He vuelto a conseguir publicar otro artículo en la revista de Colegio de Ingenieros de Madrid Nº57, esta vez sobre la situación del mercado eólico en Estados Unidos. Se repasa el estado del mercado y se comentan los retos a los que se enfrenta, a corto plazo la renovación del PTC y a largo plazo, la falta de capacidad de transporte eléctrico y la competencia del shale gas:
I am very glad to announce that an article by my workmate Victor Iglesias and me, have been published in the very famous Spanish magazine Energías Renovables.
The title is ‘¿Cómo está la termosolar en los Estados Unidos?’ (How is the thermo-solar market in the US?) and in a few pages we explain to our Spanish compatriots what is going on in the American market:
Moreover, we have been cited in the paper version, on page 59
Spain had a struggling issue in energy supply at the beginning of the 90’s. More than 70% of its primary energy sources were hydrocarbons and almost all of them were imported because there are not autochthonous reserves of oil, natural gas and only one third of all needs of coal. They were imported from countries like Russia, Libya, Algeria, Nigeria or Egypt, not very trustable from a geopolitical point of view. Moreover, the electrical markets were dominated by two vertical integrated utilities which had not been invested in new transmission capacity or new generation plants. Due to the growth of the economy, it was forecasted a important growth in energy demand (actually the demand doubled in 15 years), so the Government had to deal with a big problem, also aggravated by the environmental compromises with European Union in using renewable energy and reduce CO2 emissions.
So, the Government made important decisions to address the issue, fighting with numerous personal and private interests from utilities and the old school guys. Probably, the period from 1990 to 2010 was the moment with more energy laws and legislation passed in all the Spanish history. Following the California and UK examples, the market was liberalized, a new Independent System Operator (ISO) and owner of all transmission lines was created, Independent Power Producers were allowed to access to the grid, and important laws in supporting renewable energy sources were passed.
Nowadays, Spain is well known for being a country who is leader in the world in renewable energy technologies. Despite to be the 12th country by GDP, it achieved the fourth place in wind capacity installed, second in solar PV and it remains first in solar thermal. In 2011, the 36% of the electricity comes from renewable energies, a remarkable fact since the US only achieved 13%. In others indicators related with infrastructure (as transmission lines average age, miles of high-speed rail or miles of freeways) or with human development (mortality, education, etc), it is on the top five. Nevertheless, currently is also infamous by the struggling economic situation, difficulties to pay back the national debt and high rates of unemployment. Both achievements and failures are consequences of the decisions made, some of them related with energy. In the particular case of renewable promotion, the Spanish feed-in tariffs program (FiT) is one of the most commented, discussed and disputed energy policies in the recent years, specially the program for solar photovoltaic, who has been called for many people as the fable of Killing The Goose That Laid the Golden Eggs.
The promotion of the renewable energy, as solar, wind or biomass, is an issue of how to internalize the positive externalities into the market. These benefits are well known. The clean or renewable energies, do not pollute, do not contribute to climate change, do not imply resources depletion, do generate local employment, do promote the national industry, do improve the energetic independence, and more. All of these benefits are not included in the Levelized Cost of Energy (LCOE) or the price of the electricity. Because of that, these technologies are not competing in the same conditions as the conventional generation. That makes that the price of them is above the average price of the electricity in wholesale market, and as a consequence, the utilities do not want to build this expensive plants or to purchase expensive energy from others. This is because the benefits of the renewable energy do not go to them, but to society. That is a market failure and that is because they need the regulation or the support from the Government.
In the market, it is a basic principle that nobody, even the Government, can control the quantity and the price of a product at the same time. If you fix the price for the renewable generation (as FiT does) you do not know what will be the amount of renewable generation that you will obtain. The same, if you fix the quantity you want (as Renewable Portfolio Standards does); you do not know what will be the price for this generation. The price multiplied by the quantity is the key point, because that will be the cost for the electricity customers who are also your voters. So you have to be careful with that because otherwise you can make your citizens to pay so much for the electricity if the price by the quantity is too high, but you can make them not to gain the benefits of renewals if the renewals were not developed due to low prices which do not make the investments profitable.
In the FiT option, the government decides what will be the price of the renewable generation. That has enormous advantages for developing the renewable market because it is very easy for developers, investors and financial institutions to know what will be their retribution and the Internal Rate of Return (IRR) for their investments. It is easy to calculate the IRR and if the FiT is also well determined -the price will be a bit more than the cost of capital- then the development of renewable is smoothly and a reasonable cost for ratepayers, being society awarded with the benefits of clean generation. See Exhibit 1, with the case of wind.
