Energy and Climate Change CommitteeWritten evidence submitted by the British Ceramic Confederation (ISG 12)

Executive Summary

Natural gas represents approx. 85% of all energy consumed in the ceramics sector because it has proven to be the most suitable, energy efficient and economic fuel to achieve the high firing temperatures required to produce technically durable and aesthetically pleasing products.

Ceramic manufacturing industry needs secure and internationally competitively priced energy (gas and electricity).

Gas supply security is essential since the large kilns used by most ceramic companies cannot safely switch off at short notice.

Gas wholesale prices are more variable in the UK than in some other competitor economies.

Without the development of unconventional gas sources, the UK will become increasingly dependent on import sources, thus increasing the exposure of the UK wholesale gas market to increases in price, price volatility and supply security risks.

Variable energy prices coupled with uncertainties associated with energy security act as barriers to investment in UK manufacturing operations and hinder international competitiveness.

In the foreseeable future, it is likely that gas will continue to be the dominant fuel due to the lack of guaranteed, sustainable biofuel feedstock and the high costs associated with electric firing.

The additional revenues raised from shale gas production could be used to incentivise and develop energy-efficiency/decarbonisation technologies.

We strongly support the responsible development of UK unconventional gas resources (shale gas and coalbed methane) both on and offshore. The development of such resources would improve gas security of supply, whilst reducing price and price volatility for gas consumers.

We urge the Government to similarly adopt strong political support for the development of UK unconventional gas resources.

Brief Introduction to the British Ceramic Confederation

1. The British Ceramic Confederation (BCC) is the trade association for the UK ceramic manufacturing industry, representing the common and collective interests of all sectors of the Industry. Its 100 member companies cover the entire spectrum of products and materials in the supply chain and comprise over 90% of the industry’s manufacturing capacity.

2. Membership of the Confederation includes manufacturers from the following industry sectors:

Bricks.

Clay Roof Tiles.

Clay Drainage Pipes.

Gift and Tableware.

Floor and Wall Tiles.

Sanitaryware.

Refractories.

Industrial Ceramics.

Material Suppliers.

Abrasives.

3. The sector (including its suppliers) employs approx. 20,000 people and generates £2 billion sales. The sector is an active exporter, particularly for industrial ceramics, refractories, clay drainage pipes, tableware and giftware.

4. The industry is energy-intensive (but not energy inefficient). Energy bills/taxes can be up to 30–35 % of total production costs. The majority of the energy consumed by the sector (≈ 85%) is derived from natural gas, with lesser use of electricity (and some limited use of diesel, LPG and coal only where mains gas is unavailable.)

5. The ceramics sector is a solution provider for the low carbon energy generation and electricity distribution. In the recent European Commission report “Materials Roadmap Enabling Low Carbon Energy Technologies”, ceramic components were acknowledged to be critical in most technology options,1 with applications including wear resistant components (for heat pumps/wind turbine bearings), heat resistant components (used in the fabrication of solar photovoltaic panels) and transducers (for smart meters, temperature and flow regulators).

6. BCC is a member of the Energy Intensive Users Group and support their response to this consultation. We provide additional information about the ceramic sector below.

Gas and the Ceramic Manufacturing Sector

7. Following the discovery of natural gas in the North Sea (UK Continental Shelf), the UK enjoyed plentiful conventional gas supplies for several decades. The construction of the UK to Belgium interconnector also enabled gas to be exported to the European market.

8. However, domestic conventional gas reserves are now in long-term decline, such that since 2004 the UK has been a net importer of gas. Without the development of unconventional gas sources, the UK will become increasingly dependent on import sources, including: i) European pipeline gas (from Norway and mainland Europe) and Liquefied Natural Gas (LNG) by tanker from Qatar etc. This will result in the UK’s gas sources being less firm and more susceptible to price rises, increased price volatility and supply security risks.

9. As recognised in the recent Gas Generation Strategy consultation, gas will continue to have a critical role in power generation both in the short term (to meet core demands and fill the gap that will be created by the closure of more carbon intensive oil-fired and coal-fired plant and old nuclear plant) and the long term (balance demands associated with intermittent sources (eg wind and solar photovoltaics) and act as feedstock fuel for carbon capture and storage (CCS) abated generation). In the Electricity Market Reform Impact Assessment2 it was stated that there is anticipated to be significantly more gas-fired generation capacity and more power delivered from gas generation in 2030 than in 2010.

