Economic impact

“Dear Aunty, is it true that fracking for shale gas will help to keep energy costs affordable?”

Yes, of course it is dears, although listening to opponents of shale gas extraction you could be forgiven for thinking otherwise.

Before I explain why, I think it’s important to distinguish between ‘cheap’ energy and affordable energy.

Cheap energy is wasteful energy. When it’s too cheap, we consume more of it than we should. Instead, we need affordable energy – most people just want to know that they can power their homes without having to choose between heating and eating in the winter, and where we use just what we need.

Shale gas is unlikely to make energy much cheaper but, for the reasons I’ve just given sweeties, we don’t really want it to either. What it can do is help to constrain rises in costs so that energy remains affordable.

Here are three ways it can do that.

Transmission and supply costs

According to Ofgem, the costs of supplying us with gas (transmission, network maintenance, metering etc) make up 22% of household gas bills. Only the wholesale price of gas makes up more than this at 44%

Currently, our gas is supplied from:

– offshore installations in Morecambe Bay and the North Sea fields
– by pipeline interconnector from Norway and Europe
– by ship from Qatar in the form of Liquefied Natural Gas (LNG)

The costs of distributing this gas over such distances, and in challenging conditions, contributes to the price of supply. LNG is especially expensive cherubs.

In comparison, shale gas produced onshore – with ready access to the distribution network and much closer to the end-user, will be less expensive to get to market and thus can help to apply downwards pressure on the overall costs of supply to offset rises in the wholesale cost.

Supply and demand economics

No matter how many times shale gas opponents try to deride this notion, it really is unavoidable: when supply of anything outstrips demand, costs will fall substantially.

In the case of shale gas, nobody is suggesting that there will be so much of that it will more than meet UK demand, but it’s also a fact that increasing the supply of any commodity will apply downwards pressure on prices and so whilst the drop may not be significant, it will be a drop nonetheless poppets.

This will be much more noticeable if other European countries begin to exploit their indigenous sources of shale gas because of the interconnectivity between the UK and its nearest neighbours.

Remember, though, we don’t want cheap gas: we want affordable gas.

Balance of payments

Importing gas is very expensive, especially LNG my loves. Not only does that result in an exodus of cash from the UK economy, but it raises no tax revenue.

Contrast that with domestically produced onshore shale gas that will be taxed at 62% and, suddenly, Treasury tax receipts swell significantly at the same time as imports are reduced.

6% of the household price of gas, according to Ofgem’s analysis, stems from UK and EU policy, including climate policy and the drive towards creating more of our electricity from renewable sources using subsidies. Those subsidies are recovered through our household energy bills.

With higher tax receipts and lower spend on expensive imports, shale gas could be used by Government to ease the cost burden of UK and EU energy policy, again rendering our household gas supplies more affordable dears.

So there you have it sweeties – shale gas won’t necessarily give us cheap gas but we don’t want it to either. We want affordable gas, especially for those on low incomes for whom energy costs often account for a disproportionately high percentage of overall household expenditure.

Shale gas can play a part in achieving that outcome.

Until next time xxx

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