Appendix: Government Response
The Government welcomes the Energy and Climate Change
Committee's report on the impact of shale gas on energy markets.
Unconventional gas reserves, and particularly shale gas reserves,
have the potential to have a significant impact on future gas
markets. This has been apparent in the United States. Between
2007 and 2012, US net gas imports fell by 55 per cent and by 2020
the US is expected to be a net exporter of natural gas. This
has increased US security of supply and balance of payments.
The extent to which the US experience can be replicated
in the UK is uncertain. However, the Government is committed
to ensuring that a world-leading framework for investment is in
place so that if the conditions are right the industry can prosper.
The industry estimates that it will have to drill
20 to 40 wells over the next 2 years in order to establish the
commercial viability of extracting shale gas. The Government is
putting in place the regulatory conditions, planning regime and
tax scheme necessary to encourage the development of these exploration
wells. In addition, the industry has come forward with a scheme
of community benefits so that those local people who host shale
gas developments can share in any proceeds.
This response has been prepared by the Department
of Energy and Climate Change (DECC) with input from the Office
of Unconventional Gas and Oil, HM Treasury, BIS, the Department
for Communities and Local Government, the Environment Agency and
the Health and Safety Executive.
The Committee's recommendations are shown in bold
and the paragraph references at the end of each recommendation
correspond with those in the Committee's report. The Government's
response is given beneath each recommendation or group of recommendations.
The US shale gas revolution
1. We conclude that because the US is the only
country to have developed a shale gas industry, it can serve as
a useful case study when considering how a shale gas industry
might develop in the UK. Some of the factors which facilitated
the US revolution, however, do not apply to the UK and so development
of the UK's shale gas industry is likely to be different to the
experience of the US. The UK should learn the lessons of
the US experience, including creating a favourable climate for
companies to operate in, while ensuring environmental damage is
avoided. (Paragraph 13)
The Government agrees that there are many lessons
to learn from US experience, although allowance has to be made
for the many differences in regulatory practice and requirements
between the UK and the US, and between different States within
the US. We have already benefited from many valuable reports
from the US, including from the Secretary of Energy's Advisory
Board and the National Academy of Sciences. DECC officials have
also visited Washington, Houston and Pennsylvania over the last
twelve months to learn at first hand from regulators, industry
and other interest groups.
While the UK will benefit from the fact that the
drilling and fracturing techniques used in the US are generally
transferable to the UK, there is a very different regulatory environment
in the UK. The UK has over 50 years of experience of regulating
the onshore oil and gas industry nationally. In addition, the
UK has a strong regulatory regime for exploratory activities but
we want to continuously improve it.
The Office of Unconventional Gas and Oil (OUGO) is
working closely with regulators and the industry to ensure that
the regulatory regime is as streamlined as possible while remaining
robust enough to safeguard public safety and protect the environment.
The Government will publish in July a comprehensive package of
measures to enable shale gas exploration, including a consultation
on tax incentives and up to date technical planning guidance for
industry, planning authorities and communities. In addition,
the Environment Agency has published its plans to streamline the
regulation of exploration activity whilst maintaining environmental
protection. For its part, the industry though the UK Onshore
Operators Group (UKOOG) have come forward with a Community Engagement
Charter incorporating a benefits package. These measures will
help to give the UK a world-leading regime for investment.
Defining shale gas estimates
2. We conclude that it is right for the Government
to exercise caution over shale gas estimates given the uncertainty
and confusion over definitions. If and when the Government
does decide to issue estimates of UK shale gas resources it should
set a good example and ensure that it is explicit about which
definition it is using. We recommend that it should use the definition
which is most relevant to the general public, which in our opinion
is recoverable resources. The Government should also clearly
communicate the uncertainty inherent in some of these figures
by emphasising the difficulty of producing an accurate estimate
of shale gas. (Paragraph 16)
The Government agrees on the desirability of clarifying
resource estimates and of communicating inherent uncertainties.
