Will fracking boost the UK economy?

11 September 2013

Interview with

Michael Pollitt, Cambridge Judge Business School

So, there might be enough gas in Britain to supply us for 20 years, but will this actually lower our energy bills?  Dominic Ford went to speak to Mike Pollitt from Chocolate Moneythe Cambridge Judge Business School.

Mike -   Electricity generation fears as the energy policy trilemma which is, how do we provide low cost energy which is low carbon and which is secure?  So, the challenge is, how do you decarbonise electricity generation while maintaining energy security and while delivering reasonably low prices?

Dominic -   And by energy security, you mean making sure that we keep the lights on in essence?

Mike -   In the electricity sector, yes.  Energy security is about keeping the lights on at a reasonable price because the lights will probably always stay on, but the question is, at what cost they stay on.

Dominic -   So, why is that going to be a problem particularly in the next decade or so?  Is that does because of dwindling fossil fuel supplies or because of problem with the power stations themselves?

Mike -   Well, I think the immediate problem for the UK has been the large combustion plant directive which has meant that we've had to shut a significant number of our large coal fired power plants and that has meant that we've had to replace them with gas fired power plants.  And that process was doing very well until quite recently when the government has begun talking about electricity market reform which is a major reform of how low carbon electricity generation is subsidised in the UK.

Dominic -   So, why are we favouring gas fired power stations over coal?

Mike -   Well, we're favouring gas over coal because coal is relatively dirty in terms of greenhouse gases relative to gas because until recently, gas fired power stations were cheaper than coal fired power stations.  So, putting those two things together has meant that gas fired power production has been the choice that electricity companies make when they're making new generation investments.

Dominic -   How does fracking enter into that debate?  Is this about making sure we've got enough gas to keep those power stations running?

Mike -   No.  I don't think fracking has got really anything to do with the security of supply debate in electricity because the electricity - problem if there's going to be one - will manifest itself in the next 2 to 5 years.  Fracking is all about gas supplies in 10, 15, 20 years time.  The other thing is that the UK is heavily integrated into the European gas market.  So anything that happens in terms of UK gas production has to be seen in the context of that.  And what that means is that basically, we have to look at the size of the discoveries of fracked gas in the UK in the context of the market into which those supplies will be sold.  That may have some impact on the price, but that depends on the size of discoveries.  The main impact from an economic point of view will be clearly the UK will be able to sell that gas and simply increase its GDP as a result of producing more gas.

Dominic -   In the US, there's been talk of fracking bringing down energy prices quite dramatically because they've been able to be much more self-sufficient in their gas supply.  Do you envisage that also happening in the UK?

Mike -   Well, the US is very interesting because what's happened is that in a very short space of time, the fracked gas has gone from being insignificant to being about 25% of the gas that's consumed in the US.  Now, the sorts of numbers that are being talked about in the UK at the moment are small even in relation to the UK's current consumption of gas.  They'd be even smaller in the context of the European gas market.  So, the likelihood that they would as significantly impact on the price of gas for domestic gas consumers or for gas for power stations is unlikely I think anytime soon.

Dominic -   Could it be a boost for the UK economy?

Mike -   Yes.  I think gas is of course a very valuable commodity and there are 150 billion cubic metres of gas that the British Geological Survey has talked about recently.  It's only about 1 ½ year supply of gas that's consumed in the UK, but it's still worth say, 30 billion pounds and of course, 30 billion pounds isn't to be turned down lightly.

Dominic -   The environmental campaigners would say that we need to be getting off fossil fuels.  We shouldn't be renewing our fossil fuel power stations.  We should be building more windmills and solar farms.  Do you think that's a realistic prospect?

Mike -   Clearly, we are building a lot more low carbon generation.  I think even if the most optimistic scenarios happen for renewables and nuclear, we're still going to need fossil fuels to meet all of our electricity demands and of course, to provide the flexible generation which is needed when the wind doesn't blow or the sun doesn't shine.

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