A crash in gas use is more likely than the forecast ‘shortage’

Rising gas prices, driven by the development of Queensland’s exports, could end up driving domestic customers away. AAP Image/Dave Hunt

Gas developers have been ominously warning of impending gas shortages in New South Wales, with official forecasts from planning authorities pointing to steady or rising demand. Yet our analysis suggests that these forecasts are likely well off the mark, that gas demand in NSW will fall, and that in reality NSW is facing an inevitable price shock, not a gas shortage.

With prices rising, consumers who reduce gas use and switch to alternatives might well weather the storm best, and that could mean a big drop in the demand for gas. Our analysis suggests that gas demand in NSW could fall to as much as half within ten years.

That could mean that gas investments being made now might never pay off – a similar situation to that in the electricity market, in which demand was forecast to rise continuously but fell instead, leaving infrastructure worth billions of dollars standing under-used, while people on tight budgets felt the impact of price shocks that seemed to come from nowhere.

Gas prices on the rise

Six liquefied natural gas (LNG) plants are being built in Gladstone, Queensland, with the first of these having commenced export earlier this month. For the first time, eastern Australian LNG will be exported to Asia, in huge volumes – twice as much gas as is presently used by all eastern Australian residents and businesses.

This means that eastern Australian gas is now – and for the future – linked with global gas prices (as has been the case for many years with crude oil). The price consumers pay for gas has already gone up and will continue to climb.

What will this do to domestic gas demand in NSW? Our research, summarized in the chart below, shows a possible future in which NSW gas consumption falls to half of its recent heights in as little as 10 years.

NSW gas demand: history and future scenario Melbourne Energy Institute

How likely is this to happen? There are several factors.

First, it is widely recognised that in the coming years the amount of gas burned to generate electricity in NSW will fall dramatically. Gas is already being priced out of the market by the competition with other lower cost generation, in a substantially oversupplied market. Reductions in the electrical power sector could reduce gas use in NSW by around 35 petajoules per year, an amount equal to around half of the gas used in NSW manufacturing.

Next, householders and commercial building managers are finding that the most economical ways to heat living spaces and water in NSW do not involve gas. Reverse-cycle air conditioners, for instance, can harvest up to six units of renewable heat for every one unit of electricity used.

The transition from gas to electric heating could start as soon as this winter, as homeowners realise that the air conditioner they installed the previous summer can heat their home more cheaply than gas. As solar power feed-in tariffs wind up in NSW, householders will find that electric heat pump water heaters are an efficient way to store “excess” self-generated energy for later use. Such fuel-switching options, when added to ongoing energy efficiency upgrades, will result in significantly less gas being used in buildings in NSW.

Eventually, small consumers will begin to question the logic of paying two sets of grid connection fees to provide their energy services, and gas will be the one in jeopardy.

That leaves the manufacturing sector. Unfortunately, the now-inevitable steep increase in wholesale gas prices will put pressure on gas-intensive businesses in eastern Australia ranging from chemicals producers to brick makers to food processors, causing some to become unprofitable and close. Because of their high exposure to gas prices, the impact on the manufacturing sector is likely to be far more severe than experienced during the recent electricity price rises.

Fortunately, there are things businesses can do to remain profitable, and there are actions that governments can support. Energy-efficiency measures such as those identified under the recently terminated Energy Efficiency Opportunities program are now more likely to be implemented because of expensive gas. The NSW government’s Energy Savings Scheme offers incentives for businesses to save energy.

Similar to what building owners and managers will be doing, industries that burn gas to produce low-temperature heat can consider doing the same job with heat pumps and electrification, whereas others might switch fuel to biomass, biogas or even coal. In the longer term, direct geothermal, solar heat, and biogas sources can replace nearly all of the fossil gas used for industrial heating.

The gas fallout

As described above, rising gas prices will probably cost some people their jobs. Already there are calls for lands to be opened up to unconventional gas extraction, in a bid to ease prices. But more gas extraction will not impact local supply and prices unless international prices and demand very significantly decline.

With gas firms eyeing the possibility of wide-scale coal seam gas expansion in NSW to match the rapid development already seen in Queensland, it will be crucial for government, business, and the community to decide how, when, why gas should be developed. Among other things, climate change and the global carbon budgets should be factored in.

These decisions should be based on the best information that considers a range of credible futures, including the possibility that the pressure on local demand is significantly on the downside.