At present, neither DECC nor the industry currently have the
engineering, geological or cost information to make a meaningful
estimate of recoverable reserves.
Scientists from the British Geological Survey (BGS)
have estimated that the total volume of gas in the Bowland-Hodder
shale in northern England is some 1300 trillion cubic feet (central
estimate). The BGS study is the first in the UK to provide investors,
operators and regulators with an indication of where to target
future exploratory drilling. But until some experience is gained
on the long term productivity of actual wells, it will not be
possible to estimate the proportion which might technically be
produced, or the economic productive potential. DECC has also
commissioned work from BGS to survey the gas in place in the Weald
region of Sussex, which will also be published in due course.
Surveys for other regions will be commissioned as appropriate.
We will continue to be explicit about the definitions
we use and emphasise that the difference between 'gas in place'
and the proportion which is 'technically and economically recoverable'
is as yet unknown and requires further exploration and appraisal.
Calculating shale gas estimates
3. We conclude that it is impossible to determine
reliable estimates of shale gas in the UK unless and until we
have practical production experience. Therefore, if companies
can demonstrate that they can meet the required standards the
Government should encourage exploratory shale gas operations to
proceed in order to improve current estimates, providing that
public concern over environmental impacts is recognised and taken
into account. It should require shale gas companies to share
their gas content and production figures with relevant research
bodies (subject to commercial confidentiality). (Paragraph
21)
The Government agrees that effective exploration
and testing of the UK's unconventional gas resources is a necessary
foundation for understanding the potential of this industry.
It is creating the right framework to accelerate shale gas development
in a responsible way. Last December, we announced that fracking
could resume with robust regulation and there is nothing now stopping
licensees bringing forward new drilling plans and seeking the
necessary planning permissions and consents.
Companies should also engage early with communities
on the prospective impacts in their area, including environmental
impacts, as well as setting out the potential benefits. We therefore
welcome the Community Engagement Charter recently launched by
UKOOG which includes the commitment from industry to engage with
communities prior to any application for planning permission.
We recognise that, in the present circumstances,
where we and the industry seek the early characterisation of a
geological resource which is as yet poorly understood, it would
be desirable to promote early sharing of data. We welcome the
willingness expressed by Cuadrilla's Chief Executive, in his evidence
to the Committee, to share data on a commercially confidential
basis.
However, geological and production data is only obtained
through substantial investments by the operators, and it is only
reasonable that they should be able to reap the commercial benefits
for an appropriate period before it is made available to other
commercial interests.
The licences already require that all well results
are made available for release by DECC's agents after four years.
This is by no means unusual - in some States of the US, the confidentiality
period is ten years or more. But most oil-producing States have
a confidentially period of three to five years, similar to UK
practice.
Latest shale gas estimates
4. While it is unlikely that offshore shale gas
will be pursued in the near future, strategically, it may have
the most potential for the UK in the medium to long-term, especially
if it avoids public opposition associated with onshore operations.
We repeat the recommendation made in our previous report
that DECC encourage the development of the offshore shale gas
industry in the UK, working with the Treasury to explore the impacts
of tax breaks to the sector. This must be done before the UK's
North Sea oil and gas platforms are decommissioned, otherwise
the opportunity to utilise the UK's offshore oil and gas assets
may pass. (Paragraph 29)
The Government agrees that shale gas has the potential
to provide the UK with greater energy security, growth and jobs
and it is encouraging safe and environmentally sound exploration
to determine this potential. At Budget 2013, the Government committed
to introduce a new tax allowance for shale gas and to extend the
Ring Fence Expenditure Supplement for shale gas projects from
6 to 10 years. The Government will issue consultation on the
details of these changes by 18 July.
While the costs of offshore drilling and production
operations would be many times those of onshore operations and
are therefore much less likely to be economic in the short-term,
the Government agrees it would be prudent to assess what support
could be offered to encourage this development in the longer term.