Spain has become a leader in renewals thanks to FiT. The government support has been very strong and determined. The country started to use FiTs in 2000, and ten year later, the 35% of the total electrical generation is using renewals (2010). Spain has been successful implementing some FiTs, for instance in the case of wind, but has made huge mistakes in solar PV. The law ‘RD661/2007’ in 2007 was the most important piece of legislation because the most important FiT prices were determined. Prior prices were not enough for launching the market.
The key point of FiT is to determine the price of the premium. But that is difficult for a pioneer Government (and more in 2007 without other experiences) because a civil servant is not usually a solar PV developer, he does not know what are the real cost of solar modules, wires racking, etc. So the Government decided to ask the local solar PV generators associations to estimate the right price for the premium. Obviously, as much price, much profitable for the companies in the association, so they finally convinced the Government to fix a solar PV FiT that was 10 times higher than the average electrical price, and almost twice that the LCOE for Solar PV (at that time it was not so clear what was the real LCOE for PV, that, in fact, it has been strongly decreasing in the past five years). The business was so profitable (IRR above 20%) that it attracted investors from all over the world, and because it was pay by the Government, it was secured by the country bond with used to have an AAA rating, so practically at no risk.
The Government objective was 400MW of solar PV, but in only two years they got more than 3000MW. See Exhibit 2. Only the over cost of the solar PV FiT for the ratepayers is more than 2 billion of Euros every year, and considering all renewable technologies more than 6 billion. The reason why the Government did not realized before what was happening, it is because they relied on local administrations (similar to counties) for granting the permits for the solar facilities. Since local governments earned a lot with solar PV installations (jobs, taxes, votes), they did not informed the Central Government about the number of projects in the cue. In fact, they was not going to pay for the FiT, so they tried to host and grant permits for as many projects as they could.
Moreover, the Government decided not to increase the electrical rates, because the benefits of renewable should be paid not only for the current consumers but also by the future consumers, since renewals benefits are for different generations. So the electrical system generates every year a huge deficit that has the creative name of ‘rate deficit’, and which is accumulated as public debt (and accounted as more public debt for rating and country risk). Basically it is a debt from the ratepayers (aka citizens) to generation owners (generating companies). That debt was by the end of 2011 of more than 25 billions of Euros.
So, as the model was unsustainable, the Government finally decided, in January 2012, to cut off or suspend the FiT program, with a lot of complaints from investors and generators with projects on the way. So, since some of the causers of the over costs of the FiT model and the final breakdown of it were the own solar PV generators (trough the associations), they have been accused of killing the golden goose.
The renewable program has had additional benefits as 100,000 new employees, total contribution to GDP around 8 billion €, total exports: 3 billion €, reduction in 10,7Mtep in fuel imports (2 billion €) and savings over 370 million of € in CO2 emissions. Nevertheless the excessive cost finally collapsed the system. Now the renewable sector is accused of contributing to the tough situation of the Spanish economy. That is a good example as how careful has to be a Government when they decide the energy strategies and policies.
Gracias a una asignatura del certificate que estoy haciendo en UCLA, tuve la oportunidad de visitar la planta termosolar de eSolar Sierra Sun Tower. Sus 5MW de demostración se suman a los casi 500MW termosolar que hay en el país a en el verano del 12, aunque pronto sumarán casi el doble con los proyectos en desarrollo que hay.
Sólo existen dos plantas con su tecnología en el mundo, la que fuí visitar en el increíblemente caluroso desierto de Mojave cerca del pueblo de Lancaster, y la otra en India. La tecnología es solar de concentración, pero el pequeño tamaño de los espejos (planos) y su generación directa de vapor aportan ciertas características nuevas a la generación termosolar. A continuación se puede ver un generador de vapor desmontado, donde se pueden ver los tubos instrumentados con su especial recubrimiento. La tecnología de la torre la suministra los viejos expertos del vapor Babcock&Wilcox que también aporta algo de equity a la compañía.
