The shale gas boom in the United States has made domestic power producers cleaner and turned coal producers into major exporters. In the Middle East, governments are also tentatively turning to shale as well. In Saudi Arabia, for instance, the state-owned oil company Saudi Aramco recently announced it is ready to use shale gas to fuel a 1,000 MW plant. This will make Saudi Arabia one of the first countries outside the United States to use shale gas for domestic power generation and follows a successful period of exploration and tapping of its domestic shale gas reserves.
However, a weak Europe, anxious about fracking, is becoming reliant on cheap foreign feedstock to fuel its power stations, trapping it in a vicious cycle. The ongoing European trepidation towards shale gas is putting Europe at an increasing economic disadvantage. The lack of energy competitiveness vis-à-vis the United States has also become the biggest concern of Europe’s industrialists.
It is well known that the shale gas revolution in the U.S. has led to a massive drop in natural gas prices. From the peak in 2008, gas prices fell by over 70 percent by January 2010 and have roughly remained at that level since. This has led U.S. electricity producers to increasingly use gas-fired power rather than coal-fired power plants to supply electricity, with dramatic effects on the U.S. supply of electricity.
This has been positive for the U.S. on two fronts. Firstly, natural gas is a cleaner fuel which is better for the environment. Secondly, with more competition in the market for electricity generation following the availability of shale gas, electricity prices are falling for consumers, a massive saving for the U.S. economy.
On the other hand, the preference for shale gas has left coal producers out in the cold.
In with shale, out with coal
US coal producers have seen a declining demand in steam coal from the U.S. electricity sector. At the same time, they have maintained their annual production volumes. While coal imports into the U.S. have dropped dramatically, the excess coal production has needed to be stockpiled, exported or both. Currently, U.S. coal producers are banking on export markets to rid the stockpiles. A recent report from the U.S. Congress framed this issue very clearly: “One of the big questions for the U.S. domestic coal industry is how to penetrate the overseas market, particularly in steam coal, to compensate for declining domestic demand.”
U.S. coal producers have been successful at increasing exports and reducing imports. From 2007 to 2012, coal exports more than doubled with Europe taking about 58 percent of total exports in 2012, up from 32 percent in 2007.
This was driven by cheaper coal. The shale gas boom in the U.S. made coal less interesting to local electricity generators and it was to be expected that European electricity generators would capitalise on this “coal price revolution”. This revolution is the opposite to what is happening in the U.S. Coal had dropped from 25 percent of the total power mix in Europe in 2007 to 21 percent in 2010, but the trend reversed, starting in 2011, reaching 22 percent. In 2012, coal fired electricity output in Europe even rose by 6 percent, a greater increase than Portugal’s total electricity generation. The share of natural gas in the total power mix in Europe increased from 12 percent in 2000 to 19 percent in 2008 but had already dropped to 17 percent by 2011.
A vicious economic – and ecological – energy cycle for Europe?
In the absence of a European supply of inexpensive shale gas, the shift to coal is a rational economic decision for European power generators. The consequences of the shift, however, are detrimental on several fronts. Firstly, in spite of lower coal prices, Europe’s energy cost position relative to the U.S. will only further deteriorate. Secondly, the negative knock-on effect of relatively higher energy costs on Europe’s energy intensive industries creates further disadvantage for Europe, already handicapped by very high structural costs. Thirdly, greenhouse gas emissions, which are roughly twice as high for coal fired plants than for gas fired plants, are saddling Europe with an ecological predicament. Losing on both economic and ecological grounds is the worst outcome.
While the impetus for exploiting shale reserves in many Middle Eastern countries is less acute, governments and business leaders recognise the potential economic advantages and are already taking the initiative. Many are now looking at shale and other forms of unconvential gas for domestic consumption, and some projects for developing reserves are already underway.
By contrast, in Europe, there is a risk that the arbitration of Europe’s energy feedstock will be left to “market forces”. This is a poor policy, especially if the market mechanisms are leaving Europe dangling between U.S. coal and Russian gas. Policy makers and corporate leaders should urgently rethink Europe’s energy situation before it becomes a quagmire. Developing local energy sources such as shale gas should remain on the agenda.
Karel Cool is the BP Chaired Professor of European Competitiveness and Professor of Strategic Management at INSEAD. He directs the Competitive Strategy programme, part of INSEAD’s suite of Executive Development Programmes.
Quentin Philippe is a consultant with Boston Consulting Group.
Courtesy of INSEAD Knowledge, INSEAD Abu Dhabi campus, Copyright INSEAD 2013.
