Natural gas future clouded by CO2

Strong support for natural gas in the UK leaves three unpalatable choices: repeal its climate bill to make it less ambitious; force new gas power plants to operate at a fraction of capacity; or fit incredibly expensive, untested CCS equipment.

Natural gas has strong political support in Britain, shown by a tax break choreographed this week to balance support for wind power, but it is also on a collision course with the country's carbon emissions targets.

That pits the country's energy and climate change ministry against the Treasury, and ranges arguments for a green economy against affordability, splitting the coalition government and suggesting doubt will continue to cloud the fossil fuel's future.

From Wednesday, some new gas fields in shallow waters will be exempt from a 32 percent tax on oil and gas exploration on the first 500 million pounds of income, the Treasury said this week.

The prospect of new shale gas reserves worldwide and invigorated conventional production suggest natural gas will remain competitive for decades, but its carbon emissions pose an obstacle in Britain.

For years successive governments have endorsed a low-carbon economy while gliding over the implications for fossil fuel power plants which require far less upfront capital, presently at a premium.

The previous Labour government passed a climate bill in 2008 which offered substance, however, requiring the country to slash greenhouse gas emissions from 1990 levels by at least 80 percent by 2050 and established statutory climate advisers to recommend interim targets.

That set in motion a process which now presents the country with three unpalatable choices: it must repeal the climate bill to make it less ambitious; or force new gas power plants to operate at a fraction of capacity; or to fit incredibly expensive, untested carbon capture and storage (CCS) equipment.

Cheap

Both Britain and the United States have already proposed emissions limits which will force new coal-fired power plants to fit CCS which will add more than $1 billion per plant to their capital cost.

That will end the construction of new coal plants apart from highly subsidised CCS pilots, not such a big sacrifice given falling gas prices particularly in the United States.

It would take incredible political courage, or foolishness, to ratchet emissions limits to end unabated gas, the world's cheapest source of baseload power.

Finance minister, Conservative George Osborne, is leading UK gas support with his tax break apparently timed on Wednesday to undermine a show of support for more expensive wind power from Liberal Democrat Ed Davey, energy and climate minister.

"Gas is the single biggest source of energy in the UK," said Osborne on Wednesday. "Today the government is signalling its long-term commitment to the role it can play in delivering a stable, secure and lower-carbon energy mix."

Limit

The climate law committed the country to a binding target to cut CO2 emissions by at least 80 percent by 2050.

There are only two ways to meet the 2050 target using gas.

First, gas power plants could be limited as back-up for intermittent renewable energy, operating at about 10 percent full capacity, according to data from the government's advisers, the Committee on Climate Change (CCC).

That would brutally suppress natural gas demand.

Alternatively, Britain could tighten power plant emissions limits to force gas plants to fit CCS, potentially pricing them out of the market.

Wednesday's announcement failed to commit to either.

"We do not expect the role of gas to be restricted to providing back up to renewables, and in the longer term we see an important role for gas with CCS," the department for energy and climate change said.

Various committees and advisers have ratcheted pressure on the government to come to a decision.

In March, the chair of the CCC, Adair Turner said the country's gas plan "carries the risk that there will be too much gas-fired generation instead of low carbon investment."

He said that by 2030 the role of gas-fired generation should be limited to balancing renewable energy.

Parliament's energy committee on Monday demanded clarity on the emissions impact of new gas investment under the government's electricity market reforms (EMR).

The CCC calculates the carbon emissions of Britain's power grid now at nearly 500 grams of CO2 per kilowatt hour (kWh), and says this must fall to 50 grams by 2030 to meet the country's carbon goals - a seventh of the emissions of an average gas plant and effectively ending the unabated use of fossil fuels.

Strategy

The government's difficulty is understandable: its plans for nuclear power are faltering and the private sector is reluctant to fund offshore wind and unproven CCS, while biomass depends on largely imported feedstock.

That leaves cheap, unabated gas as a vital baseload option.

The government will publish a gas strategy in the autumn meant to clarify its role in wider energy plans.

Do not be surprised by continued hedging, however.

And the CCC will be disappointed in its central recommendation, in its "Progress Report" last month.

"An appropriate objective would be to reduce the carbon intensity of the UK power generation sector to a level of the order of 50 gCO2/kWh by 2030."

"There should also be a clear statement that ... sufficient low-carbon plant will be contracted to ensure that gas largely plays a back-up role."

Only less likely is a proposal to weaken the country's climate law, presenting a trigger to a powerful green lobby.