A UK dash for ‘smart’ gas

Ms Samuela Bassi, Grantham Research Institute

James Rydge, New Climate Economy

Cheng Seong Khor, Petronas University

Samuel Fankahuser, Grantham Research Institute

Neil Hirst, Grantham Institute for Climate Change

Bob Ward, Grantham Research Institute

This policy brief aims to provide some clarity about the future role of natural gas in UK electricity generation, including its implications for costs, energy security and the environment.

The analysis is based on a review of the most up-to-date and robust evidence about the opportunities and challenges presented by conventional and unconventional resources of natural gas. It takes into account the UK’s carbon constraints, international gas market dynamics, environmental impacts and technological progress. It explores to two key aspects which are influencing the debate about natural gas in the UK: an interest in a renewed ‘dash’ for gas-generated power, motivated by the belief that there will be an abundant future supply of natural gas which will offer a sustainable price advantage over other forms of electricity generation; and an interest in a ‘dash’ to exploit indigenous shale gas resources, motivated by the prospect of increased energy security and reduced exposure to international energy price volatility.

The paper highlights that natural gas will continue to play an important role in the UK energy mix over the coming decades, for both heating and electricity generation. Low gas prices, however, are not guaranteed and there are large uncertainties around future forecasts. Too great a reliance on gas may turn out to be inconsistent with the UK Government’s objective to insulate the economy from the risk of energy price shocks by diversifying energy supply.

The paper also finds that extensive deployment of gas-fired power stations would not be consistent with the UK’s carbon targets, unless it is accompanied by the widespread introduction of carbon capture and storage (CCS) technology. In the short run, the UK’s emissions can be reduced by replacing coal-fired power stations with those fuelled by natural gas, which emit less than half the carbon dioxide per kilowatt-hour of coal-fired plants. But in the medium to long term, a heavy reliance on gas-fired power stations with unabated emissions would hinder the decarbonisation of the UK’s power sector.

The paper indicates that actual size of UK shale gas resources and reserves that can be commercially extracted is uncertain. The potential of shale gas is worth investigating, but future exploration and production will have to be subject to strict environmental standards upstream (e.g. at the wellhead to prevent fugitive emissions) and downstream (e.g. to ensure carbon is captured and stored safely). Furthermore, even in the most optimistic scenario, shale gas is not expected to render the UK energy independent and free from the need to import natural gas, and the UK gas market is likely to remain largely driven by wholesale prices charged by foreign gas suppliers. The effect of shale gas production on household and business electricity bills could therefore be limited.

The paper concludes that natural gas will continue to be important during the transition to a low-carbon electricity system. But if the UK is to meet carbon targets in a least-cost way, there is only a limited window for baseload generation from gas-fired power plants with unabated emissions, during which time it should replace coal. Gas can only play a more significant role beyond the 2020s if CCS technology is deployed on a commercial scale. Future energy policy will require a coherent portfolio approach to be successful. To secure the investment needed in new power plant and infrastructure this decade it is critical that clear and consistent policy decisions about the UK’s electricity generation are made now.

Key words: shale gas, climate change, environmental impacts, energy security