Una planta interesante aunque quizás algo fuera de la tecnología actual, ya que no permite almacenamiento (clave para hacer interesante la termosolar), con una eficiencia más que dudosa, un mercado complicado en el corto y medio plazo y mejores competidores (los españoles entre ellos¡)
We had the opportunity to met with the Arkansas Governor Mike Beebe during WindPower trade show. He was the opening speaker in the conferences and was so kind to meet with a Spanish delegation formed by CEOs of the top renewable companies and the Trade Commission of Spain. (Actually my friend Lenka from EDC and me have been working in this meeting for almost a year).
The Governor explained to us the possibilities and opportunities of Arkansas for the foreign investment. It is a little State (no more than 3million of population) but very well located just in the middle of the the wind belt region. Despite they have not established a Renewable Portfolio Standard yet, they are working on it. The problem is that they want to make the renewable support cost-effective, which it sounds very difficult considering that Arkansas has a great reserves of Shale Gas which they are drilling now. Nevertheless they have some concerns about the explotation, since a curious fact that Mr Beebe told us, the biggest earthquake in US happened in AK, decades before the infamous disaster in San Francisco. It was not metered then but some historians have described that the waters of the Missippi river go back due to this earthquake.
From the side of the companies, Iberdrola, Acciona, Idom and Dragados were present. All of them showed its interest and appreciated the meeting.
Wal-Mart is one of the biggest companies in the world and the first one company in retail sales in the US. It is so big that it could be the 20th country comparing sales with GDP. So, the power and the influence of this company is measure in a world basis scale. Their sustainability policies are under discussion because it is not clear if they are really concerned about the problem or only they are washing its image with ‘green’ water.
Wal-Mart has been pointed as the responsible of many laid-offs of American workers because its suppliers have had to outsource their production overseas. The reason is because Wal-Mart squeezes the suppliers’ margins till insane levels.
From my point of view, it is a clear case of monopsony, which is a market form in which only one buyer (Wal-Mart) faces many sellers (suppliers). Probably is more a case of oligopsony, where few buyers faces many sellers, but the power of Wal-Mart is so big, that we can be considered a monopsony in many cases. (Remember that the rest of retail marketers are so far from Wal-Mart than it can push the price of many products in the wholesale market)
Monoposy is an example of imperfect competition, similar to a monopoly, in which only one seller faces many buyers. As the only or majority purchaser of a good or service, the ‘monopsonist’ may dictate terms to its suppliers in the same manner that a monopolist controls the market for its buyers.
The figure below shows the effect of a monopsony in a market. The price and quantity of a competitive market are tagged as Pc and Qc respectively, being the cross between the suppliers curve (S) and the demand curve (blue). Without entering in more theoretical details, the monopsonist can force the market to move according its Average Expenditure curve (Ae). Doing that, they reduce the amount of product that they buy (Qm) but, most important, they can shrink the price to Pm. The result is that they win the green area in terms of savings however they lose the red area because they buy less, but it is not a problem since red area is smaller than the green one. The suppliers lose the blue area because the sell cheaper and less quantity than the optimum. The general result is a social loss of the red and blue areas, marked with stripes. The social loss means that the society, as a whole, is away from the optimum, so it is losing welfare due to the greedy action of the buyer.
In the real world, this social loss is the unemployment generated by the bankruptcy of many US companies that Wal-Mart is causing. Obviously, Wal-Mart knows that, and I think they are trying to use some of the extra income they obtain with the monopsony to wash its public image with sustainability strategies, in many cases, impossible to satisfy. (For example 100% consumption from renewable, it sounds pretty ambitious in a country where the 45% of the electricity comes from coal)
Due to Wal-Mart is pushing continuously the suppliers to reduce their prices; many of them have to outsource the production to other countries, as China or India. That is not bad by itself. In fact, it is really good from an ideal framework. David Ricardo, a world famous economist, demonstrated in the XIX century that the international trade is always beneficial for both countries, since each one specializes in the products it makes better. This is called the Comparative Advantage theory. In this case, it is clear that all Americans have taken advantage of low prices that Wal-Mart offers. The inflation has maintained low thanks in part, to the big retailer strategy. That is ok in an ideal world, but the problem is that these low prices in China are not caused they are better manufacturing products, it is because they generate enormous externalities that are not reflected in the price: pollution, unfair labor conditions, etc.
So, at the end, the fail in the wholesale market is creating a social loss that compromise the long term for wining in the short term. That is the opposite definition of sustainability. Wal-Mart has not much to say or to do in sustainability without solving its ‘little’ problem with competition before.
