DECCs conflicting gas price projections
Two reports released by the Department for Energy and Climate Change (DECC) disagree on future gas prices. Could gas prices really fall by a quarter as a result of shale gas extraction, or will they go up?
Part of an analysis from consultancy Navigant, commissioned by DECC, shows gas prices could go down if there is a “significant expansion” of shale gas in Europe over the next couple of decades. The Telegraph picked up the scenario in a piece yesterday.
But how likely is it that shale gas will bring down gas prices?
In Navigant’s other scenarios, gas prices stay the same or go up. What’s more, DECC’s new fossil fuel price projections – also released yesterday – predict gas prices will be higher than in Navigant’s report.
Comparing projections
Every six months, DECC releases new projections for future oil, coal and gas prices. Predicting the future price of gas is notoriously difficult, but necessary for government energy policy.
The latest version updates DECC’s most recent predictions, which were made in October 2012. In DECC’s new central scenario, gas prices are expected to settle at 73.8 pence per hundred cubic feet of gas – known as a therm – in the 2020s, compared to 63.6p/therm now:
Image - Screen Shot 2013-07-18 At 10.00.43 (note)
In contrast, Navigant’s report predicts gas prices could be 10 to 20 per cent lower than DECC’s projections by 2030:
Image - Screen Shot 2013-07-18 At 10.01.41 (note)
Comparing assumptions
Navigant’s report compares its projections with DECC’s in the graph below:
Image - Screen Shot 2013-07-18 At 11.09.59 (note)
The two blue lines and orange line at the top of the graph show Navigant’s three different projections for the future price of gas. The grey dotted line appears to based based on DECC’s projections from last October, although it says current gas prices are higher now than the figure DECC uses.
Navigant’s assumptions
So why is Navigant’s price projection lower than DECC’s?
In its central case – and in common with many other reports – Navigant assumes Europe won’t produce much shale gas over the next couple of decades. But shale gas production in the USA and China continues to increase, making these major economies more self-sufficient.
This would drive down the price of gas on international markets, meaning the UK could import cheaper gas. So under this central scenario, the price of gas in 2030 would stand at about 65.7p/therm – about the same as now.
Only in its more optimistic scenario does Navigant envisage Europe producing “significant” levels of unconventional gas in the 2020s. The projection also assumes oil prices will fall. As a result, gas prices in the UK are expected to fall to just under 50p/therm by 2030 under this scenario.
In Navigant’s least optimistic scenario, gas prices would be higher in 2030 than they are now. This could happen if production of shale gas in the USA or China is lower than expected, Navigant suggests.
Why doesn’t DECC agree?
DECC released the update to its fossil fuel projections at the same time as the Navigant report, so it may seem odd that the two set of predictions don’t agree. But a DECC spokesperson told Carbon Brief the Navigant report is only one among many it uses to inform its projections:
“Forecasting gas prices far into the future is extremely challenging so DECC uses a number of independent reports to produce our assumptions.”
DECC added that Navigant’s projections are “well within the range” of DECC‘s gas price assumptions. It cites the International Energy Agency, which it says predicts European gas prices will rise by 11 per cent between 2015 and 2030.
So who’s right?
DECC is right that many different reports highlight differing projections for what gas prices might look like in the future. For example, Navigant illustrates the range of projections in reports from DECC, the National Grid and consultancy Poyry over the last few years: Image - Screen Shot 2013-07-18 At 11.27.28 (note)
In assessing Navigant’s conclusions, it’s also important to note the majority of the savings it forecasts arise from lower international gas prices – not UK shale gas. The Telegraph’s headline – which says “gas prices could fall by a quarter … if Britain exploits its shale gas reserves” – fails to make this point clear.
But the message from the Navigant report seems clear. The production of shale gas elsewhere in the world – notably the USA and China – could at least prevent gas prices from going up over the next couple of decades.
There are significant barriers to the expansion of shale gas in Europe, but in a scenario where they are overcome – and the price of oil goes down – then indigenously produced shale gas could play its part in driving gas prices down, although it won’t be the main factor.
But the government says it would be unwise to base policy on the assumption that gas prices are going down – and it also isn’t basing its projections entirely on Navigant’s report.