Shale reserves: Gas seen as bridge between old and new forms of power

The world is set to enter a golden age for gas, according to the  International Energy Agency, that will see it start to rival coal as the main  fossil fuel.

It is easy to see the attractions, not just for the environment but also in  energy security terms. Coal is widely dispersed and cheap – but it is the most polluting fossil fuel  in terms of greenhouse gases and other pollutants that affect air quality and  can cause acid rain.

Oil, while less polluting, is overwhelmingly concentrated in the politically  insecure Middle East and Russia and has seen huge volatility as well as dizzying  price rises.

Until recently, much the same was true of gas – global reserves were  dominated by Russia, Iran and Qatar, and supplies from existing suppliers such  as the UK, Norway and Algeria are being used up fast.

But the global gas market has been transformed by the advent of technology  that has enabled the exploitation of huge shale gas reserves – particularly in  the US, which has moved in less than a decade from being one of the world’s  biggest importers of gas to being self-sufficient and even preparing to become  an exporter.

Significant reserves of shale gas have been identified around the world, from  Australia to Austria, as well as in key emerging markets such as China and  India.

Ostensibly, this is good news for efforts to tackle climate change – CO2  emissions are far lower from burning gas than coal and it is a much more  flexible fuel. Not only can it be used for everything from heating to transport,  but gas-fired power stations can be run as “always on” baseload supply and also  as quick-response “peaker plants”.

The Center for American Progress, a US think-tank, says gas is a “bridge  fuel” that can ease the transition to a low-carbon economy. The IEA suggested  this year that demand could rise by more than 50 per cent by 2035. “Global  natural gas resources are vast, widely dispersed geographically and can help  improve energy security,” the IEA pointed out.

However, it also sounds a note of caution. “While natural gas is the ‘cleanest’ fossil fuel, it is still a fossil fuel,” says Nobuo Tanaka, former  executive director of the IEA.

“Its increased use could muscle out low-carbon fuels, such as renewables and  nuclear – particularly in the wake of the incident at Fukushima and the  likelihood of a reduced role for nuclear in some countries. An expansion of gas  use is no panacea for climate change.”

Ben Caldecott, head of European policy at Climate Change Capital, the  investment group, says: “Some say we should focus on gas now, and then in 2030  we will have all these low-carbon technologies to replace it. But if we don’t  invest in low-carbon technologies now, we are not going to get them up to  scale.”

One reason for the focus on gas is that prices are low, particularly in the  US, and there is hope the exploitation of shale gas reserves elsewhere will help  keep them that way.

“There is a kind of shale gas mania, with everyone saying it will transform  the energy sector,” says Mr Caldecott. “It has had a huge effect in the US, but  the prospects for Europe and Asia have been subject to considerable hype.”

Yields are likely to be lower in these regions because of denser populations,  more challenging geologies and stricter planning regimes, he adds.

There are also concerns about the environmental impacts of shale gas – from  water contamination and methane leakage to the possibility that drilling may  cause earthquakes.

Further, gas prices are not expected to remain at their current low levels,  not least because of the retreat from nuclear power in Japan, Germany and  elsewhere after Fukushima.

“Basing long-term energy plans on current low gas prices would be misguided,” says Bruce Jenkyn-Jones, chief investment officer at Impax, an investor in clean  technology. “Gas is a finite resource and if we use too much, the price will go  up.”

And at the same time, the price of renewable sources of energy is falling  rapidly.

The cost of electricity from an average onshore wind farm will be competitive  with power generated at coal, gas and nuclear power plants by 2016, according to  Bloomberg New Energy Finance, while the cost of silicon used in solar panels has  fallen 93 per cent from $475 a kilogramme three years ago to $33 now.

Gas and renewables can work well together, with gas plants that provide  baseload power being able to switch to fill in the gaps when the wind is not  blowing or the sun not shining.

“The spectre of shale gas hangs over the [renewables] sector everywhere. That  rapidly ramping gas capacity is the perfect complement to intermittent renewable  energy is being largely ignored,” says Michael Liebreich, chief executive of  Bloomberg New Energy.

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