Fuel for Thought – 23rd Sep

23 Sep, 2011

Vast reserves of shale gas revealed in UK:  Early estimates suggest there maybe up to 200 trillion cubic feet of gas in a giant field in the north-west of England; although questions remain over have much will actually be recoverable.  The hydraulic fracturing, or “fracking”, extraction process associated with shale gas has caused concern among environmentalists and remains banned in France and in parts of the US.  The response from the UK Government will be interesting.  The development of this resource offers a chance to reduce the UK’s reliance on gas imports and boost the country’s dire finances whilst it would be at odds with the Government’s stated aim of decarbonising the UK power industry.

The UK Government looking to halt a second ‘dash for gas’ to support carbon targets: The binary ‘gas bad – renewables good’ attitude of the UK Government was reinforced this week when Chris Huhne, the Energy Minister, announced the intention to use permitting restrictions to limit the development of new gas capacity.   Government policy is ensuring the UK power market is entering a period of increasing uncertainty and failure to recognise the importance of gas as a source of flexibility to compliment large volumes of unpredictable renewables capacity will increase the risk of security of supply issues.  As a consequence of these policies the investment case for new CCGT capacity is changing to one focused on providing flexibility. 

EU at loggerheads with member states over key policy initiatives:  Plans to obligate member states to inform Brussels of strategic energy alliances in advance of completion and empower the EU Executive to negotiate deals on their behalf have been met with resistance. Larger member states have suggested they are only willing to comply on a case by case basis.  In parallel, they are pushing back on plans for legally binding energy efficiency targets.  Both of these disputes signal the growing resistance of member states to any incremental loss of autonomy in key areas of energy policy.  However, the reluctance of member states to embrace energy efficiency as a mechanism for carbon emissions reduction is somewhat surprising given the transparent and cost effective benefits it offers compared with incremental renewable capacity.

Capital cost overruns are endemic in large scale LNG projects:  Despite predictions of a ‘golden age for gas’ investors appear to have an increasingly pessimistic outlook for LNG projects and developers.  This view is driven by the prevalence of cost blow-outs over and above project contingencies. The level of contingencies is typically based on inadequate assessments of the risk premium required to cover exposure to raw material prices and currency risk over the long (4-5 year) construction period.  If this trend continues financing these capital intensive projects may become increasingly challenging.

Picture of the week:

View of the European power grid from the International Space Station.  It highlights the relative isolation of the UK from the continent,  Despite having interconnectors of 2 GW to/from France, 1 GW to/from the Netherlands and 450 MW to Ireland a recent UK government report recently called for the development of a European supergrid to support the renewables capacity growth.  We will be exploring the economics of gas and power interconnectors in a series of articles in the near future.