10. Gas is extensively used in the ceramics sector because it has proven to be the most suitable, energy efficient and economic fuel to achieve the high firing temperatures (which are typically in excess of 1000°C) required to produce technically durable and aesthetically pleasing products.

11. Gas wholesale prices are more variable in the UK than in some other competitor economies. This results in unstable operating conditions (variable costs and hence variable profitability) for gas-intensive industrial users, such as ceramic manufacturers. There is a growing need to protect all consumers from price volatility and supply interruption.

12. Long-term, fixed price contracts can help smooth over price variability. However, many UK ceramic companies are unable to fund the large deposits required. Companies that can access such contracts take a gamble when they fix their gas price since fixing at the wrong point may wipe out annual profits.

13. We believe gas price volatility is likely to increase over the next few years due to: i) the increased reliance on imported supplies and ii) increased demand volatility associated with the growing share of intermittent renewables which require gas back-up.

14. In times of gas shortage, the UK Government and Ofgem have favoured a Demand Side Response, ie ceasing or scaling back manufacturing. In the ceramic industry, there is little capability for a gas demand side response as the majority of operations are based on continuous production processes. For many kilns, safely shutting down and starting up does not occur readily, requires careful planning and naturally results in periods of less efficient (energy and carbon) operation.

15. If a gas supply interruption were to occur, most ceramic companies are unable to switch off consumption at short notice. Safely shutting down large (up to 200 metre long) continuous kilns involves progressively reducing the temperature over a period of several days to avoid damage to the refractory lining.

16. It is likely that gas will continue to be the dominant fuel in the ceramic sector for the foreseeable future due to the lack of guaranteed, sustainable feedstock to permit switching to biofuels and the high costs associated with electric firing.

17. The ceramic industry (and indeed other energy-intensive industries) requires secure, reliable and internationally competitively priced energy (gas and electricity).

18. Our members inform us that variable energy prices coupled with uncertainties associated with energy security act as barriers to investment in UK manufacturing operations and hinder international competitiveness.

19. We welcome all measures that increase gas (and hence power) price stability and security of supply, namely: i) development of UK unconventional gas reserves (both shale gas and coalbed methane) ii) increased gas storage, iii) increased LNG capacity and iv) increased pipeline import capacity.

Growth of Shale Gas in the US

20. At the turn of the millennium, the US conventional gasfields were in decline. The country was preparing to become a significant gas importer and significant investment was made in LNG import terminals. Since then, advances in extraction techniques have made shale gas development economically viable. The US is leading the exploitation of this new energy source. Shale gas now supplies around 25% of total gas production, which is forecast to rise to around 50% by 2030. The change has been sufficient to completely displace the need for new LNG import terminals and several are now being converted to export terminals.

21. The rapid and large-scale development of shale gas has transformed the US gas market. US gas prices have collapsed and are now down to the levels of the 1970s. This is in stark contrast to the UK where gas prices have risen. US consumers are enjoying gas prices around 30% of those in the UK. Correspondingly, the price of electricity has also fallen.

22. Cheaper gas (and electricity) costs have triggered some remarkable changes to the US economy. Inexpensive energy is supporting job creation, growth of the manufacturing sector, lower inflationary pressures (as energy costs are not driving price rises) and a positive contribution to reducing the trade deficit.

23. Over the past five years, the US has also recorded a significant decline in greenhouse gas emissions, largely due to the increase in gas-fired generation at the expense of more costly coal-generation. Meanwhile the European Union, has seen its emissions rise, partly because its higher gas prices (which are generally linked to oil) have been a contributory factor in the increase in coal-fired power generation.

24. Shale gas extraction has now developed to such an extent that the US is likely to become a net exporter of gas in the near future.

Shale Prospects Worldwide and Europe

25. Shale gas production is not limited to US. Many other countries have significant recoverable shale gas resources, including: China, Russia, Ukraine, Argentina, Mexico, South Africa, Australia and Algeria. The knowledge and technologies from the US industry are readily transferable to other countries.

26. In Europe, there is significant potential for shale gas to become a major economic source of supply. Poland is currently the European front-runner for the early exploitation of gas shales. Significant potentially recoverable resources also exist in France, Norway, Germany, Hungary as well as the UK.

Shale Prospects in UK

27. In the UK, there are several layers of shale with vast potentially recoverable shale gas resources. Such resources have the potential to provide the UK with a secure, indigenous and competitive source of gas—in essence a partial replacement for declining conventional UKCS gas production.