That is market failure, and as well as the monopolies, should be regulated. The cases of monopsony are not so well-known by regulators as monopolies, but there are Acts against them. The famous Sherman Antitrust Act (1890) says in the Section 2 ‘Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony’. The subsequent Clayton Act (1914) declares illegal: sales on the condition that the buyer or lessee not deal with the competitors of the seller or lessor or the buyer also purchase another different product but only when these acts substantially lessen competition (Act Section 3, codified at 15 U.S.C. § 14).
So the problem is known and the laws are already prepared to deal with this, so why is not being solved yet? It might be because the money that Wal-Mart uses doing lobby. According to www.opensecrets.org, in the last four year they have expended more than 25 millions of dollars in lobbying.
To sum up, I think that in the case of Wal-Mart we are not facing a problem of believing or not in the good promises of a big company about sustainability, we are facing a market failure, that it will not be solved only with some unhappy customers quitting from Wal-Mart, and launching a sustainable strategy to become ‘the most competitive and innovative company in the world’.
Vamos a verlo por el lado positivo y lógico. Esta claro que no podíamos seguir ascendiendo, la falta de fans (demanda) y los altos costes de la expedición y las deudas contraídas nos estaban ahogando (déficit tarifario). Ahora, encima, otros métodos de escalada tradicionales y más baratos se estaban imponiendo (gas natural).
Pero valoremos donde hemos llegado: a 40805 MW de generación renovable. Un buen campo base para esperar unos años (tres según la CNE) y seguir progresando. Está claro que hemos llegado más lejos que otros paises, pero subir tan rápido nos ha dado mal de altura. La cima de las renovables nos espera, y a no mucha distancia.
La pasada semana tuve la oportunidad de conocer como un VIP una de las ciudades que más está creciendo en los EEUU, Phoenix.
Ya estuve allí el año pasado con un viaje oficial, pero esta vez la gente de GPEC nos invitó a ‘verlo a lo grande’. Y cuando digo a lo grande es que porque nos subieron a un helicóptero para que nos diéramos cuenta de lo inmensa que es la ciudad. Estuvimos más de una hora circundandola y no llegamos a abarcarla toda.
El desarrollo urbanístico peca por todos lados de insostenible, barrios y barrios residenciales, de casas unifamiliares tipo american dream: front yard, casaza de 4 o 5 habitaciones de un piso y backyard con piscina exclusiva. Multiplica eso por millones y el sumatorio es Phoenix.
Aun así se jactan de no tener ni con mucho el tráfico de LA… esperar unos años creciendo a tasas del 6% como estais haciendo y podreis decir que el hombre tropieza dos veces (y muchas más) con la misma piedra.
Curioso es también las zonas que son reservas indias, y donde este desarrollo viral no ha podido entrar…
Como una frontera, a la izquierda american-dream barrios, a la derecha desierto indio (con algun casino dentro). Y no es photoshop¡
También fue interesante el evento en Sky Song de la universidad de Arizona, donde pude comentar mis impresiones junto con compañeros de otras Oficinas Comerciales.
Enhorabuena por el crecimiento de la región, en estos días tristes de pesimismo económico es de agradecer un rayo de sol en el desierto de Arizona… pero por favor, estáis a tiempo de hacerlo sostenible.
Con motivo del viaje institucional que hemos realizado a Hawaii, aparecemos en la prensa local:
In the last 40 years, important changes were occurred in the traditional scenario of the energy sources. First, the crisis of petroleum in 1973 was the first warning about the problems of fossil fuels. More closely, the important economic development prior to 2008 pushed the markets of energy resources due to the growing demand. With traditional sources of energy as oil, gas and coal raising prices, alternatives sources which were unprofitable before, started to seem more attractive. Also, the dependency of the developed countries on the resources of foreign countries, many of them not very trustable, converted the issue in terms of national security.
Among these alternative sources, renewables, especially wind and solar, have been the main character of the play. Not absolutely new, since they had a little bright in the 80’s, now they have experienced a very strong development worldwide. A new industry has been created only five years ago. The benefits of the renewables are tremendously obvious. They do not consume fuels susceptible to expire to get energy from nature, and they almost do not affect the environment, do not pumping CO2 or other gases into the atmosphere or compromise any region with nuclear risks. On the other hand, these technologies are still not cheap enough to compete with the conventional sources. The price of energy is a key variable in the economic growth and any country try to keep it low for achieving more competitiveness and more economic expansion.
