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29 juillet 2011 5 29 /07 /juillet /2011 06:41

PART 2  SUITE

Unfortunately, such “happy talk” is not justified by the facts. Firstly, many pure (dry) shale gas plays in the US are losing money at the low prices that cause such a high level of consumer optimism in the US.

 

Because of this, shale gas drilling in the US has more or less halved since 2008 and new drilling this year is focused on areas where the gas comes up with lots of much more profitable, associated hydrocarbon liquids.

 

 

Given the looming energy shortages, it is of course important to look for and where feasible extract shale gas. This would be worth doing at almost any cost so as to reduce Europe’s increasing and potentially crippling reliance on large and near-monopolistic gas exporters like Russia, Qatar and Algeria. These suppliers have no rational interest in reducing the price of their gas and every reason to pursue and maintain their target of price parity with oil.

But Europe must remain clear-eyed. The shale gas technology is not cheap when all its external (in particular, environmental) costs are fully taken into account. So the future of shale gas as a world and UK source of primary energy must, for planning purposes, be regarded as marginal at best, until its full costs of extraction and use are better understood

Any idea of a gas surplus is premature, to say the least. Note that the US remains a net importer of natural gas and is likely to be for many years to come. Also noteworthy, in the chart below, is how fast its truly cheap, conventional natural gas resource is depleting.


Figure 7

World-class basin

Over-optimism over the future availability and price of fossil fuels has characterized UK energy policy since the discovery of North Sea oil and gas. Optimism reached a peak under the Thatcher Government in the early 1980s which set the UK on the path of deregulating almost all activities concerned with energy production and use. An excellent paper by Oxford energy economist, Dieter Helm can be recommended for those interested in the history of “light touch” UK energy regulation during the years since.

Nevertheless, Thatcher’s government, made wary by the risk of further coal-mine strikes during the 1980s, at least did pursue the construction of another nuclear power plant at Sizewell on the south-east English coast that was commissioned in 1993. This was the last major power plant built in the UK that does not rely, more or less entirely, on burning natural gas.

The composition of the fuels used by the UK’s fleet of power plants has been revolutionized during the past 40 years, particularly by the arrival of “cheap” North Sea gas and its use in power generation from the early 1990s, as illustrated in the following chart.


Figure 8

Beside the massive reduction in coal use, note how rapidly the contribution from nuclear power has been diminishing of late.

The direct consequence of the UK’s hydrocarbon extraction policy, sometimes but inaccurately spun by politicians of all stripes as a positive contribution by the UK to CO2 reduction, is the loss of almost an entire, world-class hydrocarbon basin within the lifetime of a normal adult. The UK was never obliged to do this. Both the Netherlands and Norway have regulated the rate at which their oil and gas fields have been emptied more rigorously - and so will remain in the extraction business considerably longer, and will most likely obtain a higher extraction rate from their reservoirs than the UK.


Figure 9

Net hydrocarbon exports peaked at over 60 million tons per year in 2000, ironically at the bottom of the market. Since 2005, the UK has become a net hydrocarbon importer. Import dependency has grown by an average of 10 million tones of oil equivalent (toe) per year over the past decade, so by 2015, net imports are likely to be roughly the same as they were in 1970, around 100 million toe per year.

If the price of gas once more converges with the price of oil, the addition to the trade deficit, with oil at $750/t ($100/b) will be an additional $75 billion per year. If the oil price rises further, it is hard to see how the cost of the hydrocarbon trade deficit can possibly be covered by increased exports in goods and services.

The UK has become one of the largest gas consumers in the world. Only the US, Russia, Iran, China and Japan consume more gas. Most city-dwellers use gas for heating and the country’s electricity infrastructure has seen a huge increase in gas-fired power plants since 1990, now totaling 29 GW.

This is bad enough. Worse is to follow.

Doomed plants

By or before the 1st January, 2016, under a treaty with its EU partners, the UK will lose 8 GW (Gigawatt) of ancient, polluting and inefficient, if well-functioning coal capacity and 3 GW of 1980s era oil capacity that is routinely used to cover peak demand. These power stations must close because in 2008 their owners chose not to add flue gas desulfurization equipment that is demanded of all EU power plants that burn coal or sulfur-containing oil.

In addition, by 2018, the roughly 10 GW of nuclear power capacity that was available in 2010 will shrink through obsolescence to 3.6 GW with further closures taking place in 2023.

The financial crisis of 2007 – 2009 resulted in a relatively small overall reduction in energy use, much of it in manufacturing. By 2010, with a weak financial recovery taking hold, energy demand picked up more or less to normal while peak electricity demand during the third cold December in a row, returned to levels last seen during the boom years prior to 2007.