28. In addition to shale gas, the UK also has a significant amount of a second unconventional gas source, namely coalbed methane (CBM).

Benefits of Shale gas

29. Whilst the development of shale gas resources outside of the UK, could indirectly lead to improvements in gas availability and prices for UK consumers, the benefits to the UK would be significantly enhanced by domestic unconventional gas production. The benefits associated with the development of these resources include:

30. Security of supply. The development of shale resources would markedly improve gas security of supply. Since the shale gas would be produced within our national boundaries, this would make it significantly less susceptible to external factors that impact import sources. Given the likely increased prevalence of gas-fired electricity generation, improvements in the security of gas supply, would also translate into improved security of supply for power. This is at a time when the UK is running out of conventional North Sea gas reserves.

31. Lower gas prices. The economic production of indigenous shale gas is likely to result in significant downward pressure on wholesale gas for all consumers, thus increasing affordability for manufacturers, power generators and householders alike. Many commentators have suggested that indigenous shale gas production may not have such a dramatic impact on UK prices as has been seen in the US (due to higher production costs associated with deeper deposits, smaller basins, higher population densities and shale beds that are richer in clay). Nonetheless even a more modest decline in gas price would be welcome in a world of rising commodity prices.

32. Reduced gas price volatility. The reduced dependence on imports, would also lower the exposure of the UK wholesale gas market to price spikes associated with European or International gas supply difficulties.

33. Lower electricity prices.A reduction in wholesale gas would feed through to lower electricity costs. This is particularly welcome given the UK industry faces significant increases in electricity costs as a result of energy and climate change policies.3 In 2011, the UK’s energy and climate policies added £14/MWh to industrial electricity prices. By 2020, this figure is projected to increase to £28/MWh. By comparison, projections for 2020 industrial electricity prices in other countries are less severe. US policies are projected to add nothing, Chinese policies to add £10/MWh and German policies £17/MWh. This puts UK industry at a significant disadvantage.

34. Economic benefits. The development of indigenous shale reserves would have profound impacts for the UK economy. This would include bolstering Government income through the collection of additional tax and mineral rights revenues. The revenue raised could be used to incentivise and develop energy-efficiency/decarbonisation technologies. In addition, lower energy costs which would directly increase the profitability and international competitiveness of domestic manufacturers, especially energy intensive industries, thereby stimulating economic growth, job creation, rebalancing of the economy and budgetary deficit reduction.

35. Environmental. Natural gas (both conventional and shale gas) is essential to deliver environmental objectives that are both ambitious and cost effective. As indicated above, gas has a critical role in power generation both in the short and long term. The development of shale gas may be especially important if the country falls short on its new nuclear and renewable energy ambitions. In high temperature processes (> 1000 °C), such as ceramics manufacturing, it is a more efficient use of valuable gas reserves to combust the fuel directly in a kiln rather than use it to generate electricity. This is especially important for high temperature processes since limited decarbonisation opportunities exist.

36. Localised energy supply. Many ceramic manufacturing facilities (particularly those that produce construction products, eg bricks, roof tiles, drainage pipes and wall/floor tiles) are located close to the raw materials required for manufacturing (eg clays, shales, sand). Evidence from UK exploration suggests that unconventional reserves (both shale gas and CBM) are typically associated with or close to the same geological formations as ceramic raw materials. This suggests that there are opportunities for localised consumption of local unconventional gas reserves.

Concerns over Shale Gas

37. The techniques used to extract shale gas, especially the hydraulic fracturing process, have come under intense scrutiny and, in some parts of the world, faced strong opposition.

38. We welcome the findings of the recent independent report conducted by the Royal Academy of Engineering and the Royal Society4 which concluded “The health, safety and environmental risks associated with hydraulic fracturing as a means to extract shale gas can be managed effectively in the UK as long as operational best practises are implemented and enforced through regulation.”

39. The report recommended measures to mitigate the main environmental risks, namely: groundwater contamination, loss of well integrity, seismic tremors, gas leakage, handling wastewaters and regulatory requirements.

40. We consider the UK is well placed to manage such risks given it has over 60 years experience of producing (and regulating) oil and conventional gas both onshore and offshore.

Responses to Questions

Q1. What are the estimates for the amount of shale gas in place in the UK, Europe, and the rest of the world, and what proportion is recoverable?

Q2. Why are the estimates for shale gas so changeable?

