Monday, 21 November 2011

Britain's Gas-Price Gamble

When Cuadrilla Resources, a small independent gas producer, announced in September that it had found vast quantities of shale gas under northwest England, it caught many people off-guard. It had been known for some time that the area contained some shale reserves, but nobody anticipated anything like the volumes that Cuadrilla discovered. We cannot yet know what proportion of those volumes will turn out to be producible. But this is not the first time that developments in shale gas have taken people by surprise.

Ten years ago, no one could have predicted the shale revolution that has occurred since in America's energy markets. Investors at the time built import terminals to receive shiploads of gas from the Middle East and Africa. Those now sit idle, made redundant by developments in America's shale basins.

The lesson here is that technological change will always scupper long-term plans. In the 1980s, the British government spent a lot of time examining and attempting to predict the future of the U.K. energy-generation market as part of its planning enquiry for the Sizewell B nuclear plant. None of the many energy experts involved at the time suggested a significant role for gas generation.

Yet by the 1990s, gas turbines were basically the only generation facilities being built in England. In 2003, the government issued a white paper concluding that new nuclear generation was unnecessary. By 2006 it had decided that it was essential.

Today, the possibility of large shale-gas resources is once again calling into question the U.K.'s energy policy—particularly its approach to electricity-market reform, which is based on Whitehall officials' tallies of future market developments and their desired contributions from nuclear, renewables, gas and other technologies. The government is offering tens of billions of pounds in subsidies to its favored renewable-generation technologies—a large proportion of which will go to expensive deepwater offshore wind projects.

The carbon savings from these projects are 20-30 times as expensive as those that could be achieved through technology-neutral policies, such as the EU Emissions Trading Scheme, or even Britain's own newly introduced carbon-price floor.

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