The Impact of Shale Gas on Energy Markets - Energy and Climate Change Contents

6 Impact on climate change mitigation

65. The US shale gas revolution has seen significant reduction in the country's greenhouse gas emissions. This has led some to speculate what role shale gas might have in helping the UK to meet its legally binding climate change targets.

Global emissions

66. The shale gas revolution has led to a dramatic fall in the US's greenhouse gas emissions. This has happened because low gas prices have made gas more competitive in the power generation sector than coal, which has been displaced as a result.[164] ExxonMobil suggested that the US power generation market responded quickly and markedly to lower gas prices in 2012, increasing the amount of gas and decreasing the amount of coal consumed in power generation.[165] This has been a key factor in helping the US to reduce its greenhouse gas emissions in recent years (since the emissions from burning gas are about half of those from burning coal) and according to the Tyndall Centre, could have contributed, "up to half of the total [emission] reductions in the US energy system".[166] Mr Tiley of Shell told us that, "a switch from coal to gas is probably the most important thing one can do at the moment for reducing overall emissions.[167]

67. Fuel switching in the US, however, has not necessarily resulted in less coal being consumed globally. Increased coal exports from the US combined with reduced demand from China have caused the global price of coal to fall.[168] Within the EU, which has continued to experience high gas prices, coal is now a more attractive option for power generation.[169] The very low carbon price in the EU Emissions Trading System (EU ETS - Europe's main mechanism for reducing greenhouse gas emissions) has failed to provide a strong enough disincentive to the continued use of coal. It has, therefore, failed to stop switching in the opposite direction - from gas to coal - which has occurred in the European power sector.

68. We conclude that although development of shale gas in the US has reduced America's greenhouse emissions this may have been offset by increased use of the coal in Europe. This highlights the importance of improving the EU ETS to ensure it is able to deter the consumption of unabated coal for electricity generation.

UK emissions

Fugitive emissions

69. The greatest source of uncertainty is around the impact of so-called " fugitive" methane emissions. In addition to potential fugitive emissions from conventional gas production, shale gas production may involve deliberate venting. Since methane is a more potent greenhouse gas than carbon dioxide, any such emissions have a significant impact on the lifecycle emissions associated with shale gas.

70. A 2011 study from Cornell University claimed that the greenhouse gas footprint of shale gas was larger than that of conventional gas, oil, and, over a 20-year time frame, coal. This was supported by a study from the US National Oceanic and Atmospheric Administration (NOAA) which came to a similar conclusion.[170] A more recent study, however, by the Massachusetts Institute of Technology (MIT) argued that these claims have been exaggerated because they had not given sufficient consideration to whether companies attempted to capture their fugitive emissions. The study found that companies were capturing around 70% of their would-be emissions either for regulatory or economic reasons.[171] Cuadrilla stated:

"The largest source of emissions from shale gas and the methane emissions in the US comes from the practice of storing flow-back water, so this is the water that comes back with the gas, in open pits during the initial periods of flow back. The practice has changed certainly in the US of late and it is our practice in the UK that all flow-back water passes through a four-stage separator and that the gas is separated out in the separator and is, during testing at least, sent to the flare system.".[172]

Professor Anderson of the Tyndall Centre told the committee, "If I was put on the spot I would say that if the choice was a straightforward one between Putin's gas regulated in Russia or gas from the UK produced by shale, I would say from a regulatory point of view my preference would be to go for domestic production, from a purely regulatory point of view.

71. Given the lack of conclusive evidence either way, it comes as no surprise that the carbon footprint of shale gas remains a source of controversy.[173] WWF suggested that, despite a number of studies attempting to quantify the life cycle emissions which had been undertaken since our last inquiry, there was still a high degree of uncertainty and "significantly more good quality data and peer reviewed evidence is needed".[174]

72. Professor Stevens of Chatham House told us that the extent of fugitive emissions is essentially a regulatory issue.[175] In a UK context therefore, Professor Bradshaw commented, we cannot predict the scale of fugitive emissions of shale gas because shale gas production has not yet started[176] In his Ministerial Statement on shale gas the Secretary of State said that all shale gas operations in the UK would be subject to the Government's policy on flaring and venting of methane, which requires venting of methane to be kept to a technical and economic minimum.[177] The Secretary of State also set out his intention to commission a study into the possible impacts of shale gas extraction on UK greenhouse gas emissions.[178] The Minister told us that "the evidence from America is that some of the claims made about methane are exaggerated, but let us wait to see what our own study reveals."[179]

73. We recommend that the Government should complete its research into the impact which shale gas extraction could have on greenhouse gas emissions as quickly as possible so that the data can be used when considering applications for licenses for commercial scale extraction. Policies on flaring and venting of methane should be reviewed in light of the study in order to ensure that fugitive emissions from fracking are kept as close to zero as possible. DECC should also monitor the methane emissions of those companies that are currently exploring for shale gas. It should be possible, by way of regulation, to ensure that fugitive emissions are prevented by outlawing venting.

