UK shale gas

Beyond the debate for and against fracking lies the important question of
whether the prospect of shale gas exploitation in the UK is such that we
should pin the future direction of our energy policy to it.  Following the
publication of a report by the House of Lords’ Economic Affairs
Committee on the economic impacts of shale gas, it seems fit to
examine this issue from an economic, energy security and climate
change perspective.

While we won’t know the exact production cost of UK shale gas until
exploration is under way, major analysts, including the International
Energy Agency (IEA) and Bloomberg New Energy Finance, have
provided some educated estimates on the issue based on known
differences in regulation, geology, population density, property rights
 and industry maturity that exist between the US and the UK. 

What comes out clearly from those estimates is that UK shale gas is
unlikely to be extracted fast enough, cheaply enough and in enough
 volume to have a material impact on either gas prices or the UK’s
rising exposure to gas imports.  This is especially the case as the
UK gas price is influenced by the dynamics of supply and demand
 in the European gas market, of which the UK is an integral part.
 Bloomberg estimate the cost of UK shale gas to be in the region
 of US$7.10/ to US$12.20/MMBtu, close to the level of UK gas spot
prices over the last 2 years at a time where these have been at the
 heart of the cost of living debate.

Consumers are likely to be better served in the long term if the
UK makes a rapid move towards a low-carbon energy system,
 with technologies that have a significant potential to go down in
cost and reduce consumers’ exposure to the volatility
(and possible increases) of  future fossil fuel and carbon prices.

The Committee on Climate Change (CCC) recently concluded
that the UK could save between £25bn and £45bn by moving to
a low-carbon power sector by 2030 compared to remaining locked
in a system mainly based on gas.  

Turning to energy security, the idea put forward in parts of the UK
 media that domestic shale gas could play a major role in offsetting
 the UK’s dependence on imported gas just doesn’t stack up.
Even in its very optimistic Golden Age of Gas scenario for Europe,
 which envisages a significant production of shale gas in the region,
 the IEA still sees the EU being a major and gradually increasing
importer of gas out to 2035. 

This leads to one conclusion. If the UK wants to permanently reduce
its fossil fuel import dependence and vulnerability to future price
shocks, then the priority must be to reduce its dependence on
fossil fuels in the first place.  The best way to do this is to move
rapidly towards an efficient and low-carbon energy system.

In its 10 year Annual Gas Statement in 2012, National Grid,
the gas grid operator, found that meeting the UK’s renewables
and emissions targets would cut our gas consumption by
around 40% by 2030 compared to 2010 levels, a figure that
could increase to 50% under a more ambitious roll out of
low-carbon and energy efficiency technologies.
This would be a genuine game changer for energy security.

Let’s now turn to climate change. According to the IEA,
two-thirds of “currently proven fossil fuel reserves” need to
 stay in the ground if we are to have a 50% chance of
keeping average global temperature increases to within 2ᵒC,
thereby preventing the worse impacts of climate change.
This, of course, requires leaving most of the world’s coal resources
 in the ground. But it also requires leaving just under 50% of
currently proven gas reserves in the ground, despite it being
less carbon intensive than coal.

Making this observation isn’t about being anti-gas. It’s simply
 making the point that if gas is genuinely going to play a
 “transitional” role in efforts to prevent dangerous levels of
climate change, then it must be used instead of – not as well as
 - coal , for a limited period of time only and without delaying 
investments in low-carbon technologies.   Critically, this “transitional”
 role will vary from region to region, being more important in
coal-heavy countries like China than in countries like the UK
that have already done a lot of coal-to-gas switching in the 1990s.

If the UK Government genuinely sees shale gas forming part
of a low-carbon transition, then it urgently needs to accept and
 implement the CCC’s recommendations on the Fourth Carbon
 Budget, which set out how the UK can put itself on a rapid and
cost-effective transition towards a low-carbon energy system.

It would therefore be a strategic mistake for the UK Government to see
shale gas as the key solution to the country’s energy security,
competitiveness and climate change challenges.  With or without
 domestic shale gas, moving rapidly to an energy system that’s more
efficient, low-carbon and better integrated with those of our European
 partners should remain the UK’s highest priority when it comes
to energy policy.