The consultation on changes to the tax regime for shale gas will
therefore seek views on the longer term potential for offshore
shale gas production.
Public perception
5. One key to community acceptance will be a robust
factual response by government to scare stories. The other key
to ensuring public acceptance of the shale gas industry is community
engagement. Engagement should be early and businesses need to
be able to demonstrate that they are both listening and responding
to community concerns. The Government should consider whether
it would be appropriate for the new Office of Unconventional Gas
and Oil to provide advice and support to local communities living
near potential shale gas developments, taking into account the
need to address perceptions that the Office may be too closely
linked to industry. (Paragraph 34)
The Government agrees that early community engagement
by companies is key for public acceptance of shale gas development.
We are working with industry to further encourage effective engagement
that addresses concerns raised.
The Government also recognises that it has a role
in supporting public engagement by ensuring that the debate on
shale gas is supported by evidence-based information. One of
OUGO's objectives is to help people understand the facts about
shale gas, including by supporting local authorities' engagement
with their communities to help resolve any issues and allow projects
to proceed where appropriate.
6. Communities who are affected by shale gas development
should expect to receive, and share in, some of the benefits of
the development. We support the Government's intention to ensure
that local communities will benefit from shale gas projects in
their area. We recommend that the Government explores ways
of sharing substantial material benefits with local communities.
In the same vein as the recommendation in our Building New Nuclear
report, one option the Government could consider is extending
the scope of its proposal to allow local authorities hosting renewable
energy projects to retain business rates to include shale gas
developments. A mechanism for sharing substantial material benefits
with local communities should be ready to be offered to communities
in time to encourage them to take a positive view of the prospect
of commercial shale gas operations beginning in their locality.
(Paragraph 37)
The Government agrees that communities that host
shale gas developments should share in the benefits which are
created. UKOOG, the industry body, has published its Community
Engagement Charter that includes a commitment to engage with communities
early at each stage. The community benefits package also includes:
£100,000 in community benefits will be provided per well-site
where fracking takes place at exploration stage; 1% of revenues
in community benefits at production stage; publication of evidence
each year of how these commitments have been met; and regular
reviews of this package as the industry develops.
The Government has also already recognised the value
in delivering a financial incentive for local authorities to be
proactive in encouraging economic growth in their area. Under
the previous system of funding for local government, local areas
received no benefit from attracting new development to their areas.
All of the business rates collected by councils were returned
to Whitehall for redistribution as Formula Grant. The Government
has fundamentally reformed that funding regime through the Business
Rates Retention Scheme introduced in April this year. Authorities
will now keep nearly £11 billion of business rates paid by
businesses in their area, together with any growth on that share.
These new arrangements will mean that councils will
be better off as a result of growth - the more they grow, the
greater the financial reward. It will mean that councils hosting
new shale gas developments paying business rates will be better
off. Councils will keep up to fifty pence in every pound of business
rates growth in their area, providing a significant revenue boost
for reinvestment in their communities.
Regulation
7. We welcome the Government's attempts to minimise
the regulatory burden on companies by streamlining processes and
avoiding duplication where possible. However, robust regulation
of the sector in order to protect the environment and ensure the
health and safety of workers is absolutely essential in itself
as well as to ensure that the shale gas industry is to be accepted
by the general public. We recommend that the Government
maintains the highest standards of protection in environment and
health and safety procedures. When the Government provides detail
of the objectives, remit and responsibilities of the Office of
Unconventional Gas and Oil should include clear lines of accountability
to a single Minister responsible for the Office. The Government
must also demonstrate how it intends to avoid any potential conflict
of interest arising from the different roles of the Office.
(Paragraph 43)
OUGO, announced in December 2012, has also been established,
and its remit and objectives agreed across Government. It reports
to the Minister of State for Energy, Michael Fallon. While OUGO
has no regulatory functions and will not take over regulatory
responsibility from other bodies, including licensing which is
DECC's responsibility, it will co-ordinate activity on unconventional
gas and oil (initially focusing on shale gas) and lead on streamlining
and simplifying the regulatory process while ensuring shale development
remains safe and the environment is protected.