Figure 10 UK electricity supply in MW for the 6th and 7th December 2010. Peak demand is around 6 pm daily.

It can be seen from the foregoing chart and from many similar instances all over North Western Europe, that winter peak power often coincides with very large, slow-moving anti-cyclones that bring extreme cold weather and almost no wind, and therefore little or no wind power output.

Further south, similar events in summer coincide with peak air-conditioning loads.

The chart shows that all the “doomed” nuclear, oil and coal-fired plants played a major role in keeping the lights on during the winter of 2010 – 2011. Total “firm” generating capacity stands today at around 72 GW. Clearly, no matter how much wind power is built, if the wind does not blow during periods of peak power demand, its capacity is worth more or less nothing.

The loss of 11 GW of reliable capacity during the next four years, along with 3.4 GW nuclear, almost 15 GW in all, risks precipitating a real capacity (keeping the lights on) crisis by the middle of this decade.

In a “free market”, with such obvious signs of coming, extreme stress in the system, one would expect generators to be lining up to deliver the obviously needed new capacity. There are, indeed, an impressive number of planned power stations, nearly all of them gas-fired. The major generators claim to be ready to build new nuclear power and “clean coal” power plants to replace obsolete capacity. A bright new future beckons during which the figure of £200 billion is regularly cited as the amount of money that “must” be spent to make the UK’s tatty energy infrastructure fit for the 21st century. In reality, however, we see that very few new power stations are actually being built. To understand why this is so, we have to look at the recent history of UK energy policies.

Complicated subsidy

The idea behind the liberalisation of the UK energy market started under Margaret Thatcher was to have a free market in generation and sales and a government-regulated transmission and distribution system. Then Energy Minister, later Chancellor (Economics Minister) Nigel Lawson famously said at the time that “energy (should be) a traded good like any other commodity and its supply was to be settled in the market place”.

This has more or less come to pass. We have a regulated (privately owned) transmission company, National Grid, that owns the country’s high voltage transmission system (as well as the high-pressure gas transmission system). Almost all the major thermal power stations, fossil-fueled and nuclear, are now owned by six large energy corporations, EdF, Centrica, Eon, RWE, Iberdrola and Scottish & Southern Energy (SSE). Consumers are free to switch energy supplier and energy switching rates in Britain are among the highest in the world. Energy prices are not (yet) particularly high compared to the rest of the EU.

Yet all this is irrelevant if in the long term not enough investment is made in power generation while the UK at the same time is becoming dependent on outside suppliers. This will lead to an energy crisis no matter how “the market” is organised. And this is the reality we are headed for. Why is this so?

It should be noted that, rather than leaving the energy market “free”, the UK government has embarked on a hugely ambitious climate change program that has far-reaching impacts on the power generation market. In 2008 the UK Parliament voted through the Climate Change Bill and thus made CO2 emission reduction a legal requirement for the Nation, and not just for its own remaining tenure but all the way through to 2050. During the same year the UK Government agreed to implement the EU’s 20-20-20 targets, which require that the country will deliver 20% of its energy demand from renewable energy and reduce CO2 emissions by 20% by 2020, just eight years from now.

In addition, the Labour Government introduced an expensive subsidy, called the Renewable Energy Obligation. This obliges electricity companies to purchase an ever increasing fraction of their power from OFGEM-approved renewable energy resources. A Renewable Obligation Certificate (or ROC) rewards the wind turbine or biofuel generator with an agreed number of ROCs (between 0.5 and 2) per MWh, over a pre-agreed number of years, depending on which renewable resource the Government wishes to incentivize. The cost is met by the consumer to whose electricity account all of this is charged. The typical value of an ROC to any renewable energy generator since it was launched has been between £30 and £50; it is the subsidy the generator receives on top of the market price. So far, this subsidy has cost consumers £5 billion, with £1 billion in 2010 alone.

This is set to rise to £7 billion per year by 2020, representing an accumulated transfer from consumers to (mostly) wind developers of roughly £40 billion – enough money to pay for a respectably sized nuclear capacity.

So far this incentive is delivering only 6.5% of the UK’s electricity whereas the target for 2010 was 10%. The transparent failure of this incentivization programme to achieve its targets should have given the in-coming Government some warning. Instead, it ploughs on regardless, introducing continental–style feed-in tariff (FITs) for roof top PV (annual capacity factor about 6%) costing consumers anything up to 40p/kWh. This is a great way to further transfer funds from poor consumers to rich house owners. None of these renewable energy sources will deliver any firm capacity.

 

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