store gas in the Moomba to Sydney Pipeline] may be sufficient to provide additional capacity through these shortfall periods".

The report also identifies opportunities to reduce gas-fired electricity generation on those days, freeing up enough supply capacity to resolve the peak shortfalls.

This could be achieved by finding other sources of generation, as the report suggests, or even switching the gas turbines to distillate firing for those few days. While the latter is generally a more expensive fuel than gas, only relatively small amounts would be used for short periods.

The additional costs would be much less than building additional pipeline capacity. The impact on the environment would be much lower than opening up new coal seam gas fields.

AEMO, along with other gas shortage alarmists, ignores opportunities to explore the willingness of industrial gas users to change or interrupt production for short periods if they were paid suitable compensation. The GSOO report is written as if the industrial load is a given and cannot be shaped in any way. Price responsiveness of all sectors of the demand is not modelled.

This is likely to be very wrong. Paying some industrial operators the right amount can encourage them to invest in their own on-site gas storage, purchase small amounts of alternative fuel stocks or shut down for the duration of the constraint. This could include a lower normal tariff or a direct payment for each interruption.

Responding to short term supply constraints with increased infrastructure is not only going to be much more expensive. It will also create an economic imperative for owners of pipelines and gas fields to sell more of their product.

In their rush to earn a return on their investment, they will want to see it fully utilised. They will become the enemies of efficiencies and the promoters of new uses for their energy form. New infrastructure works against reducing greenhouse gas emissions and runs counter to the energy security objectives of preparing for a world without gas.

A gas reservation scheme, according to AEMO, will not help. In fact the constraints in NSW in the absence of demand management will mean new coal seam gas wells and more infrastructure.

AEMO also ignores the possibility of negotiation with the owners of the six gas export facilities coming on stream in Queensland for short term interruption of the compressors. The export "trains", as they are called, would be in a good position to stockpile their liquefied gas product and, in any event, it is their appearance on the gas grid that is creating the constraints in the first place.

In the longer term, gas constraints are likely to become longer in duration and more frequent, as exports treble the rate at which Australia is consuming and exhausting its gas fields.

Avoiding the industrial and domestic chaos of massive increases in price and low reliability supply will require early planning and investment in much higher levels of end-use equipment efficiency, fuel substitution, particularly to sustainable biogases, and solar technologies for space heating and cooking.

It makes good economic and environmental sense to impose a tax on export gas to pay for the demand management and energy efficiency measures that have been necessitated by their presence in Australia.

Domestic gas reservation schemes would also impose a tax on the exporters but they indiscriminately pass all of the benefit to large gas users in the form of effective price subsidies. Least cost planning would use the revenue collected from a tax on the export trains to transition the industry to a more sustainable basis.

Least-cost planning avoids the need for new infrastructure and supply sources, while the GSOO shows that even a gas reservation scheme would require new pipelines into NSW and new coal seam gas wells.

It is time for new thinking for the future of the nation's gas industry. Allowing the export of massive volumes of gas from the east coast will prove to be a mistake of historic proportions. In the absence of a willingness to cancel the contracts, the next best approach is to treat the resulting constraints as an opportunity to force gas industry planning into the 21st century.