What’s wrong with gas?

Gas has a split personality. It's a boon for energy. But, if left unchecked, it's a problem for the climate. The gas strategy published by the Department for Energy and Climate Change (DECC) in December has drawn criticism from the Committee on Climate Change (CCC). The CCC has called for a 90% cut on unit carbon emissions from electricity production by 2030. This would significantly curtail the use of gas and be at odds with DECC'S gas strategy which sees a more significant role for gas.

NGOs have supported the call for a 90% cut. The think tank, Policy Exchange, has opposed the call, citing "targetism".

So what are the pros and cons of gas? How do we make sure not only that we have reasonably affordable energy but also that we avoid costly damage to infrastructure and food production through disruption to our climate?

Gas based electricity is reliable and flexible. We have to have enough gas based power for when the sun is not shining and the wind not blowing. And nuclear cannot ramp up and down over the course of the day and night like gas based power can. Gas based power is much less capital intensive than nuclear or wind. But gas has to be paid for over the long term whereas wind is free.

Security of supply of gas and the risks of gas prices going up in future are proper concerns. So the UK's exposure to gas should be contained. But the risks have lessened recently, especially with US shale gas, and the world now has well over 100 years' gas supply from reasonably diverse sources. Recent investment in infrastructure means the UK has the capacity to import nearly twice its gas requirements although more storage could be needed.

There is speculation about a shale gas bonanza for the UK comparable to that in the US. Gas prices in the US, at the equivalent of under $25 a barrel of oil, are less than half of those in the UK. My own guess is that the US experience will be hard to replicate in the UK because, even if the geology is good, there are simply not the wide open spaces for infrastructure that there are in the US. I wouldn't bet the UK's energy future on plentiful UK shale gas. But it is early days and shale gas does have some potential to make a contribution to the UK economy.

Gas based electricity comes with half the carbon emissions of coal. But if the UK is to meet its carbon reduction targets, emissions from electricity production will have to be largely eliminated during the 2030s. This can be done for gas using "carbon capture and storage" (CCS). CCS "works" but has not yet been demonstrated in the way that wind and nuclear have. Demonstration will enable confirmation of the cost.

Based on DECC's current assessment of the cost of generating electricity, gas with CCS looks like being a bit more expensive than nuclear and a bit cheaper than offshore wind. These relativities are of course just estimates at present. The Energy Bill, published in November, will enable each of the technologies to be properly tested at scale and the actual costs established. It makes sense to preserve room for manoeuvre till then.

DECC'S gas strategy envisages that, by 2030, gas generating capacity would be a bit higher than at present at about 30% of total capacity. However this capacity will have fairly low average utilisation because much of it will be there to compensate for variability in the wind.

DECC estimates that by 2030, renewables, mostly wind, would be a bit over 40% of nameplate capacity. This would mean growth in renewables by a factor of about three and a half from today. Most of the increase would take place by 2020 in pursuit of the renewables target.

Wind, with its low cash operating costs, will be first in the queue to produce electricity. This is why gas operating rates will be much lower by 2030 than in recent years, meeting about a fifth of electricity demand. Gas plant will operate, on average, at only 27% of capacity. The net of all this is a DECC gas strategy that envisages an 80% reduction in unit emissions from electricity by 2030, not quite the 90% called for by the CCC.

Another crucial factor in making sense of the gas strategy is that DECC will "grandfather" new gas plants, meaning that such plants will be exempt from any future caps on emissions.

There is a real dilemma here. Without the grandfathering, gas capacity that is needed might not get built. With the grandfathering, it is harder to eliminate carbon emissions from electricity production.

So who is right, DECC or the CCC? They both have a point. DECC should make it clear that electricity production is likely to have to become largely emission free in the 2030s. DECC should also make it clear that it will use the significant ministerial discretion built into the Energy Bill to favour the most cost effective low carbon technologies from the early 2020s. It should be signalled that gas without CCS cannot play a major role in electricity production after 2030.

Just how fully electricity production needs to be decarbonised and by when, should be determined by what is most cost-effective for decarbonising the energy system as a whole. This means preserving options while more can be learned about which technologies work best and most cheaply. At the moment the government is pursuing a sensible course of option management. Government is rightly taking powers in the Energy Bill to set carbon limits for electricity production in the future.

This idea of learning as we go and adapting the strategy to favour the least cost combination of technologies is not as tidy as setting firm targets now. But learning as we go is more realistic and, provided properly handled, should deliver the best outcome.

A final word to the gas industry. If they want their product to have a long term future they must spare no effort in getting CCS demonstrated at scale and shown to be cost competitive by the early 2020s. The future of their product is in their hands. If they succeed they will have the satisfaction of establishing a technology that will be crucial to the global effort to prevent damage from climate change.