The Australian Energy Market Operator's [AEMO] latest report said the forecast for gas supply had improved, and it now wasn't expecting shortages until at least 2026.

The expectation does hinge on the Port Kembla import terminal being up and running before mid-2023, and other planned projects, including pipeline expansions, proceeding as planned.

The report, published on Monday, said the sector was on the "cusp of transformation", with demand for natural gas poised to fall in the coming decades.

Direct consumption of natural gas could decline by as much as 20 per cent by 2040 as hydrogen becomes more economic, the report found. Industrial demand is not expected to grow in the next 20 years and could reduce "significantly" as big users start to decarbonise.

The Climate Council said the report had "put a major dent" in the federal government's contentious plan to use investment in gas to help fuel Australia's recovery from the coronavirus-induced recession.

The Morrison government's "gas-fired recovery" strategy, unveiled in September, flagged plans to unlock new supply opportunities, create an Australian gas trading hub and even build a taxpayer funded plant if the private market didn't step up.

Climate groups, experts and various think tanks have condemned the strategy, arguing it would increase greenhouse gas emissions while not delivering cheaper energy prices.

Climate Council senior researcher Tim Baxter said AEMO's report undermined the case for supporting new gas projects.

"The Morrison Government's 'gas-fired recovery' fantasy is just that - an expensive, dangerous, and unnecessary fantasy," Mr Baxter said.

"There will be no shortfall, and in the electricity sector, gas is already being out-competed by clean, affordable renewable energy. In the next few years, electrification and efficiency will also lead to a decline in gas use in other areas such as manufacturing and industry."

In a statement in which he talked up the gas-fire recovery plan, Minister for Energy and Emissions Reduction Angus Taylor drew attention to AEMO's warning of potential supply shortages if the Port Kembla plant wasn't delivered by in 2023.

The report also found that gas would continue to perform a "critical role" in the electricity sector at times when wind and solar weren't producing and coal-fired generators suffered prolonged outages.

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"We have been taking action to help secure the gas supplies that are vital to our economic recovery to avoid potential shortfalls and price hikes," Mr Taylor said.

"The supply of reliable, affordable gas will keep downward pressure on energy prices and the lights on for Australian businesses and households.

"Gas will be even more important as Australia continues to be a world-leader in the renewables sector, with one in four Australian households having solar installed."

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