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.
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The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of The Economist Intelligence Unit Limited (EIU) or any other member of The Economist Group. The Economist Group (including the EIU) cannot accept any responsibility or liability for reliance by any person on this article or any of the information, opinions or conclusions set out in the article.