OUGO's objectives, announced at the Budget 2013 are:
- make the most of our natural
resources;
- enable the development of unconventional gas
and oil, protect the environment and safeguard the public;
- make sure local communities benefit from development
in their area;
- support public engagement; and
- build our knowledge base.
Engagement is the very heart of the Office's remit.
Given the objectives of the Office, and that it has no regulatory
functions, the Government considers it will be able to fully and
satisfactorily address any potential conflicts of interest.
The UK has a strong regulatory system which provides
a comprehensive and fit for purpose regime for exploratory activities,
but we want to continuously improve it. OUGO will work closely
with the regulators and industry to ensure that it is as streamlined
as possible, whilst remaining robust enough to safeguard public
safety and protect the environment.
We have taken important early steps. In June, the
Environment Agency published its own statement of actions to streamline
and simplify the regulation of exploratory activity by the oil
and gas industry, while maintaining environmental protection.
These include ensuring there is a single point of contact for
the industry; publishing draft technical guidance for consultation
by the end of July, setting out their requirements of operators
giving them certainty and significantly reducing the time it takes
to obtain environmental permits for exploration. The Department
for Communities and Local Government will also introduce guidance,
by 18 July, on how shale gas (and other onshore oil and gas) should
proceed through the planning system and clarify the interaction
of the planning process with environmental and safety consenting
regimes.
Tax
8. The Government should make an assessment
of whether these tax breaks will continue to be required during
commercialisation. (Paragraph 47)
The Government will consult by 18 July on a "pad
allowance" for shale gas. This proposal has been designed
to incentivise early investment in exploration; maximise the economic
production of the UK's shale gas reserves; and ensure a fair return
to the taxpayer. The proposed allowance would operate similarly
to existing field allowances, by exempting a portion of production
income from the supplementary charge - reducing the effective
tax rate on that income from 62 per cent to 30 per cent. The
amount of production income exempt from the supplementary charge
would be a proportion of
capital expenditure
incurred on a shale gas pad (the drilling and extraction site).
This proposal recognises the high upfront costs associated
with shale gas projects and means that greater support will be
offered to the industry in its early stages when costs per pad
are likely to be higher. In addition to consulting on the structure
of the shale gas allowance, the Government will seek views on
extending the scope of the allowance to all onshore hydrocarbons.
Given that this is a new industry, the consultation
on the tax regime will include a request for evidence on project
economics and timings, to inform decisions on the level and scope
of the allowance and what is required from the regime at the initial
exploration phase through to production. As the industry develops,
the Government will continue to assess the appropriate level of
tax allowance to ensure a fair return for the taxpayer.
Impact of foreign shale gas on UK gas prices
9. We conclude the shale gas revolution in the
US has the potential to influence the nature of gas markets around
the world. In particular, it could stimulate greater use of gas-to-gas
competition in spot markets to determine gas prices rather than
oil indexation. However, this would not necessarily guarantee
that the price of gas will fall. (Paragraph 52).
As recently as 2008, it was widely expected that
US imports of LNG would increase over the coming decades. However,
huge increases in shale gas production in North America have turned
the US from a gas importer to becoming virtually self- sufficient.
This has reduced the US need for LNG imports and
freed up LNG in the global market, increasing the availability
of LNG on the spot market and putting pressure on oil-linked contracts.
Combined with other factors this has increased pressure to renegotiate
some oil-linked contracts in Europe. Gas importers in the Far
East, such as Japan, have also looked recently to source LNG outside
existing, oil indexed, long-term contracts. Other influences
on future gas prices will include the level of global economic
activity, rising gas demand in Asia and the availability of further
sources of LNG.