But these efforts in finding alternatives to traditional sources, also has applied to investigation in fossil fuels. Since the end of the 19th century, it is known that there are fuels buried into the ground which are not in the conventional geologic formations. These fuels are in structures which permeability is very poor to make the normal drilling process profitable. They are called non-conventional fossil fuels. Many research resources have been expended in investigating new techniques or technologies to get these fuels from earth in a profitable way. Now, it seems that it has been achieved.
These difficult geologic formations, which until very recent years were unprofitable, have different names as shales, tights or sands. From them, currently gas natural and oil are being obtained, and because of its origin, they receive the nickname of shale gas, tight gas or shale oil. At present, the most important one is the Shale Gas, because there are huge reserves of natural gas in shales and because this last 5 years the production of Shale Gas has shooted up. The raise of these new sources of fossil fuels is being named for some people as, ‘The Black Revolution’.
In this paper, it is going to analyze why the Shale Gas is so important in the new era of energy, what are the important environmental and social issues of its production and what can we expect in the evolution of the energy mix in the US and worldwide.
What is the Shale Gas?
As it has been introduced, Shale Gas refers to natural gas that is trapped within shale formations. Shales are fine-grained sedimentary rocks that can be rich sources of petroleum and natural gas and whose porosity and structure does not permit to get the fuels with the traditional ways.
The advent of large-scale Shale Gas production did not occur until Mitchell Energy and Development Corporation experimented during the 1980s and 1990s to make deep Shale Gas production a commercial reality in the Barnett Shale in North-Central Texas. They used a combination of techniques invented for other purposes, the horizontal drilling in conjunction with hydraulic fracturing.
As it can be viewed in the figure, natural gas is incorporated into the Shale Gas formation, not is in a bag as conventional gas. Moreover, shales are ordered in horizontal layers. Conventional drilling is totally useless in these formations. The new drilling technique consists of:
- A vertical well is drilled
- The drill turns to continue horizontally. In this manner, the horizontal drilling permits to make a hole along the shale
- Water, lots of chemicals and sand are pumped into the well to unlock the hydrocarbons trapped in shale formations by opening cracks (fractures) in the rock and allowing natural gas to flow from the shale into the well.
As the success of Mitchell Energy and Development became apparent, other companies aggressively entered the play, so that by 2005, the Barnett Shale alone was producing nearly 0.5 trillion cubic feet of natural gas per year. As producers gained confidence in the ability to produce natural gas profitably in the Barnett Shale, with confirmation provided by results from the Fayetteville Shale in Arkansas, they began pursuing other shale plays, including Haynesville, Marcellus, Woodford, Eagle Ford, and others.
Although Shale Gas production started ten years ago, only in the past 5 years has been recognized as a “game changer” for the U.S. natural gas market. The proliferation of activity into new shale plays has increased dry shale gas production in the United States from 1.0 trillion cubic feet in 2006 to 4.8 trillion cubic feet, or 23 percent of total U.S. dry natural gas production, in 2010. Wet shale gas reserves increased to about 60.64 trillion cubic feet by year-end 2009, when they comprised about 21 percent of overall U.S. natural gas reserves, now at the highest level since 1971. Oil production from shale plays, notably the Bakken Shale in North Dakota and Montana, has also grown rapidly in recent years.
Something is considered as a ‘game changer’ if it has the ability to change the price of good. That has happened in the case of the Shale Gas.
As you can see in the figure on the left, due to the more offer of gas natural in the market, and also the contraction of the demand, the price of natural gas has dramatically fallen down between 2005 and 2010. Moreover, the projection shows that thanks to the influence of the Shale Gas, the evolution of the prices (blue line) will be below the prior projections which did not considered the new gas. That has huge implications in energy markets. For example, less natural gas prices imply less electricity prices and more difficulties to renewables to achieve grid parity.
To better understand the importance of this new source of gas, let compare it with the actual figures of the natural gas market in the US. Of the total natural gas consumed in the United States in 2009, 87% was produced domestically; thus, the supply of natural gas is not as dependent on foreign producers as is the supply of crude oil (only 51% domestic), and the delivery system is less subject to interruption. The availability of large quantities of Shale Gas will further allow the United States to consume a predominantly domestic supply of gas.
