Brian Wilson: Let’s keep an open mind on energy

The politics of energy are permanently fascinating, but current developments have implications that go far beyond the normal parameters of why we should pay attention.

Scotland’s economic interests are closely intertwined with what goes on in energy markets, not only in terms of North Sea oil and the jobs it supports.Our local interest also involves half of Scotland being licensed for the “fracking” of gas – or , to give the process its Sunday name, the extraction of shale gas by hydraulic fraction. The reaction has been led by those who are instinctively opposed. But I think it would be advisable to retain open minds until we know a little, or preferably a lot, more.

There are as many opinions as there are experts on our true fracking potential. It might all turn out to be an over-hyped non-event, or it could be a significant energy bonanza. Either way, it must be properly regulated from the outset – but also seen as an opportunity rather than a threat. The land of Paraffin Young should not fear the modern application of an old idea.

Whatever the prospects for fracking in Scotland, the certainty is that there is already a lot of it going on elsewhere, with spectacular consequences. The price of gas in the United States has come down by half since 2008, when it began in earnest. Shale gas is expected to account for more than half of US consumption in a decade.

The knock-on effects are dramatic. For starters, the American shale gas boom has sent the price of coal tumbling. And cheap coal – while creating big challenges for what is left of the UK’s domestic industry – means that imported black stuff is being used hand-over-fist for the generation of electricity here at home.

At exactly the time when renewables and other virtuous forms of generation are supposed to be on the up-and-up, the reality is that over 40 per cent of the UK’s electricity is coming from coal. The question is not whether, for the foreseeable future, coal will continue to play a major part in our energy mix, but where it will come from.

While the low price of coal has driven up its use for UK power generation, it has also made domestic production uncompetitive. That is a paradox which will have to be addressed very rapidly if we are not to become wholly independent on imports from Russia, Colombia and the US itself to fuel almost half of our electricity needs. And they said King Coal was dead!

In his Autumn Statement, George Osborne announced both a programme of gas-fired generation and positive approach towards fracking, suggesting with understandable vagueness that shale gas could make “a substantial contribution” to UK gas supplies within a decade.

From an economic perspective, it is difficult to argue with. If it is possible to generate power from indigenous sources, then surely this must be better than depending on gas imports. Then we have the associated American oil boom which owes a lot to shale production in Texas and elsewhere but also to technology investment. This is not something that has happened out of the blue. For decades, dependence on oil imports has been the Achilles’ heel of the US economy and has distorted its foreign policy imperatives. Money has been poured into research aimed at ending that dependency.

According to the International Energy Agency, the US is now projected to overtake Saudi Arabia as the world’s largest oil producer around 2020. This is an extraordinary change in both the economic and political balance of power. Once an American president is no longer dependent on current partners for security of oil supply, a lot of assumptions and tolerance levels will start to change.

Already, the implications for the American economy are enormous in terms of job creation, lower energy bills and improved industrial competitiveness. But what will this proliferation of American energy riches do for the oil price – again, a matter of no small interest to our own corner of the world? And what are the implications when China, with the world’s largest reserves, gets serious about its own fracking programme?

There are huge uncertainties in all of this, both economic and environmental. In the blink of an eye, vast new volumes of fossil fuels are becoming available and are going to be utilised. One way or another, for cleaner or dirtier, the relevance of this transformation will have massive implications for all previous assumptions about the carbon reduction imperative.

A transition to gas-fired generation, when it is as a replacement for traditional coal-burning, can reduce carbon emissions. Indeed, the United States has now met its Kyoto obligations without even signing up to them, simply because shale gas is rapidly replacing coal as the cheapest power generation option.

If there is to be a dash for gas in the UK over the next few years, then there are implications not only for coal but also for our own low-carbon power sources – nuclear and renewables. In each case, their prospects will be determined by the guarantees and subsidies that government is prepared to grant. As the debate about other sources of plentiful energy evolves, and as household bills continue to rise, it will become more difficult to argue for such subsidies on an increasing scale.

The technologies most vulnerable to this debate are those which cost most and contribute least to baseload – in other words, offshore windfarms and marine technologies which have not yet seen the commercial light of day. Investors are already wary of the costs involved in both building and maintaining structures to operate in hostile marine environments. Whether or not fracking ever happens to any significant extent in Scotland, or the rest of the UK, the ripples it is already sending out have nothing to do with the earthquakes it is alleged by its more alarmist opponents to engender. It is contributing to an energy glut from which no previous conventional wisdoms are immune – environmental, economic or geopolitical.

Basing economic assumptions on what the energy mix and commodity prices might look like ten or 20 years from now was always going to be high-risk.

Now it looks like nothing less than a fool’s paradise.