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All hail shale?

A recent report from the Institute of Directors (IoD) argues that we should “all hail shale”.  The report sets out a potentially major role for UK shale gas in meeting energy demand in the decades to come.

The report is based on the US experience, together with estimates of possible reserves here. It does not include economic analysis of shale gas impacts on UK and European gas prices, or costs associated with continued gas use in a carbon-constrained world.

Our analysis supports the view that there may be a useful role for shale gas in substituting for imported LNG to meet ongoing gas demand, for example, to heat homes. Given appropriate regulatory arrangements, and carefully targeted use, this could bring economic benefits without adversely affecting the UK’s carbon footprint.

But shale gas does not change the fact that it is economically sensible to invest in a portfolio of low-carbon power generation technologies and not to have a 1990s-style dash for gas.

The IoD report recounts the experience in the US, where shale gas is significantly cheaper than imported gas. This has resulted both in import substitution and coal-to-gas switching in power generation. The report then rules out major US exports of shale gas to the UK. In this respect, it is consistent with IEA analysis, which suggests very limited trade in shale gas between the US and Europe over the next decades.

The focus of the report is on UK reserves, which it is argued should transform our approach to energy policy. In particular, the report envisages use of gas to meet demand for heat and extensive use of unabated gas-fired generation over the next decades.

But the report does not look at potential impacts of these (and wider European) reserves on gas prices. Although inherently uncertain, consensus projections suggest that even under optimistic assumptions about exploitation of shale gas reserves, UK and European gas prices are likely to go up rather than down.

Moreover, costs associated with using gas will increase significantly in a carbon-constrained world. Although the price of carbon in the EU ETS is currently low, this will have to change over time if climate objectives are to be achieved.

Unabated gas-fired power generation will therefore become more and more expensive whatever the gas price. This is why it is sensible to invest in a portfolio of low-carbon power generation technologies as insurance against risks of climate change and rising energy bills driven by rising gas and carbon prices.

Whereas the IoD report assumes that unabated gas-fired  generation would substitute for coal use, with associated emissions reduction, most of the UK’s coal plants are already due to close under EU air quality regulations. Use of unabated gas-fired generation to meet baseload and mid-merit demand would be more likely to substitute for required investment in low-carbon technologies, and should be avoided.

Our recent report on the UK’s carbon footprint concludes that shale gas can have comparable emissions to conventional (pipeline) natural gas if appropriate regulatory arrangements are in place to limit methane leakage during production – and lower emissions than LNG.

If other concerns can also be addressed (e.g. relating to water supply), we recommended in this report that UK shale gas may be substituted for imported LNG to meet ongoing demand for heat in buildings and industry, in unabated gas-fired generation to balance the system, and in gas generation with Carbon Capture and Storage (CCS). Demand related to these uses is likely to be significantly higher than can be met from commercially extractable UK shale gas reserves, and meeting it from these sources is likely to have economic benefits for the UK.

So there may be a useful role for UK shale gas – but this is not a game changer. Any role should be part of a balanced approach to investment in a portfolio of low-carbon technologies. This is needed to manage the risks that we face and to build a resilient energy system.