No Hot Air

No surprise

From PA:

• British Gas parent Centrica has said its residential utility arm was on track to see profits soar by an expected 43% this year, despite a 7% fall in energy consumption.

Seven per cent drop in sales, 43% increase in  profits.  Why can't the rest of UK industry do this well?  Probably because they don't have an as blind, toothless and incredibly naive regulator as Ofgem.

Ofgem believes, solely because the Big Six told them so, that they simultaneously had the misfortune (ours, not theirs evidently) to buy July, August and September 2009 gas during the highest prices ever recorded in July 2008.  Ofgem has resisted calls to have an open book investigation of suppliers on the grounds of commercial confidence.

Unless the Big Six are complete morons,  they would have  contracted for that gas at the time, with the price set at the prices in effect on the wholesale markets at the time of delivery.  They would have perhaps bought an option to buy the gas at that price, or any number of derivatives to protect themselves but they probably didn't bother.  This was the time of $143 oil, and everyone knew which way that was going.

Wholesale prices today are up  to 70% lower than they were last year.  And that is the price that the big six are paying, which explains  how they increase profits even as sales decrease.  Ofgem is naive on the verge of incompetence if they believe, with no proof, that suppliers bought into iron clad agreements last year.

Utility bills are as unavoidable as taxes.  Utilities are essential a tax for modern life.  And they have a similar impact as taxes.  If they are higher than they could or should be, they have a macro economic impact that should take precedence over the narrow interests of Big Six shareholders.  Better economists than I can say what the £50 a month that the average user over pays would be equivalent to:  It would surely be equivalent to a point or two on income tax or VAT. Energy bills are an incredible downward drag on consumption and may explain why the UK is doing worse than other economies.  I don't believe this is deliberate, as it imputes competence they don't have , but the net impact of Ofgem sabotages the recovery. That £50 a month could be going from energy payers, which is just about everyone who also pays taxes (and those who don't like the unemployed and pensioners) into retailer tills, or paying down debt or even investing in companies like Centrica.

But we can do something about those who raise taxes.  We can't do anything about energy bills, because Alistair Buchanan says that British Gas's prices are just fine with him.  The Tories are allegedly planning to ditch Ofgem. 

What"s the betting that Alistair Buchanan ends up on one of the boards of the Big Six sometime in the future? 

IEA on gas again:

Two countries, two views:

Apart from the FT, we couldn't find much in the UK press where the International Energy Agency talks about the gas glut, so we have to find out their views from the German press:

Unconventional gas is unquestionably a game-changer in North America with potentially significant implications for the rest of the world,” said Mr. Tanaka. The share of unconventional gas in total US gas output jumped from 44% in 2005 to around 50% in 2008 and, in the Reference Scenario, is projected to rise to almost 60% in 2030. The boom in North American unconventional gas production, together with the recession’s impact on demand, is expected to prolong the glut of gas supply for the next few years. The analysis of WEO-2009 shows that the annual under-utilisation of inter-regional pipeline and LNG capacity could rise from around 60 billion cubic metres in 2007 to 200 bcm by 2015. This glut could have far-reaching consequences for the structure of gas markets, with suppliers to Europe and Asia-Pacific coming under pressure to modify pricing terms under long-term contracts, to de-link gas prices from oil prices, sell more gas on a spot basis and to cut prices to stimulate demand.

But The Times doesn't want to hear from someone like the head of the IEA, when they can give a forum to the cheerleader in chief for nuclear, CCS, gas storage and everything with a government subsidy attached, Dieter Helm.  Mr Helm is an Oxford man, but he hasn't heard of gas:

How did we get to this state? Partly because energy policy has never been taken seriously. Without a crisis, it is always someone else’s problem — and one for the future. Most solutions require customers (and voters) to pay more now — and that is something politicians are loath to admit. But bad news on bills — and an energy crisis — is coming unless radical action is taken soon.

But what about un-radical action, like gas for example?  It's a strange world where the right is seeking radical action and old lefties like myself are promoting free market solutions.

Gas is barely mentioned on Planet Dieter and it's the same old story.

North Sea gas reserves have been running out

So?  Big deal in a gas glut.

