A major gas shortage looms for Australia from next year, posing a risk to electricity supply and security in several states.

Key points: AEMO says NSW and SA face power supply risks from 2018

AEMO says NSW and SA face power supply risks from 2018 Liquefied natural gas export is a significant market challenge, it says

Liquefied natural gas export is a significant market challenge, it says More gas production or quick alternative energy options are urged

An assessment from the Australian Energy Market Operator (AEMO) is warning that, without a swift response, Australia could face a difficult choice — keeping the power on versus cutting gas supplies to residential and business customers.

"If we do nothing, we're going to see shortfalls in gas, we're going to see shortfalls in electricity," AEMO chief operating officer Mike Cleary said.

The analysis said without new development to support more gas-powered electricity generation, modelling showed supply shortfalls of between 80 gigawatt hours and 363 gigawatt hours could be expected from summer 2018/19 until 2020/21.

Widespread shortages are predicted to hit New South Wales and South Australia first, then Victoria in 2021, and Queensland between 2030 and 2036.

AEMO said the anticipated shortfalls would breach its reliability standard, which was an aim to supply at least 99.99 per cent of electricity demand.

The report warns AEMO could be forced to curtail gas supplies to big users in winter next year to prevent a shortage in Victoria and South Australia, unless a pipeline upgrade can be fast-tracked.

An upgrade of the south-west pipeline is required to refill an underground gas storage facility at Iona in Victoria, which is used to help meet peak winter demand.

Less gas risks more blackouts

The AEMO report makes clear Australia's energy mix is facing big challenges, with export of liquefied natural gas now a dominant factor for the eastern states, production from existing gas fields in decline, and electricity demand rising.

It said some state governments were prohibiting onshore gas development with bans or moratoriums on fracking.

"To meet electricity supply needs, the NEM [national electricity market] requires either increases in gas production ... or a rapid implementation of alternative non-gas electricity generation sources," the assessment said.

"Gas-powered generation [GPG] is required ... to provide operational flexibility, by increasing and decreasing generation relatively quickly to meet changing demand when wind and solar generation [are] unavailable.

"The risk of short-term interruptions of electricity demand will increase when there is not enough GPG available to increase generation fast enough to meet demand."

Brief rolling blackouts, when load-shedding was ordered by AEMO, occurred in South Australia last month, as a mothballed gas-fired power generator was unable to swing into operation quickly enough to help meet demand during hot weather.

AEMO also noted South Australia, which suffered a crippling state-wide blackout last September, was now heavily reliant on gas generation "to provide the minimal level of thermal generation the system needs to manage frequency changes".

"Otherwise widespread outages may be experienced, should the region become separated from the rest of the NEM," the report said.

The assessment factored in closure of the Hazelwood brown coal power station in Victoria's La Trobe Valley at the end of this month, and assumed South Australia's partially-mothballed Pelican Point generator would return to full service as a response to that Victorian closure.

Both plants are majority-owned by French company Engie.

Difficult choice looming

Mr Cleary said hard choices could confront Australia unless there was new gas production.

"If we use the gas for electricity, the potential for shortfalls are in the domestic and the industrial [supplies]. If we use it in industrial and domestic, the shortfalls will be in electricity," he said.

"No longer can we look at gas and electricity independently. They are now totally integrated to the point where we need national planning to understand how we're going to operate these fuels going forward, given that any decision we make in gas or electricity will have an impact on the other."

AEMO said it expected "continued upward pressure on pricing", which could "threaten the financial viability of some commercial and industrial customers".

The report said new gas supplies might help with reliability and security in energy markets, but would be unlikely to lead to much price relief due to rising gas production costs.

Is there a solution?

AEMO said it hoped policy makers and energy markets would respond to the findings of its assessment.

"We can either redirect some of the LNG from the international markets into the domestic market, assuming that the price allows that to happen, we can increase production from the existing fields, we can explore and develop new fields or we can have investment in the pipelines," Mr Cleary said.

"So there is time and there [are] options within the market to react and that's what we want the report to do."