Meeting climate change obligations

74. There is a role for gas in the UK's future energy mix. Even in the scenario where the UK significantly decarbonises its power sector, gas with carbon capture and storage (CCS) could be part of the generation mix, and a small amount of unabated gas could be used for balancing purposes.[180] According to Professor Bradshaw of the UK Energy Research Centre (UKERC), "it is not a question of gas or no gas. It is how much gas and in what role."[181] Professor Bradshaw advocated looking at "the whole energy system" and "the role that gas plays and then, within that, what shale gas is contributing."[182] Domestically produced shale gas which displaced imported gas could make a positive contribution. Mr Egan of Cuadrilla argued, for example, that it would be beneficial for the UK to produce its own gas because emissions would be, "about 10% less than imported gas" (whether liquefied natural gas or pipeline).[183]

75. An unchecked increase in gas-fired generation, driven by shale gas development, however, could make it more difficult for the UK to meet its climate change obligations. According to Dr Kennedy of the Committee on Climate Change:

"The gas-generation strategy includes scenarios which model early power sector decarbonisation. These are economically sensible and compatible with meeting legislated carbon budgets. It also includes a scenario which reflects a new dash for gas, with very limited investment in low-carbon technologies through the 2020s. This would not be economically sensible, and would entail unnecessary costs and price increases. Neither would it be compatible with meeting carbon budgets and the 2050 target. Early decarbonisation of the power sector should be plan A - and the dash for gas Plan Z. Including these very different investment paths in the strategy exacerbates mixed signals already given by the Government and is damaging for the sector investment climate. It will be essential going forward to ensure that the Electricity Market Reform is aimed at achieving a carbon intensity of 50 gCO2/kWh in 2030 through investment in a portfolio of low-carbon technologies, rather than a dash for gas which would raise long term costs and risks.".[184]

76. There are different policy options to address the risk of a UK 'dash for gas' which would expose consumers to the risk of higher fossil fuel prices, and the benefits of lower prices if they materialise, and could be harmful to meeting the UK's statutory climate change targets. Mr Moore of Policy Exchange suggested that restricting shale gas would not help reduce emissions because they would be emitted elsewhere in Europe. He agreed that it would be better to focus on improving the EU ETS to control emissions from the electricity sector.[185] Professor Anderson, however, described the EU ETS as a "damp squib" because the price of carbon was so low as to make it irrelevant.[186] Professor Anderson suggested that focusing on price (as a mechanism for reducing greenhouse gas emissions) was a mistake because it was not able to incentivise the large step-changes required to tackle climate change. Instead, Professor Anderson promoted the idea of setting standards in terms of emissions which could apply to electricity generation. These could be technology neutral and could get stricter each year.[187]

77. We conclude that the Government needs to recognise that the unchecked development of gas-fired generation, which the development of shale gas may facilitate, might be incompatible with meeting the UK's climate change obligations. As we have recommended before the Government should implement an emissions performance standard (EPS) that gets tighter over time so as to include unabated gas-fired plant and avoid excessive gas "lock-in". However we do recognise there will be a role for unabated gas as peaking plant and to balance intermittent renewable sources. If shale gas does prove to be plentiful and either cheap or yielding substantial tax revenues it would be sensible to put far more emphasis on developing CCS.

Carbon Capture and Storage

78. The extent to which gas is used to generate electricity in the future will depend heavily on whether carbon capture and storage (CCS) technology can be proven at scale and become economic to use. In oral evidence to the Liaison Committee the Prime Minister, the Rt Hon David Cameron, said:

"The key question that no one can fully answer about gas is, if you knew how well carbon capture and storage would go, then actually how much gas you have wouldn't really matter, because it would not be contributing to carbon.".[188]

79. National Grid said that it believed shale gas could coexist with low-carbon generation as long as the majority of fossil fuel generation had CCS.[189] Furthermore, it is SSE's belief that if there is significant development of shale gas in the UK or elsewhere in the world, then the importance of developing gas CCS increases.[190] Mr Pibworth of SSE, for example, told us that the benefits of developing CCS included helping to meet the UK's climate change obligations, "strengthening the academic knowledge base, potentially exporting that technology going forward, and also taking advantage of the current very good standard of offshore gas engineering that we have in this country."[191]

80. CCS is not currently proved at commercial scale: something that will require significant capital support. It is hoped that over time, costs will come down as the technological know-how improves and economies of scale are realised.[192] The Government's attempts to fund CCS demonstration projects have been subject to repeated delays. We are pleased to hear in the Budget that the Government will take two projects to the next stage of the CCS commercialisation competition. Despite this the availability of commercial CCS in the near-future still appears extremely unlikely. Mr MacLean of SSE told us that "we very quickly need to get to a point where we are not talking theoretically about whether CCS works, technically and economically, but that we are getting on and demonstrating it. It is quite frustrating how long that is taking."[193] We share this frustration especially because it appears that the Prime Minister is banking on shale gas to meet our statutory climate change targets. In oral evidence to the Liaison Committee he said:

