The Impact of Shale Gas on Energy Markets

Written Evidence Submitted by SSE (ISG 29)

1. SSE is a UK owned and based company operating in the UK and Ireland. It has interests in the generation, transmission, distribution and supply of gas and electricity. SSE is currently the UK’s second largest generator of electricity and the second largest supplier of gas and electricity. SSE also has interests in upstream gas, with North Sea production assets, however it is currently not involved in the extraction of shale gas.

2. Gas has a vital role in the UK electricity sector. However, developing CCS on gas is vital to ensuring the decarbonisation of the electricity sector and maintaining security of supply. SSE has submitted a bid into DECC’s CCS competition for a retrofit project on its gas power station at Peterhead, Aberdeenshire, in collaboration with Shell. If there is significant development of shale gas in the UK, then the importance of developing gas CCS increases.

Summary

3. Shale gas extraction has potential to impact on the UK gas market through domestic extraction, but is more likely to influence it through extraction elsewhere in the world, as was seen by the indirect impact on the UK of the US shale gas boom. To mitigate the short to medium-term impacts of potential cheap shale gas extraction elsewhere in the world and to avoid jeopardising the UK’s ability to meet its long-term objectives of decarbonisation and security of supply, the UK needs to ensure that the following policy supports are in place:

3.1 Robust carbon price and low carbon support

The shale gas boom in the US, coupled with a weak EU ETS carbon price, has led to an increase in coal-fired coal generation in the UK as a result of reduced coal use in US electricity market. If it extends for a significant period of time due to the lower gas prices caused by an excess of supply worldwide then there is a risk of carbon lock-in and a delay in investment in low-carbon electricity generation. This would have long-term impacts on electricity decarbonisation and would increase the risk of price volatility from imported fossil fuels. Therefore the UK needs to lead European efforts to strengthen the EU ETS and ensure that emerging low carbon technologies receive the required support to bring them to economic viability in the future.

3.2 Development of gas CCS

Given the importance of gas to the UK’s electricity system, developing CCS on gas is vital to ensuring the decarbonisation of the electricity sector and maintaining security of supply. If there is significant development of shale gas in the UK or elsewhere in the world, then the importance of developing gas CCS increases as does the UK’s opportunity of developing a world-leading export industry. Full-chain CCS has yet, to be proven at a commercial scale and therefore requires upfront capital support to bring it to economic viability and give policy makers the confidence that new gas plant can become low carbon at an appropriate stage.

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?

4. It is widely remarked that the UK shale plays could provide significant volumes of gas into the UK market. However, the resource is not as easily accessible as it is in the US and the population density of the UK and Western Europe would make it more difficult to mitigate the local impacts of drilling than is the case in the US.

5. The volumes of shale gas recoverable will depend on the gas price. At current market prices, shale gas extraction in the UK will likely not be economically viable due to higher production costs in the UK than the US. Higher gas prices in the future could allow for the extraction of higher cost unconventional shale gas, although large volumes of cheap shale gas extraction as seen in the US looks unlikely.

Why are the estimates for shale gas so changeable?

6. Estimating potential resources and recovery rates is not an exact science and an understanding of recovery rates is only reached after there is has been significant investment in an individual well. Given the absence of production experience outside of the US, resource estimates should be treated with caution.

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

7. The prospects for offshore shale gas exploration appear limited because of the higher costs of offshore operations on top of the higher production costs of extracting unconventional gas. As with onshore shale gas, while offshore resources may be uneconomic at present, they could become economically viable if gas prices rise into the future.

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

8. The success of shale gas in the US has led to a reduction in demand for LNG in the Atlantic Basin. This has put a downward pressure on the UK market, but it is unlikely that shale gas volumes seen in the US will be replicated in Europe or elsewhere. This effect on the LNG market would be the same if any volume of natural gas were to be extracted and is not limited to shale gas or any form of unconventional gas.

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

9. Large discoveries of natural gas of any source have the potential to moderate the global trade of natural gas, particularly the interregional flows of LNG, but there is limited evidence to suggest that it could lead to the emergence of a single global gas market. The large transport costs associated with gas would be the most obvious barrier to a single global gas market.

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

10. It would appear unlikely that shale gas extraction would be a sufficiently lucrative activity to make it worthwhile to consider setting up a wealth fund. It is unclear why setting up a national wealth fund would be considered for shale gas, and not conventional oil and gas.

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

11. Given that extraction of significant volumes of shale gas in UK would only become reality at higher gas prices, it would appear that investment in UK shale gas would limit negative impacts on investment in low carbon electricity generation.

12. However, if shale gas extraction is cheaper elsewhere and exerts a downward pressure on the UK gas market indirectly, as happened with shale gas extraction in the US, this could deter investment in low-carbon electricity and energy efficiency. This impact would be mitigated if there was a robust Europe-wide carbon price. A weak carbon price coupled with low gas prices would damage low-carbon investment and energy efficiency uptake significantly, and would leave both the UK and the rest of EU overexposed to gas price volatility in the medium to long term. Therefore, it is imperative that the UK leads Europe in attempts to strengthen the EU ETS and to encourage low-carbon generation and energy efficiency to insulate the UK from potential price volatility.

13. Although a carbon price signal corrects the negative market externality created by carbon emissions, it does not provide support for the development of emerging technologies and industries, such as renewables and CCS. These emerging technologies require support for them to be brought to economic viability. Therefore, a transparent support mechanism with a clear trajectory is required to bring forward technologies to market while developing UK supply chains and the associated economic benefits of jobs and growth.

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

14. At the point of use, the carbon footprint of shale gas will be the same as conventional gas, where it prevents investment in low carbon electricity, it would be to the detriment of the long-term decarbonisation of the UK power sector, although where shale gas is encouraging coal to gas switching for power generation it would bring emission reductions in the short to medium term. Coal to gas fuel switching has significant importance to the reduction of carbon emissions of other national markets, which unlike the UK do not have a significant proportion of gas-fired electricity generation capacity currently on their system.

15. Electricity sector decarbonisation is vital to meeting legally binding 2030 carbon targets, as there is a greater push for the electrification of heat and transport. New gas plant will be required on the system before 2030 to balance the greater penetration of intermittent renewables and ensure security of supply with planned capacity closures. To ensure that flexible gas plant can balance the system at times of supply shortage post 2030, it is important that gas CCS is available at an appropriate stage so that gas plant are able to be retrofitted with carbon abatement technology. This alone makes developing CCS on gas vital for meeting the UK’s legally binding carbon targets, and if shale gas extraction occurs in volume anywhere in the world, developing CCS on gas will not only develop in importance in the UK but for other countries as they increasingly switch from coal to gas for electricity generation.

16. The UK has a distinct comparative advantage on developing gas CCS, given its strong academic knowledge base, existing offshore oil and gas engineering expertise, accessible offshore storage sites and existing penetration of gas plant on the electricity system. If there is appropriate government support, gas CCS can prove to be a strong export opportunity for the UK and play a vital role in ensuring the electricity system is decarbonised by 2030.

October 2012

Prepared 25th October 2012