He said something that since we know that Ireland generated just under 40% of it's power from wind recently, we got a bit suspicious about:

We not only pay among the highest bills for wind, but in Europe only Cyprus and Malta generate a lower proportion of their electricity from it

What is he trying to say?  That we generate too much wind or not enough?  Is he saying that our pitiful contribution to wind power is among the best in Europe?  If that is the case we didn't have to look far. Same newspaper, same day:

High winds across Spain on Sunday meant that for over five hours, over 53 per cent of the country’s power came from wind energy. The towering white wind turbines which loom over Castilla-La Mancha — home to Cervantes’s hero Don Quixote — and which dominate other parts of Spain, set a new record in wind energy production.

Red Electrica said this year wind power is expected to produce 13 per cent of all electricity, hydroelectric power 10 per cent and solar power 2.5 per cent. Spain’s solar industry is one of the fastest growing in the world.

Less Hysterical Tones on European Gas

From Datamonitor via iStockanalyst a story which starts out plainly noting that Nord Stream, the Russia/Germany pipeline under the Baltic has all the necessary approvals but then provides some of the best analysis of European gas going, and that includes us:

Thus it appears that the fundamental beliefs which have underpinned European states' energy planning for the past five years may soon be turned on their heads. From 2011, Nord Stream will increase the security of Russian supplies to Europe. LNG regasification capacity will also be far higher and it is reasonable to assume that LNG supply will remain strong for at least the next four years. Finally, indigenous supplies may not actually be declining at the rate previously assumed. Hence, over-reliance on gas (the central obstacle facing policy makers between now and the new generation of nuclear plants' activation around 2020) may not present such a critical flaw as previously thought. Of course, under-investment in new infrastructure resulting from the financial crisis could yet leave the gas market tight by 2015 (particularly if the global economy were to rebound powerfully) but perhaps the debate surrounding Europe's energy strategy might now be conducted in less hysterical tones.

Less hysterical, and less paranoid. And dare we ask realistic to boot?  It will take a while for the gas Chicken Littles to get worked out of the system, but their days may be numbered

Two sides of the global gas glut

All of a sudden everyone says what we've been saying for over a year:  There is a global gas glut.

 There may be an “acute glut” of natural gas in the next few years because of rising production of so-called unconventional fuel in the U.S. and Canada, according to the International Energy Agency.

Bloomberg have been slow on shale, whereas the WSJ has been on this since the beginning.

The International Energy Agency says in its annual outlook, published Tuesday, that a glut of natural gas is looming. The boom in North American shale gas and a demand-depressing recession mean there will be a giant amount of unused pipelines and liquefied gas terminals, enough to move 200 billion cubic meters, or 7.06 trillion cubic feet, by 2012. That’s more than enough for all of Africa or Latin America.

Back to Bloomberg:

Gas prices will tend to rise in Europe and Asia-Pacific because of the predominance of oil-indexation in their long-term supply contracts, diverging from those in North America,” according to the report

But WSJ says:

The consequences of that have already been felt on the European spot market. LNG exporters, discouraged from selling into the U.S. market, are increasingly offloading their cargoes in Europe and Asia, depressing spot prices.

That, the IEA says, “could increase the pressure on gas exporters and marketers in Europe and Asia-Pacific to move away from, or to adjust, the formal linkage between gas and oil prices in long-term contracts.” More uncontracted supplies being released to the spot market could push down prices and boost demand, especially in power generation, it says, which would soak up the supply glut.

The IEA report seems to have something for everyone's point of view.  It mentions how uncertain shale gas is outside the US, while also mentioning what a game changer it can be:

The extent to which the boom in unconventional gas production in North America
can be replicated in other parts of the world endowed with such resources remains
highly uncertain. Outside North America, unconventional resources have not yet been
appraised in detail and gas production is still small. Some regions, including China,
India, Australia and Europe, are thought to hold large resources, but there are major
potential obstacles to their development in some cases.

 This projection is subject to considerable uncertainty, especially after 2020; there is potential for output to increase much more.

No wonder people are confused.  The IEA puts in all the usual dampers on shale outside the US and then says it can be much more.

We tend to believe the Wall Street Journal more.  The IEA assumes that the gas/oil link will still be strong enough outside the US, whereas we and the WSJ think the gas oil link is wobbling in 2009.  To assume it will still be around at all in 2020 is very optimistic.