The Government agrees that there is no guarantee
that gas prices will fall in the absence of oil indexation. However,
moves to deliver liquid, transparent, more effectively linked
gas markets (through the EU Third Energy Package and other mechanisms)
can have a downward effect on gas prices and can enhance security
of supply.
10. We conclude that if the US were to begin exporting
its shale gas as LNG, the UK might find it economically attractive
to import some of this gas. However, the significant transportation
costs associated with shipping LNG, combined with expected demand
for LNG from Asia, means that the price for this gas in the UK
is likely to be significantly higher than that experienced in
the US. (Paragraph 56)
The Government agrees with the Committee's conclusions
on the likely impact of US LNG exports. US unconventional gas
production has had a profound impact on US gas prices. However,
recent analysis shows that once processing and transport costs
to the UK are added to US domestic gas prices, the price of LNG
delivered to the UK could be similar to the gas price we pay now.
US wholesale gas prices have risen in 2013 and the
US Energy Information Administration expects this trend to continue.
In addition, liquefaction, shipping and regasification costs
will add significantly to the price of any LNG imported from the
US. The Oxford Institute for Energy Studies (OIES) estimate that,
at US wholesale prices of $5-6/mmbtu, the delivered cost to Europe
would be $11.4-12.4/mmbtu. This compares to UK prices (at the
National Balancing Point (NBP) of around $11/mmbtu for the year
to date 2013.
We welcome the LNG supply contracts between UK companies
and potential US gas exporters. US gas producers will seek the
best available terms on which to sell their gas and recent prices
in Asian markets could mean that US producers will favour those
buyers over Europe. The OIES estimate that the transport cost
of US LNG to be $3/mmbtu for Asia compared to $1.3/mmbtu for Europe
meaning that only a price spread of $1.7/mmbtu or less would make
supplies to Europe more profitable than Asia. The spot price
for LNG delivered to Japan is materially higher than the UK and
the price differential would need to close significantly for future
US exports to be routinely directed to the UK.
Large-scale US gas exports could put downward pressure
on UK gas prices even if no gas is directly traded; for instance,
if US supplies to Asia were to make other LNG sources more available
than would otherwise be the case. Significant US exports to all
markets would be likely to reduce the variance between the prices
in the different markets - all things being equal.
Impact of domestic shale gas on UK gas prices
11. We conclude that it is too early to say whether
domestic production of shale gas could result in cheaper gas prices
in the UK. It is unlikely that the US experience will be directly
replicated in the UK because of differences in geology, public
attitudes, regulations and technological uncertainties. Shale
oil is likely to be present in the UK but it remains uncertain
whether industry will consider shale oil economically worthwhile
to explore. (Paragraph 61)
Impact of foreign and domestic shale gas on UK
gas markets
12. We conclude that there remains substantial
uncertainty about the impact shale gas will have on gas prices,
both internationally and domestically, and it is by no means certain
that prices will fall a result of foreign or domestic shale gas
development. It would be wrong for the Government to base
policy decisions at this stage on the assumption that gas prices
will fall (it is possible that they will rise) in the future.
However, if large quantities are found they will either bring
down prices in the UK, or generate substantial tax revenues, or
both - and will certainly reduce imports with benefits to our
balance of payments and energy security. For all these reasons
the Government should encourage exploration to establish whether
significant recoverable reserves exist. (Paragraph
64)
Economic benefits
20. If shale gas development produces cheaper
gas prices in the UK, as a result of the export of shale gas from
the US and the development of shale gas in the UK, the energy
intensive industries could benefit from lower electricity and
chemicals prices. (Paragraph 96)
The US boom in unconventional oil and gas production
has been supported by favourable geology, low population density,
a competitive supply industry which has developed significant
advantages of scale, variable levels of environmental regulation,
and strong development incentives for landowners.