"Those arguing for a firm decarbonisation target are betting that carbon capture and storage is available. If not, you are in quite serious water, because you would be only relying on nuclear and renewables. If carbon capture and storage didn't come forward and you had a very tough carbon target, you would have no unabated gas at all.".[194]

The speed of commercial development of CCS will affect whether it can play a meaningful role in the UK's energy mix and how much gas we can rely on without conflicting with UK's climate change targets. Unfortunately, there is no sign that an economically viable form of CCS will be available in the next ten years.

81. We share SSE's frustration at how long it is taking to develop CCS especially as it is clear that the Prime Minister sees it as critical to meeting our future climate change targets. The speed of commercial development of CCS will affect whether it can play a meaningful role in the UK's energy mix and how much gas we can rely on without conflicting with the UK's climate change targets. While we are pleased to hear in the Budget that the Government will take two CCS projects to the next stage of the CCS commercialisation competition, we recommend the Government needs to conclude its CCS competition as soon as possible and bring forward CCS demonstration projects to allow it to be deployed in time to contribute towards meeting our carbon budgets. Unless progress towards economically viable CCS accelerates rapidly in the next three years, it will become impossible to base UK energy policy on the assumption that it will be available in time to help meet the decarbonisation recommendations of the Committee on Climate Change. We intend to keep a close eye on DECC's progress in this area.

Displacing lower carbon technologies

82. While emissions from gas-fired electricity plants are lower than those of other fossil fuels, such as coal, they are still significantly higher than low-carbon technologies, such as nuclear and renewables. We heard a range of views about the role that gas should play in decarbonising the UK's electricity system.

83. Mr Moore of Policy Exchange advocated greater use of gas in the short-term (rather than more expensive technologies, such as offshore wind), with this plant being retired early to avoid excessive emissions in the medium-term.[195] However, this could create stranded assets in the future and, as Professor Bradshaw of the UKERC warned, this kind of approach could require state intervention to remove the plant from the system in the future.[196] Dr Kennedy of the Committee on Climate Change emphasised that using a portfolio of different low-carbon technologies could protect the UK from gas price increases in the future. He argued that gas prices were likely to rise in the future and so too great a reliance on gas-fired generation could leave consumers paying the price:

"Gas is carbon intense and, as long as we are in a carbon constrained world, a gas-based system must be subject to an increasing carbon price and will be more and more expensive over time.".[197]

84. Some witnesses were worried that increased levels of investment in gas, potentially stimulated by shale gas, could squeeze out investment in renewable and energy efficiency. This might result in a prolonged use of gas and therefore increase emissions.[198] The Tyndall Centre estimated, for example, that between £19bn and £31bn could be diverted as a result of developing shale gas in the UK. WWF also suggested that future expectations about shale gas could undermine the case for investment in low carbon generation or energy efficiency.[199] Professor Anderson of the Tyndall Centre warned that continuing to invest in gas made it, "more strenuous to get off the curve and gives more reason to avoid getting off the curve."[200]

85. Several witnesses disagreed with this argument and Professor Stevens of Chatham House told us that the most important factor driving investment in decarbonisation was regulation and policy.[201] DECC contended that the Government support mechanisms such as feed-in tariffs would continue to make low-carbon options attractive to investors, even if the price of gas were to fall. Mr Barton from DECC told us that he did not think that shale gas, or gas in general, would reduce investment in renewables. He believed instead that, "increased use of gas can go hand-in-hand with increased renewable deployment".[202] In contrast, Ms Banks of WWF stressed uncertainty about long term support for renewables beyond 2020 which could undermine investor confidence.[203]

86. We recommend the Government push through its reforms to the electricity market, as set out in the Energy Bill, without delay. This will discourage the unchecked development of unabated gas-fired generation and create a favourable investment climate for low carbon technologies which could help to avoid gas "lock-in".

164 Ev 97 Back

165 Ev w20 Back

166 Ev 126 Back

167 Q 140 Back

168 Q 73; Ev w25; "The unwelcome renaissance", The Economist Online, 5 January 2013, www.economist.com Back

169 Q 81; Qq 266-273 Back

170 "Air sampling reveals high emissions from gas field", Nature, 7 February 2012, www.nature.com; "Study: 'Fugitive' methane from shale gas production less than previously thought", MIT, 29 November 2012, web.mit.ed Back

171 "Study: 'Fugitive' methane from shale gas production less than previously thought", MIT, 29 November 2012, web.mit.ed Back

172 Q 93 Back

173 Q 80 [Professor Bradshaw] Back

174 Ev 136 Back

175 Q 80 {Professor Stevens] Back