The Oxford Institute for Energy Studies asks:

Continental European Long-Term Gas Contracts: is a transition away from oil product-linked pricing inevitable and imminent?

The spot market is too volatile which doesn't help anyone: producers,end-users or transporters.  There has to be a new way to provide long term funding for gas without crippling volatility.  But it might make gas geology look simple.

Geography and natural gas

Back in the old days, or at least the last century days of drill, baby, drill gas and oil were considered to be so rare that nowhere was too far away to find it, and wherever that was no self respecting oil or gas company would let polar bears, newts or indigenous people stop them extracting it.

But shale gas is so abundant that we can see the rise of a new phenomenon:  the choosy gas driller. We remarked on that recently when Chesapeake Oil walked away from drilling in the NYC watershed part of the Marcellus Shale in upstate New York.  Aubrey McLendon said simply that "we don't need the brain damage".

I was reminded of this by news out of Canada, where the emergence of shale plays in the Eastern US and Canada has led to choosy buyers.

emergent economic forces don’t care about the mountains and are progressively challenging the traditional west-to-east flow of natural gas. In fact, the whole character of where North Americans get their natural gas is undergoing realignment of seismic proportion. Recent events provide indications of how the dynamics are changing

Alberta has traditionally been the Canadian Oil and Gas patch.  But the emergence of the Marcellus Shale has changed a lot:  Gas from the Marcellus Shale doesn't have to pay 3000 miles of transport fees to reach markets that are next door.  Marcellus drillers can charge a premium over Barnett or Haynesville gas but the customers make money anyway.

Everyone's a winner.  Apart from some gas transporters.  Which may explain why National Grid is eager to join in as the final link in CCS, transporting CO2 from power station to depleted gas field.   In the UK, if there were significant shale finds, National Grid might even get shut out of transporting them since the local grids were sold off.  Local grids could  transport shale finds the short distance to generators, CHP or larger end users.

In Europe, if shale is produced in Poland or Northern Germany  why generate electricity in Berlin, Hamburg or Warsaw with gas imported from Russia, Norway or Nigeria?  Shale is so abundant that it may well be under most people's feet.  Not only will this make energy security risk meaningless or disrupt capital flows, it will make energy simultaneously cheaper and more precious.

Lower Carbon Future? Try Natural Gas.

 Tony Hayward of BP,  unable to find space in UK newspaper pages busily proposing outdated solutions to obsolete energy shortage scenarios has been reduced to writing op-eds for The Washington Post.

...shaping our energy future will be more complex than simply using less fossil fuel and more alternatives. Getting to a lower-carbon world while also providing the increasing energy needed to power a growing economy requires a more nuanced approach.The issue, then, is not a choice between fossil fuels and alternatives but, rather, what combination can achieve the fastest carbon reduction at the lowest possible cost using available technology?

Hayward then goes to the usual arguments about how gas can replace coal, CCS is unproven and doesn't work yet and ramping nuclear up won't be quick.  He doesn't deny they'll ever happen but:

..providing the increasing energy needed to power a growing economy requires a more nuanced approach.

Renewable energy sources -- wind, solar, biofuels -- have an important role, and BP, the energy company I head, is investing significantly in all. Still, the shift to alternatives can't happen overnight.

Meanwhile here in the UK, it's going to be nuclear's day today, which is pushing an expensive, divisive and long winded solution to a problem of energy security that no longer exists. 

BBC discovers shale

Until now the BBC, the outlet which usually leads UK print media and puts it to shame, has not had it's finest hour in reporting on shale gas.

But now even they have suddenly discovered shale, and unlike those who report shale more as a US phenomenon, the BBC goes straight to what we've always said is the heart of it all:

  Upgraded shale gas reserves are particularly relevant ahead of the Copenhagen summit, as it could help the world meet the Kyoto targets for carbon emission cuts,

With coal being too dirty and wind farms and nuclear power plants arriving late, it seems the world is left with a stark choice: keep on polluting or turn out the lights.

Unless, that is, someone comes up with an alternative.
Energy executive Rune Bjornson thinks he has the answer.

"Natural gas, more than any other fuel, is an option we have here and now," he tells the BBC in an interview.

The video is the really interesting part here:  Bjornson when asked for a comparison of shale reserves in Europe says they are 14 times those of the Troll field, which is already the largest off shore field in Europe and in the US the reserves are "significantly more".

