Dieter Helm: Britain’s Great Gas Debate

  • Date: 15/09/12

In Britain, denial – the classic reaction to change – is well entrenched. For wind and nuclear, any notion that they would become cost competitive against gas in the next decade now looks questionable.

New gas discoveries have been so significant that they have already begun to transform global energy supply. A shale gas revolution has taken place in the United States. New resources have also been unearthed in Argentina, Russia, China, Australia, the Middle East and Europe. Add in coal bed methane (on a potentially very large scale) and now shale oil, and an era of abundance of both gas and eventually oil may be upon us. We are not going to run out any time soon: indeed, from a climate change perspective, the problem is that we have too many available fossil fuel resources.

Unsurprisingly, politicians and energy policymakers are scrambling to keep up. All sorts of surprises are turning conventional wisdom on its head. The US has amongst the fastest falling carbon emissions among the major economies-unlike Europe, whose emissions are no longer falling much, if at all. The US is switching from coal to gas so quickly that its coal production is being dumped on world markets, driving down the coal price and hence increasing coal’s role in Europe’s electricity markets. The US has abundant quantities of gas, which is being used as a direct fuel for transport and even for turning into conventional liquid fuels.

In Britain, denial – the classic reaction to change – is well entrenched: from claims that gas prices will remain linked to oil and that oil prices will keep rising; to the notion that shale gas will not be developed here; through to the surprising idea that the economic effects will remain within the US and will not be felt elsewhere. Yet people who think along these lines are having a tough time. The Treasury is determined to open up the gas question; the government has initiated a “Gas Review” with a view to identifying obstacles to further investment in gas-fired power stations; and the fourth climate change budget has been opened up for review. For wind and nuclear, any notion that they would become cost competitive against gas in the next decade now looks questionable.

Until the end of the 1970s, gas played little part in Britain’s energy mix, and to the extent it did, it was coal based, or came in bottles. What projected it to the forefront was the discovery of natural gas in the North Sea. The state owner, British Gas, converted appliances to natural gas, built the new pipelines and managed the contractual relationship with the offshore companies. In the space of a decade, a remarkable transformation was effected.

It wasn’t until the end of the 1980s, with the privatisations of both the gas and the electricity industries, that gas moved from being a premium fuel for industry and a domestic heating fuel, to being used to generate electricity. In 1990, coal made up nearly 80 per cent of electricity generation, with nuclear at about 20 per cent, and gas at close to zero. In just two decades gas moved centre stage and now produces over 40 per cent of electricity.

At every stage of this remarkable transformation there have been doubts about the reliability of supplies and fears about prices. Every time the scale of the resource has outshone even the most optimistic forecasts. There were serious worries that North Sea gas should be husbanded for the petrochemical industry, and up until 1990 burning it in power stations was banned. The dash for gas in the 1990s was deemed so risky as to merit a moratorium in 1998. Now the secretary of state frets about gas price volatility and the exposure of Britain to what he believes may be ever-higher gas prices.

The new world of gas is disruptive, and will need policy changes. Since it is becoming more secure than oil as a fuel source, and potentially much more cost competitive, the problems with gas are largely environmental. Gas is a fossil fuel. It might cause around half the emissions of coal, but a decarbonised economy cannot have much gas on its energy systems, unless carbon can be captured and stored by carbon capture and storage technology (CCS) on a large scale.

There are, broadly, three possible policy options. The first is simply to let it happen: let the market decide. The case for this laissez-faire approach would be that gas will in any case replace quite a lot of coal, and so in the short term will do little harm, and possibly some environmental good. In any case, no one else is doing much about climate change. Nothing much has been achieved since 1990, carbon emissions are now rising at an alarming 3 parts per million (ppm) globally, up from about 2ppm in the 1990s, and the major threshold of 400ppm will soon be crossed.

To put these numbers into perspective, before the Industrial Revolution, concentrations were at about 270ppm, and 400-450ppm is the threshold that many scientists say will result in potentially two degrees warming. Worse, Britain like many other European countries has been deluding itself that it is making progress: its carbon consumption has been going up, as it has moved out of energy intensive production to imports.

The second option is to put up the barricades against gas. This could be done by tightening the emissions performance standards (EPS), applying the same requirements for carbon capture and storage as are being required for coal. Furthermore, given that the government is proposing to intervene directly in electricity generation through its new Energy Market Reform (EMR) legislation, it could simply exclude gas. This would make room for renewables and nuclear, and squeeze out gas as well as coal-all before 2030.