According to the EIA Annual Energy Outlook 2011, the United States possesses 2,543 trillion cubic feet (Tcf) of potential natural gas resources. Natural gas from shale resources, considered uneconomical just a few years ago, accounts for 862 Tcf of this resource estimate, more than double the estimate published last year. At the 2010 rate of U.S. consumption (about 24.1 Tcf per year), 2,543 Tcf of natural gas is enough to supply over 100 years of use. Shale Gas resource and production estimates increased significantly between the 2010 and 2011 Outlook reports and are likely to increase further in the future. The Shale Gas represents about 37 years of supply considering the US consumption of 2009.
The US plays of Shale Gas are spread around the country but there are some formation especially important located in Barnett shale (Texas), Bakken Shale (North Dakota and Montana), and the most important is Marcellus Shale (Pensilvania, New York and others).
The Shale Gas is being extracted in rural zones, and that is causing important changes in these villages. There are some important environmental implications, due to the extraction of Shale Gas is not perfect and can affect aquifers. Moreover, the social equity in the villages is changing since the owners of the lands where the gas is extracted are earning much money for royalties they had imagined feeding cows and growing plants.
The extraction of Shale Gas is not as simple as it was presented above. As many industrial activities, important bad externalities are generated. The amounts of water and chemicals pumped for the hydraulic fracturing are huge. Drilling a typical deep shale natural gas and oil well requires between 65,000 and 600,000 gallons of water. Not only the consumption of tons of water is something to be considered from an environmental position, also the composition of the chemicals is important. The problem is that the actual composition has not been revealed because is considered an industrial secret. About a 2% of the mixture is chemicals. They are crucial for the Shale Gas extraction and include acids, anti-bacterial agents, breakers, clay stabilizers, corrosion inhibitor, crosslinker, friction reducers, gelling agents, iron controls, pH adjusting agents, and scale inhibitors, between others.
The huge amount waste water of the process, full of chemicals, sand and muddy has to be treated. Analysis performed to this waste water shows that it contains some components that are carcinogenic and even nuclear radioactive. The treatment of this water is done in the States with the more lax regulation. Many of them do not have equipment to remove these chemicals out of the water, which is pumped in rivers. Nobody knows what will be the effects of these chemicals in the environment in a long term, because this new type of extraction is almost new.
But maybe, this is not the worst problem. When the drill punches the land, in many cases, some of the layers crossed are aquifers. In some places of Pennsylvania and other States, the tap water has been contaminated by the waste water and even by the gas. The problem was shown in the documentary ‘Gasland’ by Josh Fox, where it is possible to see incredible images of taps running with flammable water. Also, it presents some cases of people living near the drills with terrible and strange diseases, animals dead, bad water contamination and other health issues. A ‘silent law’ seems to be happening because many people of these farms are earning lots of money with the royalties of the gas and also they have disclosure contracts with the drilling companies.
As named above, the Shale Gas production started in Texas ten years ago. I had the opportunity to speak in October 2010 with Keith Sheedy, Chief Engineer’s Office from the Texas Commission on Environmental Quality. He basically explained that in Texas, no water contamination have occurred in this ten years of commercial exploitation. The cases of Pennsylvania are due to bad practises in the drilling process. When the hole is not properly cemented, then some of the gas running through the hole can pass to aquifers and contaminate the tap water.
Anyway, drilling has been doing for decades in similar industries, so regulations should have existed about water uses and disposal, but why is not the Shale Gas drilling regulated by environmental rules as the rest of industrial activity? Because, The Congress, pushed by Vice President Dick Cheney, exempted gas drilling from EPA Clean Water Act regulations in 2005. It is something curious that Cheney was former CEO of the Halliburton Company, one of the biggest driller and Shale Gas extractor in the US. After 2005, Shale Gas drilling boomed.
There are other collateral effects in Shale Gas extraction. Fracturing is changing the structure of the geologic formations. In the drilling zones some earthquakes has been occurred in recent years, and the seismic activity is above the average. In addition, the great amount of water used, generates large truck traffic to this normally quiet populations.
The global effects of the boom of Shale Gas are similar to the rest of fossil fuels usage. As fossil fuel, CO2 are generated in its combustion. The CO2 is a greenhouse gas that contributes to the global warming, which diverse effects in the environment. Even, during the Shale Gas extraction, many other greenhouse gases, more powerful, as CH4, are liberated due to bad practises in the drills and the lack of regulation.
Moreover, it is an exhaustible fuel. That means that there will be a day when there will not be more.
