Shale gas for the UK?

It's already been a few years since shale gas started making headlines in mainstream media. Despite some first doubts now it is clear to everyone that shale gas is a "game changer" for the US energy supply. Increased gas supply meant that prices plummeted and for the first time the link between oil and gas price was broken. Gas is a very flexible resource as it can be used for power generation with very efficient combined cycle gas turbines, for industrial processes, for domestic heating and cooking or even for transport. When burnt it is cleaner than any other mainstream fossil fuel; therefore the benefits of lower gas prices can be felt across every sector of the economy. Low energy prices make the US an attractive place for energy intensive industries, some of which have already started relocating. 

It all sounds rosy about shale gas but leaving open space for the industry to operate freely (see lack of regulation) meant that shale gas operations caused numerous light tremors and in some cases were accused for water contamination. Drilling for shale gas makes use of hydraulic fracturing which is the source of all the aforementioned problems.

What about shale gas in the UK then? Do we have enough resources here? Can we drill for them in ways that will control and limit the environmental impact? Should we just let shale gas where it is because more gas will only keep us hooked to fossil fuels for longer? Recent reports show that although the UK is not among the top shale gas countries outside of the US, the indigenous reserves are not negligible. Even more recently the British Geological Survey estimated the total reserves to be at 40 trillon cubic metres (tcm).

I'll straight-forward say that if we can control and limit the industry's environmental impact then there is no good reason for not drilling. Why?

With UK's conventional gas extraction being pretty low while US LNG is ready for shipments there is no doubt that the UK gas intensive industry will sooner or later start importing. Centrica already signed a 20+10 years contract for gas deliveries starting in 2018. That's shale gas converted to LNG. Although I have no proper estimations it is fair to assume that the embedded emissions of imported LNG from shale gas is higher than indigenous LNG. I wonder how the embedded emissions comparison looks like for imported LNG from conventional Qatar's sources and indigenous shale.

Will a success story for shale gas lock-in the UK in a high carbon (gas) future? There is no need to go very far to realise that this is not necessarily the case. The US, with huge coal reserves and production made a fast shift as soon as a new and better resource (shale gas) became available. In the same way, the UK will shift away from shale gas as soon as other, better resources (wind? wave? nuclear?) become available.    

The government should be wise enough to regulate the environmental impact of the industry, arrange for community compensations and do not favour the gas industry against the low carbon energy industries.

Will the lights go out in the UK?

Quite recently Ofgem's outgoing CEO Mr Buchanan, warned us about electricity shortages and rising energy prices. For the limited attention span of busy media and public that may have come as a surprise. But it wasn't really one. Mr Buchanan, was in fact following up from Ofgem's earlier press release on the same issue. Ofgem reported that the electricity margin could fall from 14% in 2012 to the dangerously low 4% in 2015/16. But how did we arrive here?

In brief, the dirtiest UK coal-fired power plants are shutting down as a result of the Large Combustion Plant Directive (2001/80/EC). No, the EU is not to blame. The Directive was rightly agreed to control the very harmful SO2 and NOX emissions. Notice, it was agreed in 2001 and by the way it succeeded similar Directives of 1994 and 1988.There was plenty of time to prepare. Scottish Power's Cockenzie (1200MW), E.On's Kingsnorth (1940MW) and RWE's Didcot A (2000MW) are taken off the grid. That's a significant capacity loss but there are several other coal-fired power plants remaining in operation in the UK. Tighter environmental regulations will probably take them out of the market by or before reaching their lifespan. New coal-fired plants in the UK will have to be fitted with CCS systems which do not exist yet. Germany seems to have different views on that matter planning to open about 12GW of coal-fired capacity by 2020.

Germany has to do that to substitute the 23% capacity loss their will suffer after shutting down all their nuclear power plants by 2022. Which brings me to the next problem of the UK's power sector. That of underinvestment in nuclear power. In fact, there's no investment at all. After all nuclear players deserted the UK's "new nuclear scene" we're left with EDF demanding guaranteed prices for life. The Government tries to offer that in a politically correct way and in the meanwhile pushes back to 2030 (instead of 2025) its plan for 16GW of new reactors. EDF is probably less in a hurry than the Government should be. While any new capacity is being delayed the Government will have to choose between switching the lights out or extending the already extended lifespan of the existing nuclear fleet. Did I mention that nearly all of the UK's operating nuclear fleet belongs to EDF?