While the position in the UK is different, the Government
is taking steps to ensure that we make the best use of our unconventional
gas resources. We want to see any growth potential realised,
to create jobs and enhance our energy security while safeguarding
the environment and public safety in the process. Failure to
explore the potential of shale gas could result in UK gas prices
being higher than they might otherwise be as large volumes of
shale gas production in the UK could be expected to exert downward
pressure on UK gas prices.
The question of whether recovery of UK shale resources
is economically viable is ultimately one for industry. The Government
is ensuring the right framework is in place to support industry
and local areas as exploration and production moves forward if
geology and economics prove favourable.
Global unconventional gas production would be a strongly
positive development in terms of energy prices and security, but
we cannot assume it will bring impacts comparable to those seen
in US. Gas price forecasts produced by external analysts (eg
the projections used by the IEA in the World Energy Outlook) point
to continued high gas prices to 2030. The uncertainties on unconventional
gas potential, combined with expectations of rising global gas
demand (IEA estimates it will rise by 50% by 2035), lead most
analysts to project global gas prices will remain around the current
levels.
The Government agrees that policy decisions should
not be based on the assumption that gas prices will fall. DECC
policies are assessed using price assumptions which provide a
range of projected gas prices reflecting the inherent uncertainty.
Different possible outcomes are modelled; one in which prices
are low, one in which prices are high and a central case. The
2012 Price Projections see increases from 2013 onwards in both
the central and high cases. Only the low price case sees prices
gradually fall and this relies on comparatively optimistic assumptions
of plentiful global volumes of LNG and subdued European gas demand.
Unconventional gas production is only one of a number of factors
expected to affect gas markets over the coming years.
Cheaper gas prices in the UK, whatever the driver,
would benefit consumers of both gas and electricity and particularly
energy intensive users (eg steel and aluminium, chemicals, paper,
lime glass and ceramics). Cheap and secure supplies of gas would
provide additional benefit to the chemicals industry as hydrocarbons
are widely used as feedstock for products such as fertilisers,
plastics, dyestuffs and pharmaceuticals.
Shale gas has the potential to generate substantial
tax revenues but this is largely dependent on a number of currently
unknown factors (including the volume of economically recoverable
reserves, the cost of recovery and prevailing gas prices). There
is potential for domestic shale production to result in a decline
in the UK's gas imports, dependent on the volumes.
Global emissions
13. 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. (Paragraph 68)
The Government agrees that the EU ETS needs to be
strengthened and is pressing for urgent reform of the system to
achieve a higher and more stable carbon price that will drive
further investment in carbon abatement and low carbon technology,
including for power generation.
We continue to support the European Commission's
proposal to "back-load", or delay, the auctioning of
allowances proposals, as a short-term, temporary measure pending
more substantive structural reform of the EU ETS to address the
surplus of allowances in the system and provide a robust carbon
price in the longer term. We are actively engaging in EU level
discussions on structural reform and have called on the European
Commission to produce legislative proposals by the end of the
year.
We believe that the EU ETS should continue to be
a core component of both EU and UK climate change policy. We
will be considering the full range of options for reform as we
develop the Government's position on the future of the EU ETS
with the aim of ensuring that it continues to be an effective
instrument for keeping the EU on a reliably robust decarbonisation
trajectory.
UK emissions
14. 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.
(Paragraph 73)
The Secretary of State has asked DECC's Chief Scientific
Adviser, and Dr Tim Stone, the Senior Advisor to the Secretary
of State, to undertake a study into the possible impacts of shale
gas extraction on greenhouse gas emissions. The study will consider
the available evidence on the lifecycle greenhouse gas emissions
from shale gas exploitation, and the need for further research.
It will also consider the monitoring of methane emissions in
shale gas exploration projects and the Government will also give
weight to the Committee's recommendation in deciding upon the
way forward. The study will be published in the summer.
Venting and flaring are already regulated by DECC.