The problem with this approach-what might be called “straight to renewables and nuclear from coal”-is that it almost certainly will not work. It will not make much difference to Britain’s carbon consumption, and by increasing the competitive gap with the US (and much of the rest of the world) it will encourage industry to leave. But long before this happens, consumers would probably revolt against the bills, and the impact on the economy more generally would force a U-turn.

The third option is both more likely to achieve the policy objectives, but also requires a more nuanced and hence more difficult policy approach. This envisages an expansion of the role of gas for the next two decades and then a contraction, if carbon capture and storage does not work. The overwhelmingly important challenge that climate change poses to energy is the need to get out of coal as quickly as possible. Unless there is an exit from coal, we are doomed to a lot of warming. As demonstrated in the US, switching from coal to gas is in the short term significantly reduces emissions. So unlike Germany, which incredibly is now building several very dirty lignite coal power stations, we should close coal stations as fast as possible, and fill the gap with more gas.

This is only a short-term fix, but then there are no other plausible short-term fixes. How then to transform out of gas later? The risk is that, once built, the gas stations will continue to be used. That is true of coal now, but it has not stopped EPS and other measures slowly closing them down. The way to signal that in the medium term the carbon emissions from gas cannot be tolerated is gradually to increase the price of carbon. If carbon prices rise throughout the next two decades through the introduction of credible carbon pricing mechanisms, by 2030 gas will only be able to compete in the face of the carbon price if emissions can be captured-if not, the rising price of emitting carbon will squeeze it out of the system. The big difference between EPS and the credible carbon pricing is that the latter allows for flexibility whereas EPS is a top-down rule, introduced now in ignorance of how the world will be in 2030.

The debate is now politically polarised. On the one hand, offshore wind and nuclear are threatened by cheaper gas. Indeed gas has all but ruled out nuclear in the US. Simply chanting “wind good, gas bad” endlessly, and prophesying ever-higher fossil fuel prices looks increasingly futile. Worse, it isn’t doing anything to address global warming. In Germany the Greens have reaped what they have sown: now there will be more coal to replace the nuclear and to make up for the intermittency of the wind.

On the other hand, the gas industry sees a major opportunity and lobbies for its interests every bit as intensively as the supporters of current renewables. They want to be left to get on with it and too often ignore the longer-term consequences.

The additional problem with the laissez-faire approach is that it won’t actually lead to more gas. Because wind farms that provide intermittent energy are being built at scale on the back of large subsidies and guaranteed contracts, everything else is rendered intermittent too. Gas stations cannot rely on running continuously, for when the wind blows, the marginal cost of energy is zero and it therefore forces everything else off the system. The result is to ration off gas. That in turn undermines the gas power station supply contracts and their economics.

The way around this is to recognise that, having fixed everything else, gas power stations will only be built if they too are offered some form of fixed contracts. Once government starts intervening, it tends to intervene more and more. Hence the gas review, and the idea that there must be special capacity contracts for gas.

Government determination – the Gosplan, Soviet-style approach – looks like the way Britain is going. The results are unlikely to be good. Yet it does not have to be like this. The alternative is to take a more intelligent approach to energy policy. Low carbon is what we want, not specific technologies, and the obvious way to do this is to let the carbon price go to whatever level is necessary to meet the path to decarbonisation through to 2050, and let the market sort out how best to do this. Then the money saved from the current high subsidies could be devoted to the technological transformation that is already a familiar part of the landscape of Britain’s laboratories. Future renewables will probably wipe the floor with gas: from smart meters and smart grids turning the electricity industry from a passive to an active demand side, through to batteries and storage and a host of new generation technologies, including next generation solar.

The trouble with this approach is that it poses our politicians two unpalatable challenges: forcing the electorate as energy consumers to pay the full costs of their carbon addictions; and facing down the powerful lobbying groups that promote renewables, nuclear and other technologies and which want to avoid competitive bidding against a carbon price. It would also require politicians to get serious about research and to fund it properly.

Dieter Helm is professor of energy policy at the University of Oxford and author of “The Carbon Crunch: How We’re Getting Climate Change Wrong and How to Fix it” (Yale University Press)

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Power Engineering, 14 September 2012