41. Recoverable shale gas resources across the UK, Europe and world are known to be significant. Several publically available reports estimate the resources both in the UK, Europe and world-wide.4 ^, 5 For example, the British Geological Survey (BGS) estimates that potentially recoverable UK resources to be around 74—148 bcm5 with the largest resources in the Upper Bowland Shale of the Pennine Basin (underlying Lancashire and Yorkshire), with further resources in the Weald and Wessex Basins (underlying Sussex, Hampshire and Dorset).

42. However, it is not clear what the exact size of UK and European shale and UK reserves are. Since shale gas exploration in these areas is in its infancy, relatively little is known about the characteristics of potential shale formations. As a result, estimates of shale gas reserves remain subject to a wide range of uncertainty and will be subject to revision as new information from exploratory programmes becomes available. Current estimates for UK shale gas reserves typically range from 10 to 30% of recoverable resources.

43. In addition to shale gas, the UK also has significant CBM reserves. In 2010, the BGS mapped the potential areas of interest for future CBM development (principally in central Scotland, north Staffordshire, Cheshire, Humberside and South Wales).6 It estimated that the potentially recoverable resources of CBM are around 290 bcm (thus larger than those of shale gas). This indigenous resource should similarly be developed.

Q3. What are the prospects for offshore shale gas in the UK Continental Shelf?

44. In addition to significant onshore gas resources, the UK is also thought to have significant offshore resources. Recent reports from the BGS suggest that UK offshore reserves could be up to ten times higher than UK onshore reserves.

45. Although, commercial exploitation of offshore shale gas reserves is less likely in the near future due to higher extraction costs, technology development has the potential to make offshore production commercially viable. The expertise associated with its long established conventional North Sea oil and gas production makes the UK well placed to develop offshore shale gas.

46. We recommend that the UK Government encourages the development of both onshore and offshore shale gas resources.

Q4. Should the UK consider setting up a wealth fund with the tax revenue from shale gas?

47. Whilst we are not in a position to form a strong opinion on the relative merits of establishing a wealth fund, it is clear that the development of UK shale gas resources could help boost the nation’s economy.

Q5. What have been the effects of shale gas on the LNG industry?

48. An abundance of domestically produced gas reduces the dependence upon foreign sources, including LNG and pipeline gas. The UK has existing LNG import contracts with Algeria, Egypt, Equatorial Guinea and Qatar (the latter supplying ≈ 80%). These countries are located in regions of political instability which inevitably raises potential security of supply risks. Furthermore, it should also be noted that the responsiveness of LNG supplies will always be limited by how quickly it can be shipped to the UK.

49. As seen in the US, the development of shale gas has completely displaced the planned imports of LNG. The development of UK shale gas would similarly reduce our increasing dependence on LNG and the associated security of supply and price concerns.

50. Although the displacements of LNG cargoes from the US market initially led to a global increase in natural gas availability, gas demand in Japan abruptly intensified after the Fukushima disaster (an unforeseeable event).

Q6. Could shale gas lead to the emergence of a single, global gas market?

51. Shale gas is changing the dynamics of the gas market. It is feasible that increasing amounts of shale gas may further erode the historic price link with oil, thus leading to a more global market for gas.

Q7. What are the effects on investment in lower-carbon energy technologies?

52. Over the coming decades, a significant amount of renewable generation will be added to the grid, much of which will be in the form of intermittent sources. Gas (including shale gas) must support this development to ensure power generation is maintained when the wind is not blowing or when the sun is not shining.

53. The Government revenue raised from shale gas extraction could be used to incentivise the uptake of proven energy-efficiency/decarbonisation technologies or fund emerging technologies, including industrial demonstrator projects as well as supporting the further development of renewables and new nuclear.

Q8. What is the potential impact on climate change objectives of greater use of shale gas?

54. As outlined above, natural gas is essential to deliver ambitious, but cost effective environmental policies. Gas will continue to have critical roles in high temperature prcesses (where direct combustion is an efficient use of resources and limited decarbonisation options exist) and power generation.

Conclusions

55. The British Ceramic Confederation strongly supports the responsible development of UK unconventional gas resources, both shale gas and coalbed methane both on and offshore. The development of such resources would improve gas security of supply, whilst reducing price and price volatility for gas consumers. We consider this development to be vital to the long term success of manufacturing operations in the UK.

56. We urge the Government to similarly adopt strong political support for the development of UK unconventional gas resources. It is essential that the UK, with its existing expertise in conventional gas production reaps the benefits of its indigenous shale gas reserves.

September 2012