The Impact of Shale Gas on Energy Markets

Written evidence submitted by National Grid (ISG 26)

1. Introduction to National Grid

1.1. National Grid owns and manages the grids to which many different energy sources are connected. In Britain we run systems that deliver gas and electricity across the entire country. In the North East US, we provide power directly to millions of customers. We hold a vital position at the centre of the energy system. We join everything up.

1.2. That puts National Grid at the heart of one of the greatest challenges facing our society; supporting the creation of new sustainable energy solutions for the future and developing an energy system that can underpin our economic prosperity in the 21st century. First and foremost this is a scientific and engineering challenge. Decisions around the future of our energy infrastructure – its cost, local impacts, objectives and risks – will of course involve most of society.

1.3. In the UK, National Grid’s primary duties under the Electricity and Gas Acts are to develop and maintain efficient networks and also facilitate competition in the generation and supply of electricity and the supply of gas. Activities include the residual balancing in close to real time of the electricity and gas markets.

1.4. Through our subsidiaries, National Grid also own and maintain the electricity Interconnector between England and France, and a Liquid Natural Gas importation terminal at the Isle of Grain. The wholly owned subsidiary National Grid Carbon Limited has advanced the transportation and storage elements of the Carbon Capture and Storage (CCS) supply chain.

Shale gas

1.5. The economic and energy security impact of the US shale gas exploration has created huge interest in other areas of the world in the potential for shale gas production.

1.6. If UK produced shale gas can be developed economically then it could make a useful contribution to the UK’s gas supply in terms of diversity and security of supply. There are likely to be technical and development challenges associated with the production of shale gas, this may include the UK’s requirements for gas quality for National Transmission System (NTS) entry. However we do not anticipate that these should be insurmountable given the experience of working with shale gas from our US operations which may be beneficial in developing the use of this new source of gas in the UK.

1.7. If shale gas becomes a significant contributor to UK gas supplies, this would represent an important development that we would need to take account of in relation to future network investment - potentially in relation to both the NTS and the Distribution Networks, so it will be important that developers provide us with a clear understanding of the scale, timing and locations of shale gas developments.

1.8. The existing network arrangements for gas entry to the NTS should also be applicable to shale gas or other ‘unconventional’ sources. Therefore network entry (subject to meeting existing arrangements) should not be seen as a barrier for shale gas development.

1.9. In the UK Future Energy Scenarios published September 2012 the gas supply forecasts include a modest contribution from onshore gas sources, specifically shale, coal bed methane (CBM) and biogas. The ‘greener’ agendas of ‘Gone Green’ and ‘Accelerated Growth’ favour biogas with a bias towards CBM in ‘Slow Progression’. Shale is assumed to make a small contribution in both ‘Slow Progression’ (from about 2015) and ‘Gone Green’ (from about 2020). For all three onshore gas sources there is considerable uncertainty over development timescales and potential volumes, hence the assumed modest contributions could be significantly understated. As a proportion of UK demand, the contribution of onshore gas sources in the scenarios increases from near zero today to about 1–2% in 2020 and about 3–4% in 2030, with the highest proportion being associated with ‘Slow Progression’ and ‘Gone Green’. For further information please see page 70 of National Grid’s Future Energy Scenarios publication:

2. Questions Posed by this Inquiry

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

2.1. To date only shale developments in the US have had any impact on the LNG industry. The US was expected to import significant volumes of LNG and numerous import terminals were built. With the emergence of shale gas these have only been utilised to a limited extent. One terminal is now being converted to export low cost US gas as LNG and other plans are under consideration. Hence the effect of shale gas on the LNG industry has been less LNG to the US and more to other markets with the prospect of more LNG to global markets in the future.

2.2. The liquefaction plants will have an expected life of 25 years, so are a long term investment.

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

2.3. Increased shale development and therefore more traded LNG rather than contracted LNG could promote market developments. It is too early to say if this could ‘lead to the emergence of a single, global gas market’.

2.4. As US prices are so low, cargos could well be diverted to Europe / UK during the winter months.

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

2.5. Anecdotal evidence from the venture capital and cleantech communities in the US who we work with closely suggests that the emergence of shale gas has had a negative impact on cleantech investments. Business cases for new and emerging clean technologies are based on the high cost of traditional fossil fuels. As this falls, the business case for cleantech erodes and they find difficulty in attracting investors. As the corollary to high and uncertain gas prices driving investment in alternative fuels and solutions, it appears low and sustained gas prices have the opposite effect. Given the uncertainty in US clean energy policy, the link is difficult to formally establish.

2.6. Shale gas and low carbon generation can co-exist providing there is certainty in policy around overall carbon emission targets and that the majority of fossil fuel generation has carbon capture and storage.

October 2012

Prepared 25th October 2012