The fight to frack

The UK looks to get in on the shale boom; the solar trade wars get more intriguing as demand looks on shaky ground; and the EU carbon price is up and down like a yo-yo ahead of a key policy decision.

UK Chancellor of the Exchequer George Osborne will likely be disappointed if he expects natural gas prices to experience the same declines as those seen in the US thanks to fracking. This is because shale gas will cost more to exploit in the European country, and legal, planning and environmental factors will hold up the development of its resources.

As a result, the expansion of shale gas will be too slow to offset fully the need to import higher-priced natural gas.

These are the results of a report by Bloomberg New Energy Finance published last week. It estimates that it will cost $US7.10-12.20 per million British thermal units (MMBtu) to extract shale gas in the UK, compared with $US4.54-4.83 for dry US plays.

The UK government is considering tax breaks to encourage shale gas exploration, having lifted a ban on hydraulic fracturing – known as 'fracking' in December.

“We don’t want British businesses and families to be left behind as gas prices tumble on the other side of the Atlantic,” Osborne said in his autumn statement to Parliament.

US natural gas prices plunged to $US1.80/MMBtu in March 2012 from a record $US12 in 2008 and are currently around $US3.40. Costly imports mean that natural gas trades around $US10 in the UK.

Companies are beginning to eye the UK's shale resources with interest: France's Total is considering whether to invest in UK shale drilling, its CEO Christophe de Margerie told reporters in London on February 14. Shell CEO Peter Voser also said at the end of January that the Anglo-Dutch company is looking at investing. Meanwhile Cuadrilla Resources is in advanced talks to sell a stake in its UK shale gas operations to an energy major, according to shareholder AJ Lucas Group.

The UK is not the only European country considering the potential of shale gas: German Chancellor Angela Merkel said last Wednesday that the government is working to build consensus on fracking in light of the environment impacts. With the nation's nuclear plant to close by 2022, it needs to develop alternative energy sources. The main opposition Social Democrats and their Green Party allies want a temporary and permanent ban respectively. Federal elections loom on September 22.

The environmental impacts of shale gas production have also come to fore in the US in the last week: the Environmental Protection Agency said on February 22 that it will more closely study emissions from fracking, after its auditor concluded its current data are insufficient to make policy decisions. It is too early to say what this might be mean in practice, as we await the results of the EPA's interagency study of methane, toxic and other air pollutants released during fracking.

In the meantime, the EU-China spat over solar panels rumbles on: member states on February 20 approved the European Commission's plan to register solar panels imported from the largest Asian economy. If enacted, this plan would enable duties to be imposed retroactively. The Commission is investigating whether imports from the world's leading solar manufacturer are being sold below market value – a process known as 'dumping' – and benefitting from unfair government subsidies.

The EU is likely to find against the world's leading solar manufacturing country, following in the lead of the US last year, but the question will be whether the tariffs will be enough to slow down the flood of Chinese solar products into Europe.

Last October, the US Department of Commerce implemented anti-dumping duties of 18-250 per cent on solar-energy cells imported from China and anti-subsidy penalties of some 15 per cent.

In any case, Bloomberg New Energy Finance anticipates a decline of 7GW in PV demand in the EU this year, as governments curb clean energy subsidies. If the bloc were to impose duties on Chinese products, some could find a place in their home market, as demand in the Asian country is forecast to climb just over 3GW.

European manufacturers would not benefit from tariffs on Chinese solar panels, according to a recent report. Up to 193,700 jobs and €10.2 billion could be lost across Europe within the first 12 months, if 60 per cent duties were implemented, according to the study published this month for the EU Alliance for Solar Energy.

In response, EU ProSun, which filed the original complaint with the European Commission, criticised the study's methodology.

"The United States case disproves the claims made by AFASE and Prognos," its president, Milan Nitzschke, told Bloomberg News on February 19. "None of the negative effects predicted by China took place."

Concerns are premature, however: the EU inquiry only began last autumn and experience of policymaking in Brussels suggests that this process by itself will take some time – a view echoed by the Commission itself. Any final measures must come into effect by December this year.

Just under 5,000 miles east, on February 19, the Ministry of Commerce in Beijing pushed back its decision on preliminary duties on imports of polysilicon from the EU, South Korea and the US, reported Bloomberg BNA. China began investigating last November whether foreign manufacturers were dumping their product in the Asian country. The ministry now intends to announce the results of the inquiry in March.

If China imposes high import tariffs, it will most likely hurt its own wafer makers (which still need to import feedstock) – a consideration that is likely to make the government pause. Such duties would affect four of the five largest solar-component manufacturers: Korea's OCI, Germany's Wacker, US-based Hemlock and the Norwegian/US Renewable Energy Corporation, Bloomberg New Energy Finance data show. The biggest polysilicon producer is China-based GCL-Poly.

The majority of solar companies worldwide – regardless of their side in the trade disputes – are having a rough ride, with many wafer, cell and module makers seeing double-digit negative margins. And, with another case popping up each month, these trade wars may well do not much more than jeopardise growth and endanger good relations.

In early February, the US lodged a complaint with the World Trade Organization against India's domestic content requirements. Under debate is the Asian country's National Solar Mission, implemented in 2010, requiring project developers to use domestic silicon solar cells and panels. Last November, India began its own anti-dumping investigation for solar cells from the US, China, Taiwan and Malaysia.

Solar glass has also come under investigation: on February 5, EU ProSun Glass – a consortium of European manufacturers – filed an anti-dumping complaint with the Commission against solar glass from China. On the other side of the Atlantic, the Coalition for American Solar Manufacturing is pursuing legal action to challenge the US Department of Commerce's decision not to investigate China's subsidies of rolled glass.

EU carbon market

The European carbon market recovered last week from a fall on news that the environment committee of the bloc’s parliament postponed a decision to seek fast-track approval for a plan to fix an oversupply of permits.

Benchmark European Union allowances (EUAs) for December 2013 delivery ended the week unchanged from the previous Friday’s session at €5.19/tonne. They were trading as high as €5.52/t on Monday before falling to as low as €4.09/t on Tuesday morning after the results of the environment committee (ENVI) meeting became public. The panel signalled support for the EU’s backloading plan but delayed a vote to allow its rapporteur to start negotiations with member states and the European Commission, in talks known as 'trialogues'.

Carbon prices bounced back later in the week, rising with the energy complex, in anticipation of a possible vote by ENVI at its next meeting on 25-26 February. However, these hopes were dashed yesterday when the committee's rapporteur, Matthias Groote, confirmed to Bloomberg News that the backloading plan will go to straight to a plenary vote on April 15. This delays the conclusion of the political process and makes eventual approval of the plan even more uncertain.

United Nations Certified Emission Reduction credits (CERs) for December 2013 bounced back last week, ending Friday 6.3 per cent up at €0.34/t.

This article was originally published by Bloomberg New Energy Finance. Republished with permission.

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