The usage of fossil fuels generates strong externalities for the rest of the world, and they are not incorporated in the cost of its use. As indirect effect, the boom of the natural gas or the reduction of its price is bad for renewable energy because is a substitutive product. As lower is the price of fossil fuel generation, more difficult is for renewables to achieve grid parity and be competitive by their own.
At the end, the more usage of natural gas, despite is greener as other fossil fuels as coal or oil, address our world to a very tough scenario, with a society dependant of scarce fuels and an earth that had suffered non-return changes in its ecosystem.
In the past five years, many drills have been done. In the next figure it is possible to see the evolution of the Shale Gas drills (red spots) in the Barnett shale during the last decade.
The economic benefits for the owners of the land have been important. Signing its gas lease about $1,000 per acre and a royalties of 12.5% for the gas produced, can make them to earn between $1,500 and more than $500,000 per year during the term of the extraction, which can last some years. This is much money for people used to feeding cows and growing plants for fringe benefits.
This disparity of earnings is generating some social equity problems within farmers but more between ‘county folk and city people’. The city people are not earning anything with the drilling but they suffer the problems of water contamination, truck traffic and risks from the unknown effects of the activity. They are against drilling but farmers, in general, are in favor of it. Disputes are increasing in these, up to now, calm and little populations.
A good impact of the drilling activity is the job creation. According to a recent study by Pennsylvania State University, the industry has created 23,000 jobs, including employment for roustabouts, construction workers, helicopter pilots, sign makers, Laundromat workers, electricians, caterers, chambermaids, office workers, water haulers and land surveyors.
Another controversial topic is the unequal tax policies to the drilling activity. Currently, companies operating in Pennsylvania pay no tax to extract gas. (Governor Tom Corbett reportedly received at least $1 million in campaign donations from gas interests). Corbett recently introduced legislation that would levy fees that critics say would amount to a tax of 1% per well on gas extraction, significantly lower than Arkansas (3.45%) and Texas (5.4%). It is not very fair to tax differently the activity between States, since the basins extends along vast territories of different States and the problems of the activity are affecting people in the same way.
Conclusions: my personal vision
An important change in the energy world is happening. The important economic implications of the availability of domestic natural gas are something to be considered for any country. The US has been the first country to exploit the benefits of the Shale Gas, but it is expanding through the world. You can see in the next figure the worldwide reserves.
The new distribution of the sources of energy changes the game of power. No dependency from Middle East could be a fact that changes the course of international policy.
Apart of the good benefits from the economic point of view, there are other aspects in the sustainability analysis that have to be considered. The local effects on the environment are not trivial. Public health and environment ecosystem is endangered. Nobody knows what will be the effects of the chemicals used for extraction in the long term but, my impression is that many companies are working as fast as they can to get the maximum amount of gas before the effects will be public. Responsibility from the Government must be priority to avoid this, but as another market failure, the current democracy system permits the regulator be supported by the companies which he has to regulate.
At a local scale, the social problems of inequity will convert stronger in future years. Ronald Coase, a famous economist, states that if trade in an externality is possible and there are no transactions costs, bargaining will lead to an efficient outcome regardless of the initial allocation of property rights. In this case, this bargaining is not happening and that will push unfortunate people to fight for its rights.
From a global sustainability point of view, the raise of the fossil fuels has huge impact on the world. If the fossil fuels come to be cheap again, the efforts in renewables will stop and we will experience something similar to the 80’s, when the first renewable plants were built and no more were set up until 20 years later. At the end, it is to delay the inevitable, but in a worse scenario. We will have a warmer earth, more population and more bubble, because we have been growing with more energy than we can produce in our present time.
In a more practical way, the implications for the US energy mix or the electricity energy mix are obvious. The current 45% of coal will be substitute by gas, cleaner and not much more expensive now. If you see the predictions of new electrical capacity added from EIA, you can figure out:
After knowing more about the Shale Gas, I understand better the words by President Obama during the State of the Union discuss in 2011, when he claims for a new goal for America’s energy future, saying 80 percent of electricity should come from clean energy sources by 2035. He considers clean, among others, wind, solar, nuclear and natural gas.
Energy Information Administration (EIA): www.eia.gov
Josh Fox, Gasland, the movie: www.gaslandthemovie.com
The Economist, ‘We will frack you’ November 22, 2011: www.economist.com
Chesapeake, Hydraulic Fracturing Facts: www.hydraulicfracturing.com
New York Times, ‘The Fracturing of Pennsylvania’ November 17, 2011: www.nytimes.com