1 November 2011: No Dieter, it’s not ‘the wonder gas’

Dieter Helm (Professor of Energy Policy at the University of Oxford – see Dieter Helm CBE) has been out and about in the media in recent weeks, joining many normally less sensible voices in suggesting that renewables are “too expensive” and that instead of building them, we should dash for gas.

He was more direct than ever when quoted as the principle expert in a recent article in the Sunday Times titled “THE WONDER GAS THAT COULD CUT YOUR ENERGY BILL”. Under a large photo of someone’s energy bill bizarrely burning up in a large gas flare, the article – about shale gas – quoted Helm thus: “We’re going to spend £100bn on offshore wind, and my guess is that it would cost £10bn or less to achieve the same carbon dioxide savings if you closed lots of coal and built gas instead.” This is a statement which mirrors much of the lobbying that gas companies have been engaged in this year.

Is this claim really true? To start with, the glaring problem with this statement is the failure to differentiate between investment and cost – a surprising mistake from an economist. Investment is money committed in order to earn a return. Cost is what the end-user typically pays for the goods (in this case,
electricity) – which includes for providing a return on investment.

So the statement implies that the cost would be 10 times greater to replace coal with wind rather than gas. But if you consider lifetime costs then you find that a coal to wind switch to achieve the same carbon dioxide emission reduction should in fact cost less than the coal to gas option.

Let’s do the numbers to show why. Using 2010 estimates for the levellised cost of electricity from a study by Mott McDonald for DECC, new gas generation costs 0.08 £/kWh, and a half and half blend of onshore and offshore wind would cost 0.125 £/kWh. The saving for a switch to gas-electricity is 0.5 kgCO2/kWh, and to wind-electricity is around 1 kgCO2/kWh. By the way, this analysis generously assumes that we ignore the likely additional greenhouse gas emissions from shale gas, caused by gas leaking during the extraction process – exactly how much is likely is currently a matter for fierce debate.

So we would pay (0.08/0.5=) 0.16 £/kgCO2 for the emissions saving from gas, but only (0.125/1=) 0.125 £/kgCO2 to achieve the same from wind – its 20% cheaper. (And even if all the wind is the more expensive offshore form, the carbon saving cost would still be the same as for gas.)

But what if Helm meant investment, are the numbers right then? Well, the £10bn number is indeed the investment needed to replace all the UKs coal-electricity with gas-electricity. But the equivalent investment opportunity in wind to achieve the same carbon savings would in fact be £50 bn – half the £100bn figure stated.

Of course, critical to this analysis are predictions about the future of gas prices. The numbers above use 2009 gas prices, while almost all experts predict the gas price will in fact continue to rise. One factor is the decline of UK north sea gas production, and our need to import from mainland Europe, where prices are around 40% higher. On the other hand, wind energy is on a declining medium-term cost curve driven by increasing deployment and R+D.

Helm predicts that shale gas may bring down gas prices – due mainly to the apparently large quantities available. So just how large are the shale gas resources? Cuadrilla, the company behind the Blackpool shale gas find, has estimated that the reserve could contain an incredible 5.6 trillion cubic meters. However, a study by the British Geological Survey for DECC, based on actual shale production figures from the US, estimated the total UK resource “could be as large as” 0.15 trillion cubic meters. The UK’s total gas consumption is currently about 0.1 trillion cubic meters per year – suggesting UK shale may not be quite the wonder gas after all.

Robert Webb is an energy engineer and entrepreneur. He co-founded and built quietrevolution, the leading developer of vertical-axis wind turbine technology. He writes an energy blog, Energy Race.

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