We have to point out here that it is Statoil who supply 80% of UK gas imports, so we're glad to see they are being listened to.

The BBC, in the spirit both of "balance" and good old fashioned English pessimism (notice we didn't say British pessimism) is desperate to create a controversy.  So who pops up, but Arthur Berman the world's most popular shale gas debunker.  Of course that is a very small field.  In fact, apart from Berman, it's empty.

The Texas-based geological consultant believes the latest estimates are vastly exaggerated and suggests the shale gas reserves are neither as large as nor as profitable as many in the industry predict.

The BBC doesn't provide balance to the many who have an alternative view on Berman :

HOW ARTHUR BERMAN COULD BE VERY WRONG…

There isn't anything in the BBC story that hasn't been said here at some length and some months ago.  However, to have shale put into the spotlight, directly discrediting previous BBC lights are going out stories will be important in changing the UK energy debate.  With a piece on shale in the UK's small, but influential Spectator Magazine, unavailable online,  and some other news coming up that we know of,  ignorance will soon be no excuse for UK energy "experts".

Which leads us back to the BBC piece, directly to No Hot Air's target audience:

Unconventional gas will exert downward pressure on energy prices for years to come," predicts Mr Sterne - in the US, as well as elsewhere.
"As shale gas fields come on line in the next five years, it is likely that European prices will drop in half."

Which leads us to ask:  Why use an energy consultant in a world where security of supply and energy prices risk no longer exist?

Gas as back-up to renewables and bridge to the future.

Natural gas can buy us time and be the bridge fuel to a no carbon future based on a energy mix every bit as diverse as the current coal, gas, nuclear, renewable mix. A no/ultra low carbon future might arise from any one or many sources: wind, tidal, stored solar, oilgae, solar batteries, hydrogen or fusion for example.

Robert F Kennedy Jr of the US environmental organisation Waterkeeper's Alliance is a supporter of gas as an alternative to coal.  He recently proposed using gas as back up to solar:

The solar power sector and the natural gas industry need to build an alliance to get more government support and take over the energy sector from incumbents like Big Oil and King Coal, Robert F. Kennedy, Jr. said on Wednesday....

The alliance is just forming,” Kennedy told reporters after his remarks. He added that the natural gas industry has been “hiding under oil and they think Big Oil is going to take care of them. But they’re realizing Big Oil is never going to let them make a profit” and that companies like Chesapeake are realizing “that their future is with the environmental community and the renewable community.”

He said the team-up also makes sense because power from natural gas can help balance out solar and wind-generated electricity on the grid, eliminating the problem of inconsistency on sunny days, for instance.

What about UK environmentalists?  Where do they stand on the new world of abundant natural gas?

Many of them are as unaware of the game changing events in natural gas everyone else, simply due to the (diminishing) silence in the UK MSM.  But some greens are starting to educate themselves, and will be popping up in unexpected places shortly.

More than energy at stake in UK policy.

Very alarming post from the Daily Telegraph today which is far more disturbing than a mere energy story:

Today I bring you some straight-talking from Professor David MacKay, the UK’s chief scientist on energy and climate change, who started off an excellent speech yesterday with the plain facts that the UK wants to tackle climate change and has fears about energy security.
Who wants to risk being held hostage to fossil fuel producers “with funny accents”? he asked the room.

Funny accents?  My God, they'll have dark skins next!  At the  moment those funny accents apply to four out of six of the UK domestic energy suppliers: Eon, RWE-npower, Iberdrola (Scottish Power) and EDF.  Professor MacKay is a big nuclear fan, but there we run into funny accent types "holding us hostage" with the only nuclear constructors having French, German or Japanese accents.

Professor MacKay wrote Without Hot Air  (great minds think alike!) a very illuminating book that has one key flaw.

It manages to discuss electricity generation with barely a mention about natural gas, except to mention the old story that it is running out. 

We asked Professor MacKay earlier this year of his opinion about shale and got this reply

a surge in natural gas is not relevant to me. My book is about "how do we live without fossil fuels?"

Natural gas provides at least 40% of the fuel for electricity generation.  MacKay shares our doubts about CCS for coal,  but is a carbon purist when it comes to nuclear.  He comes to the conclusion that without carpeting the country with windmills we'll never achieve a no carbon future without a huge increase in nuclear. On the plus side I've got to mention his view on efficiency, while also pointing out his recommendation on wearing sweaters might be sound sense from your mother but is barely a realistic policy.