For all oil and gas activities, DECC requires that venting should
be kept to the minimum that is technically possible. Routine
venting is never permitted but it is not possible to prohibit
venting entirely, as in particular circumstances it may be necessary
for safety reasons. The preferred alternative, where gas has
to be released because there is no economic use for it, is that
the gas should be flared to reduce its contribution to global
warming emissions. For onshore oil and gas activity during the
exploration phase, there is normally no economic use for any gas
which may be produced as it is unlikely that relevant pipeline
connections would exist at that stage and flaring would in those
cases normally be permitted.
In respect of future appraisal or production activities,
DECC's established policy is that flaring should be reduced to
the economic minimum. DECC will therefore expect operators to
use best practice at an early stage in the design of the development,
to capture gas from the flowback fluids through "green completions"
and to seek economic use for the captured gas at the earliest
point feasible in the development. These aims are fully reflected
in the best practice guidelines developed by UKOOG.
DECC and the Environment Agency are giving further
consideration to the appropriate treatment of methane emissions
within the framework of environmental permitting, and what further
work is necessary to characterise residual emissions levels.
Better information around the potential sources of emissions will
inform policy on how best to minimise fugitive emissions, i.e.
methane which is emitted not by specific actions by the operator
(venting) but because of the design and operating characteristics
of the pressure containment systems, pipelines and related equipment.
Full account will be taken in this work of the latest research
and other relevant information.
15. 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 gasfired 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. (Paragraph 77)
16. 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. (Paragraph 81)
Significant levels of investment will be needed in
new gas capacity over the next decade to ensure security of supply
as ageing coal, nuclear and gas capacity is retired.
Analysis for the Government's Gas Generation Strategy[1]
(GGS) shows that whilst we may need more gas capacity in 2030
than we have today (up to 5GW based on an average grid intensity
of 100g/kwh), the role of gas will increasingly become one of
balancing a system with increasing amounts of intermittent and
inflexible low carbon generation (i.e. wind and nuclear).
The levels of gas generation will be determined by
the market, while keeping emissions within the limits set by the
Carbon Budgets. The GGS analysis shows that whilst individual
gas plants with the highest efficiencies (i.e. those which are
new or have undergone significant refurbishment) can be expected
to operate at relatively high load factors, the overall generation
from gas will steadily decrease as more low carbon capacity comes
onto the system and is prioritised by the measures we are bringing
forward under EMR. Analysis for the GGS shows the average overall
load factor for gas plant at around 27% based on achieving average
grid emissions of 100g/kWh in 2030.
The "grandfathering" of the Emissions Performance
Standard (EPS) limit, under which a new plant is consented until
end 2044, is consistent with the GGS analysis. Grandfathering
removes the EPS regulatory risk that may deter or increase the
cost of investment in new gas capacity by providing certainty
about the regime under which a new plant will operate. However,
it is not a "right to emit" up to the defined EPS limit
and it will be economic factors that will determine the levels
of gas generation.
Whilst setting the EPS on a declining trajectory
could mark out a decarbonisation pathway and provide certainty
on the amount of carbon emissions that individual plants could
emit at a given point in time, without equal certainty about the
scale and timing of investment in new low carbon capacity, it
risks creating unintended consequences that are counter to our
decarbonisation, security of supply and affordability objectives.
For example, were the levels of low carbon generation lower than
expected for the period covered by each tightening of the EPS
limit, then the EPS could prevent energy demand being served in
the most efficient way, as generation from the most efficient
gas plant may be curtailed and replaced by less efficient plant.
This could result in increased emissions and cost to the consumer.
We have committed to review the EPS on a regular basis.
As the Committee have noted, the Government recently
announced its two preferred bidders in the £1bn CCS Commercialisation
Competition. These are large, complex, first of a kind projects
and we have been working at pace to progress the competition.
The detailed process we have gone through has brought
much value, both in terms of gaining stronger assurances that
the projects we proceed with will be both deliverable and financeable,
but also that they could ultimately provide good value for the
UK taxpayer. The next stage is for projects to enter into multi-million
pound Front End Engineering Design (FEED) contracts in the summer.
