Dual Revolutions = Energy Evolutions?
Two energy revolutions are underway. The United States has hit a jackpot with its newfound ability to tap unconventional natural gas reserves. And Germany is rolling out Energiewende, a planned transition to renewable energy and Germany's largest infrastructure project since post-world war II reconstruction. Both are already reshaping our world.
The goal of Energiewende, which literally means “energy shift”, is to reduce greenhouse gas emissions to 40% below 1990 levels by 2022 and 80% by 2050. Compounding an already extraordinarily ambitious target is the fact that in the wake of Japan’s Fukishima nuclear disaster the German people pulled all support for nuclear power. Despite describing it as a “Herculean Task”, Chancellor Angela Merkel supported decommissioning all nuclear power plants by 2022 and increasing renewables to 80% of the energy supply by 2050.
I was recently in Germany for a series of meetings discussing the details and status of Energiewende. Ursula Heinen-Esser, Parliamentary State Secretary to the Federal Minister for the Environment, Nature Conservation and Nuclear Safety, is one of the officials at the helm of this transformative effort. She stated bluntly that Germany wants to, “break its dependence on fossil fuels and prove that an industrialized country can move to a low-carbon energy system”.
They are ahead of schedule, with renewables now comprising 23% of Germany’s electricity supply. However, the means to this end has not been without controversy. Twenty year contracts to buy solar power at a premium price are driving up electricity costs for all rate-payers. And the massive wind development in Northern Germany at times dumps huge amounts of power onto the European regional grid, upsetting energy supply and balance in adjacent countries.
During meetings at their headquarters in Berlin, the German Federation of Businesses (BDI) expressed both support for and concern about Energiewende. They voiced unanimous agreement that nuclear is done in Germany but also concern about the costs of the transformation. Carston Rolle, BDI’s Managing Director for Energy Policy, explained that the build out of renewables and necessary transmission lines is expected to cost 350 billion euros and increase electricity costs by approximately 30%. There doesn’t appear to be an answer as to who will pay for this. Currently, industrial consumers of very large amounts of energy have been exempted from most of the energy price increases but the business sector is nervous about how this will be handled in the future and what it will mean for Germany’s competitiveness in the global economy.
The most impressive aspect of this energy shift is that the Germans are making the difficult decisions necessary to significantly reduce greenhouse gas emissions and build a post-fossil fuel economy. They are concerned about the costs and the risks but view them as worth tackling given the costs of fossil fuel dependency and climate change. They are making mistakes. It’s a bumpy road. But they are moving, as a nation.
The energy revolution in the United States is a very different story. The U.S. natural gas revolution is not intentionally strategic. It is capitalistic, driven by energy developers who expect to make personal fortunes. And yet, with some proper sideboards, it has the potential to help America transition to a more secure, renewable energy system.
The abundance of low-cost natural gas has been made possible by new technologies in hydraulic fracturing (or “fracking”). This involves the injection of highly pressurized hydraulic fluid into shale or other rock layers creating fractures in the rock through which natural gas can be extracted. This has unleashed a boom. Shale gas now accounts for nearly 40 percent of U.S. natural gas production which overall is at record levels.
This revolution has reduced the price of domestic natural gas to the point that it is often more cost effective than coal for electricity generation. This could be a boon to American competitiveness; keeping energy prices relatively low for U.S. based industry. It could also be a means to reduce greenhouse gas emissions since natural gas combustion emits roughly half as much as coal combustion. However, in order to realize this potential several tough issues must be addressed.
One serious challenge to development of unconventional gas resources is the myriad of environmental impacts associated with fracking including the use of toxic chemicals in “fracking fluid,” groundwater contamination and the potential to trigger earthquakes. In addition, while natural gas combustion generates significantly less carbon than coal combustion, the production process for unconventional natural gas releases significant amounts of methane into the atmosphere. Methane is a far more potent greenhouse gas than carbon and such leakage could negate the climate benefits of natural gas over coal.
Although unconventional natural gas is touted as a relatively cheap energy source, rational decision-making must factor in the additional costs associated with environmental damage and polluted water supplies. And, any strategy to embrace natural gas must be accompanied by the adoption of stringent federal regulations on the way natural gas is produced. The right set of regulations and incentives could stimulate a new wave of innovation and economic activity focused on mitigating, reducing and eventually eliminating these environmental impacts to allow natural gas to be produced in an environmentally sound manner. Recent advancements in impact mitigation such as faster drilling, smaller and fewer well-pad footprints, and EPA methane capture requirements that go into effect in 2015 are steps in the right direction.
Another serious consideration about the role of unconventional natural gas is that it, like all fossil fuel, is a finite resource. High-end estimates have suggested that U.S. reserves of unconventional natural gas could last up to 100 years. However, the Energy Information Administration recently revised its estimate of unproved technically recoverable shale gas resources downward by 42 percent. Coupled with known shale gas reserves this amounts to 24 years of supply at current production rates. As pointed out in a report by the Post Carbon Institute this is an extremely aggressive forecast considering that most of this projected production is from unproved resources and would entail a massive expansion of drilling with enormous associated environmental concerns. This begs the questions of whether it makes sense to continue investing billions of dollars of private funds and public subsidies in an infrastructure that will only serve for a few decades and whether doing so will hinder us from investing in more secure, longer-lasting options.
And this brings me to the biggest potential benefit of unconventional natural gas – its role as a bridge fuel to a lower carbon future. This concept is often discussed but at a superficial level because to develop natural gas as a bridge will require a set of actions and commitments to ensure that it truly is a transition fuel, the use of which will be reduced over time through the acceleration of conservation, energy efficiently and the development of renewable energy sources. In other words, embracing this strategy means intentionally developing a business model for the natural gas industry which anticipates the gradual transition to renewable energy.
The potential of such a strategy is vast. The shale gas boom could produce the investment needed to pay for the transition to a renewable energy system. Relatively inexpensive natural gas should bring down overall energy costs and the associated savings could be used to invest in transitioning to renewable energy sources. This is the general idea behind the Energy Security Trust announced by President Obama last week.
Revolutions are risky and in this case both countries are taking big chances. Germany is committed to an energy plan that will lead to higher energy prices. If the costs climb too high too fast German economic competitiveness will be undermined. The U.S. has no plan at all, seeming willing to trust that longer term energy solutions will naturally present themselves.
I think lack of a coherent plan is the riskiest approach. At least the Germans have an idea of what they’re in for and can start taking steps to prepare. My hope is that their eyes wide open approach will propel the United States to use its windfall of natural gas abundance as an investment in longer term, sustainable solutions. If so these dual revolutions could lead to real evolution in the global energy and climate situation.