This stranglehold was identified in 2009 in a DECC's report "The UK Low Carbon Transition Path". The Analytical Annex, found low levels of capacity margin and significant expected energy unserved by 2025. It seems that in 2013, things only look worse.

Let me then return to the initial question. Will the lights go out? As someone who believes that power-cuts are entirely unacceptable at these times and part of the world I'll say that it won't happen. It is not my faith in existing policies that is responsible for this optimism. I just tend to believe that since the capacity exists (even if retired) it will be used for generation. We may also need to import as much electricity as possible from the continent. We may finally need to use more open cycle gas turbines than we planned.

Quite shamefully, we'll also have to bare the environmental and financial costs for these choices. The government promised to act over the looming energy gap but they don't seem to have a clear plan, let alone a plan B...


PS: Even though it certainly reads like it, I'm not frustrated only with the Coalition government. It doesn't look to me that the previous Governments treated this matter with the sense of urgency it deserves either.

Is your company a challenger or a leader?

With so many companies already stepping up efforts to adopt sustainable practices it is not a surprise that some are doing better than others. But, how is sustainable practice adoption really measured? How do we actually know how well (or how bad) their performance is? Up to a large extend sustainability corporate performance is all about reputation. Even those tangible benefits that companies expect to achieve by engaging in sustainable practice are in fact just a matter of managing their reputation. This doesn't necessarily mean that companies only talk the talk but rather that they talk the talk at least as much as they walk it.

Brandologic teamed with CRD analytics to map the sustainability performance and the stakeholder perception of 100 prominent world companies. The evaluation classifies companies in one of four categories Challengers, Leaders, Laggards and Promoters in what they call Sustainability IQ Matrix. 
Leaders are those companies that perform well in ESG (Environmental, Social and Governance) and are perceived to do so by their stakeholders. Challengers are companies that even though they perform well, they do not manage to get enough credit for their performance. In contrast, Promoters are those companies that get more stakeholder credit than what they deserve and finally Laggards are companies that do not take a keen interest in ESG.

Apart from the difficult to read graph pasted above, there are industry specific graphs that do well in providing you with a clearer picture. Not surprisingly, I've taken a keen interest on the one focusing on the energy (oil and gas) sector. There I've noticed that Exxonmobil, Shell, BP and Chevron are actually doing bad in managing their reputation even though they're not that bad in their sustainability practice. Obviously,
Deepwater Horizon accident must have something to do with refreshing the oil and gas sector's bad name (and unfortunately it's not the only one...).

There's also a category for industrial companies and transportation in a rather inconvenient joint presentation. I'd rather focus on the airlines here and let you know that they all perform badly. However, some manage to convince their stakeholders and their credentials. American Airlines and Lufthansa seem to get more credit than they deserve even though they do not perform significantly better than British Airways and even Japan Airlines (which actually performs the worst of all). As far as transport is concerned you'd probably prefer to use UPS than FedEx based on their ESG performance. Mind that even though UPS performs a lot better than FedEx they receive less credit. Something for the UPS management to pick up urgently!

In the detailed methodology section of the sustainability leadership report  I've noticed that Environmental, Social and Governance performance are not weighted equally. Instead, the main weight (50%) is on social responsibility with the rest (50%) shared between Environmental and Governance. Makes me wonder how the results would look like with equal weights or even more if Environmental was on the 50% scale.   

(Why I do not like) nuclear fusion...

For anyone interested in energy matters at an international scale, ignoring the occasional noise about nuclear fusion is not easy. Lately there's been even more of it as Nature reports that South Korea in collaboration with the US Department of Energy's Princeton Plasma Physics Laboratory. I could even risk saying that there seems to be a subtle race between the projects in Korea and ITER, the France based international fusion facility.

