October 8, 2012 12:04 am

US example: Gas replaces coal as the favoured fuel

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For more than a century, the coal plants of America’s Southern Company have been generating electricity for towns and businesses throughout the country’s south-east.

Coal, as in other regions, has dominated the energy landscape. Until today. Over the past few years coal’s share of Southern’s electricity mix has dropped sharply. Four years ago, it produced 70 per cent of its energy from coal. Last year, this had dropped to about 40 per cent, and this year, it is expected to fall to 35 per cent.

The newcomer providing competition is natural gas. Five years ago gas accounted for between 10-12 per cent of Southern’s energy. The company expects this to grow to 47 per cent in the future.

The reason for the switch is simple: US natural gas prices have touched 10-year lows. The discovery of shale gas – trapped in rocks thousands of feet under the ground – coupled with new extraction techniques have transformed the country’s gas production.

Ten years ago, America was preparing to import gas. Now, some estimate the new reserves will last 100 years.

Low natural gas prices have prompted many utilities to shift large parts of their generation from coal to gas. North America’s energy transformation has been watched by the rest of the world. After assessing the potential in 32 countries, the US’s Energy Information Administration has estimated shale could increase the world’s technically recoverable gas resources by more than 40 per cent.

The International Energy Agency has heralded “a golden age of gas”, predicting it will account for more than a quarter of global energy demand in 2035, overtaking coal as the second largest primary energy source after oil.

Royal Dutch Shell is also bullish. By 2030, it predicts global gas demand will be 4.8 trillion cubic metres a year – up 50 per cent on the 2010 level.

“This increase in gas demand equates to five times today’s global liquefied natural gas [LNG] industry,” says De la Rey Venter, head of LNG at Royal Dutch Shell.

It is achievable, he says, citing significant production expected from North and South America, Australia, China and South Africa. Countries such as Mozambique and regions such as the eastern Mediterranean are also coming into play as producers.

Not everyone is convinced. For one thing, North America’s shale gas success has its roots in a unique combination of circumstances, including a well-developed, low-cost service industry and accommodating regulation.

“You have to ask, ‘a golden age’ for whom,” says Noel Tomnay, head of gas at Wood Mackenzie, the consultancy. “Globally, we have more supply options – shale in North America, LNG from Qatar and soon to come from Australia. But it is still expensive. If you want cheap gas, you need it to be on your doorstep.”

Europe, he says, is not well placed to benefit similarly. Compared with other regions, a lack of relatively low-cost, local gas and an absence of government policy to promote its benefits relative to other energy options are discouraging demand growth.

Not only are policy signals missing on the demand side, there is constraint on the supply side. Some European countries, such as France, have imposed moratoriums, given widespread environmental concerns about hydraulic fracturing, or fracking, the technique used to extract the gas from the rock.

Fracking involves pumping sand, chemicals and water at high pressure deep into the rock. Much of the opposition to it has focused on fears of water contamination.

The energy industry insists its practice is safe, while acknowledging more needs to be done to convince policy makers and the public.

One of the benefits of burning more gas, says the industry, is its lower emissions profile compared with coal. Executives point to the US, noting that since many utilities switched to burning more gas than coal the country’s carbon dioxide emissions have dropped. Figures from the IEA in May showed that CO2 emissions in the US in 2011 fell 1.7 per cent.

Others caution that over the longer-term, investing in gas-fired power plants could take away funding for renewables. Ben Caldecott, head of policy at Climate Change Capital, a sustainable investment manager, says: “In developed economies such as Europe, and Japan, more gas-fired generation is a real issue. It could crowd out renewables, making it harder to meet carbon reduction targets.”

The deployment of renewables at scale is vital, he argues, as only that will drive down costs.

Given the long-term nature of the energy business, governments are in the tricky position of having to take decisions that will determine investment decisions for decades against the backdrop of today’s economic downturn.

Mr Tomnay says: “If you are looking for a global gas revolution, the question you should ask is: ‘Where is the next cheap gas going to happen?’ My bet is China or Latin America. But it’s not happening quickly.”

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