The core issue is low carbon now versus no carbon in the future. If we don't act now or as soon as 2020, the goals of fifty years may not be a problem.

MacKay's no carbon at all purism is also held by some greens, although carbon purity is the sudden new concern of the nuclear and carbon capture lobbies, who have a lot to gain from the old view of ignoring natural gas or confusing carbon constraints with gas constraints.

This is the reply we got from DECC this morning about the story:

This was an inappropriate choice of words and Professor MacKay regrets any offence that may have been caused.  The important point he was intending to make was that much of the world’s remaining fossil fuel reserves lie in potentially unstable regions, this being one of the reasons for the shift to low carbon.

It's hard to give a free pass on unwise comments by those who are funded by the tax payments of many a  funny accented taxpayer. We'd be more inclined to do so if he kept an open mind on energy as well.

UPDATE  FT Energy Source on this story

The background to disaster

UK energy policy seems to actually relish a disaster and this year the press including people who should really know better like the Economist and the BBC, are acting as cheerleaders for doom in promoting the risible idea of electricity shortages in 2016.  I predict that as reality intrudes, we'll see those stories disappear, but the basic narrative of ever rising power prices is based on anecdotal, but not fact based, assumptions, of constrained gas and rising environmental costs that will echo for years. One reason it will is that there is a lot of money to be made in promoting energy as a problem. Energy consultants, especially the 3PIs (Third Party Introducers) and switching sites, have a huge vested interest in making customers fearful so that they take a longer term price which is inevitably a higher price. The up to 10% commission 3PIs receive from suppliers is the underlying incentive for them push the "energy risk" narrative, even when that story no longer applies.

3PIs have  unwitting, or is that witless, enablers within Ofgem, who  seem to promote unhealthy behaviour that actually undermines the UK economy. Ofgem feels perhaps that promoting risks,even where they are unlikely or impossible makes them more indispensable.  Is this for their own short term needs?  Ofgem is in fact the largest energy consultancy in the UK. It promotes the doubtful benefits of competition while having a sacred belief in the value of "choice" even where the choice is fairly empty, often only laying the framework for consumer confusion which costs far more than the choice saves. Suppliers are a stranger bunch. Some I+C suppliers are smart, progressive and provide good value. Other suppliers have mixed feeling about 3PIs where they both shovel millions of pounds their way while trying to escape doing so. 3PIs are basically outsourced marketing arms, with most suppliers politely having mixed feelings about the sums they spend with the 3PIs. Customer capture is difficult, with the utility market being very sticky. Suppliers need to be either very expensive or very incompetent to lose business. But it's also hard to gain new business.The other reality is that most retail arms are happy with the business they have. It costs money to find new business and the existing business is rarely profitable enough to fund seeking any.

Let's think about "competition". Does choice and value in a market like petrol/gasoline?  Of course it doesn't. Petrol prices are within a pence per liter in any one area.  The vast majority of drivers make the "choice" of where to fill up based on need or convenience.

At least in a petrol station, pricing is transparent, unlike the confusopoly pricing of the big six domestic energy firms, where tiered rates in randomly metered arcane units of measurement mean a true choice providing true value simply isn't provided.

In domestic supply, pay by monthly direct debit and the standard rate between the six is essentially the same. It's the same for the the same reasons as petrol, in that they are priced against a wholesale market.

In the UK, only the largest end-users can access wholesale prices because of the lack of monthly meter reads for almost everyone. The level at which you can use index prices is falling, but not far enough.  The difference of day ahead index prices compared to long term prices is stunning, with 70% savings common over the past year. In fact there has only been one month,January 2009,in the past eighteen  where the day ahead index price was not lower than any price available in advance of the month of use.

For example for November 2009 things looked like this:

 

A fixed price is basically the projected monthly volume multiplied by the monthly price.  November is roughly 10% of an annual heating load.  If one fixed a price in September 2008 for one year, November was £1 a therm.  The lowest possible price one could pay for November in advance was on 32.05 in early September.  But the wholesale index price for System Average Price has been below 25 this month.

In English:  Consultants cannot beat the default price, the price of doing nothing. So what are people paying them for?