For ITER the EU is joined by India, Japan, Russia, China, South Korea and the US. Financing is roughly shared at 45% for the EU and 9% for each one of the other partners; the bill has already reached €15bn for a project which now looks like it will be completed in the late 2020s. There's plenty of time until then for plans to be reviewed again and costs to hike again. This is not criticism against ITER or nuclear fusion. Uncertainty is in the very nature of experimentation and that's exactly what ITER is; a large scale, very expensive experiment.

The title of this post makes it sound as if I really have something against nuclear fusion, when in fact I don't. I have nothing against it. There's nothing negative about a technology that promises to meet our ever-growing energy demand without serious environmental impact. However, I do not think that nuclear fusion will make any serious contribution to the world's energy needs until 2050 that is often linked as a milestone date for it.

Setting unrealistically ambitious targets for 2050 distracts public opinion, decisions and funding from real solutions. There are people (quite often even my students) who believe that there's no need to invest in renewable energy or nuclear fission (or anything at all for that matter) because nuclear fusion is just around the corner and will solve all of our energy problems. Could this belief be playing a role in public opposition against wind energy, I wonder? Could it be diverting funds from nuclear energy investment?

My intention is not to blame nuclear fusion for all that is wrong in the energy sector. I cannot escape to see though that it is misleadingly used as a panacea and that as such it may be making investment in real solutions a lot more sluggish. This is very dangerous in a period when under-investment is one of them main problems of the electricity sector in most developed countries. Public opinion as well is led to believe (very conveniently) that we can avoid wind turbines, nuclear power stations or even conventional thermal power stations simply because there are other means in which we can meet our energy needs.

Sustainability reporting becomes mainstream

Just before the end of 2012 news about "Environmental reporting more than doubles" made headlines. There has only been little (if any) discussion about this issue which deserves more attention. To begin with, the data on which the news is based reflects on much wider sustainability and responsibility trends, rather than just "environmental reporting"; the latter is part of the agenda for responsible business.

The findings are attributed to research made by the Governance & Accountability Institute, (G&A Institute) which also serves as the data partner for the Global Reporting Initiative (GRI) in the US,UK and Ireland.

In detail, only 19% of the S&P 500 companies reported in in 2011 while in 2012 the reporting companies were 53%. Similarly, in 2011, only 20% of the Fortune 500 companies produced reports in contrast to 57% for 2012. It is therefore fairly obvious that sustainability reporting is being adopted by large corporations rather rapidly. It also becomes clear that for the first time companies that report are the majority.

So, does reporting provide reputational benefits for companies? 

G&A Institute's results show that although there is a positive association, the answer is not that simple. 58% of the companies included in the Newsweek's Green rankings are reporting; however, another 42% are not. The Corporate Responsibility magazine's list of the 100 best Corporate Citizens includes 47 companies that are not reporting. It's only the Ethisphere's list of the World's most Ethical Companies where 76% of those included are reporting. 

Apart from the direct reputational benefits for companies, they can be included in indices with a focus on sustainability and responsible citizenship. Most exchanges operate a number of such indices; the World Federation of Exchanges (WFE) reports that there are at least 75 such indices in the main exchanges internationally. So, are the reporting companies more likely to be included in the high profile indices for sustainable and responsible business? 

On this issue reporting seems to be a strong determinant. Out of the companies listed in Dow Jones Sustainability Index (DJSI) North America, 85% produce reports the vast majority of which (91%) are based on the GRI standard. The DJSI World is dominated by companies that report by 98%. Finally, the results are pretty similar with the NASDAQ OMX CRD Global Sustainability 100 where 97% report their sustainability performance.  

The benefits from reporting are generally intangible, since they do not translate directly into profits. However, it is important to see that the effort that companies put in developing that aspect of their communications is acknowledged. Any vagueness should be not be attributed to the market not picking up the signals but to the lack of a single definition or methodology for responsible and sustainable business reporting.

Companies may choose to  discuss their environmental and social impact in qualitative terms or disclosure quantified details about their resource management and emissions. Standards like the ones provided by GRI or the Carbon Disclosure Project (CDP) allow corporates and organisations to produce in depth reports. Selecting between a rough qualitative or a detailed quantitative approach defines the degree of commitment and the expected public acknowledgement that companies should expect.