This post originally appeared on Chatham House's website, reproduced with permission.
On the 5th of December, the UK Chancellor, George Osborne, effectively announced a new dash for gas in the UK energy sector as part of his Annual Financial Statement on the economy. He argued that up to 37 Gigawatts (GW) of new gas fired generating capacity would be built by 2030. This implies around 40 new power stations although some will replace existing plant. His statement coincided with the release of a new “Gas Generation Strategy” document by the Department of Energy and Climate Change (DECC) which gave as its base case an increase of 26 GW of new capacity by 2030 and even this was above the 20 GW of capacity which DECC had previously recommended in September in an effort to keep the UK on track to meets its legally binding emission targets for 2025.
The “Gas Generation Strategy” document clearly stated "…ultimately there is significant uncertainty about future gas prices, so we need to be prepared for both high and low gas price scenarios." However, implicit behind Osborne’s statement was the assumption that gas would be cheaper in the future. Furthermore, this appears to be based upon a view that these lower gas prices would be driven, as it had been in the USA, by a shale gas revolution. To this end, Osborne also announced that there would be consultations on tax breaks for shale gas operations and the creation of an “Office for Unconventional Gas” to cover the regulatory context for shale gas operations to keep it “safe but simple”.
Osborne’s view of the future is seriously misleading and highly dangerous. It is misleading because it ignores the very real barriers to shale gas development in the UK and Europe more generally. The US revolution was triggered by favourable factors such as geology, tax breaks and a vibrant service industry amongst many others. However, in Western Europe the geology is less favourable notably with the shale containing a higher clay content making it more difficult to use hydraulic fracturing (fracking). The CEO of ExxonMobil stated in March 2012 that the technology, so successfully used in the USA, was simply not applicable in Europe and that more research was needed. The problem is that this sort of fundamental scientific research needs to be funded by government as indeed it was in the USA. Yet there appears no appetite in the British Government for such funding and the European Commission has explicitly ruled out any such involvement. Currently there are no tax breaks outside of Hungry and the drilling/service industry is far far behind the US. Also in a densely populated Europe (compared to the US), disruptions caused by shale gas developments will struggle to find public acceptance. Finally, unlike the USA, benefits from gas production accrue to governments, not local landowners.
Also so far the UK Government has been extremely slow in any decision making over shale gas operations. In May 2011, the House of Commons Select Committee on Energy and Climate Change produced a report on shale gas which recommended that fracking should be allowed albeit closely monitored by DECC. The Government effectively ignored this and the same Committee has just started a second enquiry related to shale gas. Similarly, in June 2012 a report produced by the Royal Society and the Royal Academy of Engineering came to a similar conclusion that fracking, subject to monitoring was safe but again this led to no action by government. The effective ban by DECC on further fracking imposed in summer 2011 following the “earthquakes” in Blackpool relating to Cuadrilla’s operations remains in place although there are expectations that it will be lifted soon. Given there are clear and deep divisions between DECC and the Treasury over the future role of gas, such indecision is likely to remain alive and well. This will add to the very long list of other barriers to shale gas development in the UK. Thus Osborne’s view of the energy future is likely to prove extremely misleading.
His view of the future is also highly dangerous if there is concern over climate change as indeed there should be. The Treasury’s concern is that the higher cost of electricity, which they see as being driven by the greater use of renewables, will damage the competitiveness of the UK economy. A dash for gas they believe will reverse these rising costs. There are several flaws with this view. First, it assumes that gas will be cheaper in the future and, as already explained, while this could be the case it will certainly not be the result of any shale gas revolution in UK or Europe in the next five to ten years. Second, gas remains a hydrocarbon. While it is less damaging than coal for climate change (although even this is debatable given current uncertainty over fugitive emissions from shale gas operations) if it substitutes for renewables rather than coal then this is seriously bad news.