These studies are a fundamental part of any large engineering
or construction project prior to final investment decisions -
it is only through this detailed work that all parties can gain
greater certainty regarding the costs involved. The results of
the FEED studies will then inform decisions, in early 2015, on
constructing up to 2 full projects. We expect the projects to
be operational between 2016 and 2020.
17. 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". (Paragraph 86)
The Government agrees with the recommendation to
proceed with EMR delivery without delay and that this will serve
to align incentives for developers across low and high carbon
generation. This is why, on 27th June, the Government
announced, among other detail on the EMR mechanisms, that the
first capacity market auction will run in 2014 for delivery of
capacity from winter 2018/19, subject to state aid clearance.
We question the validity on the point on avoiding
gas "lock-in" as gas-fired generation receives no guarantee
of dispatch. Evidence for this is provided the current limited
operation of such plant due to high gas prices which has meant
that it is less efficient to use than plant with lower operating
costs. While the capacity market will provide incentives for
reliable capacity (including gas-fired generation) to deliver
energy when needed (such as during periods of peak demand), prices
in the electricity market will still determine the merit order
for plant dispatch. This means that low carbon generation, which
typically has lower operating costs than gas-fired generation,
will tend to operate more frequently than gas in the future.
Security of supply
18. We recommend that Government should
not rely on shale gas contributing to the UK's energy system when
making strategic plans for energy security. We welcome the commitment
made by the Minister that the new Office for Unconventional Oil
and Gas will assess the effects of shale gas development on the
UK's security of supply - providing we can be reassured that that
the Office does not have a conflict of interest. (Paragraph
90)
Shale gas activity in the UK is very much in its
infancy and it is far too early to make any useful assessment
on the impact of domestic shale gas production on UK energy security.
DECC will continue to monitor the potential effect of shale gas
on the UK's security of energy supply.
However, the Government is clear that if significant
resource could be developed in a safe and environmentally sustainable
way, this would bring benefits to the UK in terms of jobs and
energy security. The Government is therefore committed to enable
the exploration of UK shale gas in a safe and environmentally
sustainable way to establish its potential. The Government's
position on potential conflicts of interest for OUGO is set out
in the response to Recommendation 7 above.
Economic benefits
19. We recommend that Government encourage
partnerships such as the one between Cuadrilla and the University
of Central Lancashire to ensure the skills required to develop
the shale gas industry are available. Government should make an
assessment of the need for skills development and should work
with industry and the relevant sector skills council to develop
a skills action plan for shale gas similar to the Nuclear Supply
Chain Action Plan which the Government has recently published.
(Paragraph 93)
One of the potential benefits of the production of
shale gas is job creation. As part of the Government's Growth
Strategy, DECC will work with BIS to assess the need for skills
development. Building partnerships to encourage job creation
and growth is part of the work being led by BIS. In order to
improve the responsiveness of the skills system to the needs of
business, BIS is promoting much greater employer leadership and
closer collaboration between business and higher education and
further education colleges. We hope that other companies and
institutions will follow the lead of Cuadrilla and the University
of Central Lancashire.
A number of industry led bodies provide an assessment
of skills needs in the energy sector including sector skills councils
(Energy and Utility Skills and Cogent) and OPITO. The UK Commission
for Employment and Skills has also conducted work to understand
the skills needs and challenges of key areas of the UK economy,
including the energy sector, and will continue to do so.
The Oil and Gas sector strategy has identified how
the sector and the Government can work on the skills challenges
the offshore sector faces, and that links could be made
with opportunities in future sectors including shale gas. There
is also supply chain mapping being commissioned. A supply
chain action plan, along the lines of the nuclear industry, may
be the way forward once we have confirmed our current understanding
of the skills challenges in this part of the energy sector.
1 https://www.gov.uk/government/publications/gas-generation-strategy
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