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Is Europe stuck in a vicious energy cycle?
In the Middle East, governments are also turning to shale
The shale gas boom in the United States has made domestic power producers cleaner and turned coal producers into major exporters. In the Middle East, governments are also tentatively turning to shale as well. In Saudi Arabia, for instance, the state-owned oil company Saudi Aramco recently announced it is ready to use shale gas to fuel a 1,000 MW plant. This will make Saudi Arabia one of the first countries outside the United States to use shale gas for domestic power generation and follows a successful period of exploration and tapping of its domestic shale gas reserves.
However, a weak Europe, anxious about fracking, is becoming reliant on cheap foreign feedstock to fuel its power stations, trapping it in a vicious cycle. The ongoing European trepidation towards shale gas is putting Europe at an increasing economic disadvantage. The lack of energy competitiveness vis-à-vis the United States has also become the biggest concern of Europe’s industrialists.
It is well known that the shale gas revolution in the U.S. has led to a massive drop in natural gas prices. From the peak in 2008, gas prices fell by over 70 percent by January 2010 and have roughly remained at that level since. This has led U.S. electricity producers to increasingly use gas-fired power rather than coal-fired power plants to supply electricity, with dramatic effects on the U.S. supply of electricity.
This has been positive for the U.S. on two fronts. Firstly, natural gas is a cleaner fuel which is better for the environment. Secondly, with more competition in the market for electricity generation following the availability of shale gas, electricity prices are falling for consumers, a massive saving for the U.S. economy.
On the other hand, the preference for shale gas has left coal producers out in the cold.
In with shale, out with coal
US coal producers have seen a declining demand in steam coal from the U.S. electricity sector. At the same time, they have maintained their annual production volumes. While coal imports into the U.S. have dropped dramatically, the excess coal production has needed to be stockpiled, exported or both. Currently, U.S. coal producers are banking on export markets to rid the stockpiles. A recent report from the U.S. Congress framed this issue very clearly: “One of the big questions for the U.S. domestic coal industry is how to penetrate the overseas market, particularly in steam coal, to compensate for declining domestic demand.”
U.S. coal producers have been successful at increasing exports and reducing imports. From 2007 to 2012, coal exports more than doubled with Europe taking about 58 percent of total exports in 2012, up from 32 percent in 2007.
This was driven by cheaper coal. The shale gas boom in the U.S. made coal less interesting to local electricity generators and it was to be expected that European electricity generators would capitalise on this “coal price revolution”. This revolution is the opposite to what is happening in the U.S. Coal had dropped from 25 percent of the total power mix in Europe in 2007 to 21 percent in 2010, but the trend reversed, starting in 2011, reaching 22 percent. In 2012, coal fired electricity output in Europe even rose by 6 percent, a greater increase than Portugal’s total electricity generation. The share of natural gas in the total power mix in Europe increased from 12 percent in 2000 to 19 percent in 2008 but had already dropped to 17 percent by 2011.
A vicious economic – and ecological – energy cycle for Europe?
In the absence of a European supply of inexpensive shale gas, the shift to coal is a rational economic decision for European power generators. The consequences of the shift, however, are detrimental on several fronts. Firstly, in spite of lower coal prices, Europe’s energy cost position relative to the U.S. will only further deteriorate. Secondly, the negative knock-on effect of relatively higher energy costs on Europe’s energy intensive industries creates further disadvantage for Europe, already handicapped by very high structural costs. Thirdly, greenhouse gas emissions, which are roughly twice as high for coal fired plants than for gas fired plants, are saddling Europe with an ecological predicament. Losing on both economic and ecological grounds is the worst outcome.
While the impetus for exploiting shale reserves in many Middle Eastern countries is less acute, governments and business leaders recognise the potential economic advantages and are already taking the initiative. Many are now looking at shale and other forms of unconvential gas for domestic consumption, and some projects for developing reserves are already underway.
By contrast, in Europe, there is a risk that the arbitration of Europe’s energy feedstock will be left to “market forces”. This is a poor policy, especially if the market mechanisms are leaving Europe dangling between U.S. coal and Russian gas. Policy makers and corporate leaders should urgently rethink Europe’s energy situation before it becomes a quagmire. Developing local energy sources such as shale gas should remain on the agenda.
Karel Cool is the BP Chaired Professor of European Competitiveness and Professor of Strategic Management at INSEAD. He directs the Competitive Strategy programme, part of INSEAD’s suite of Executive Development Programmes.
Quentin Philippe is a consultant with Boston Consulting Group.
Courtesy of INSEAD Knowledge, INSEAD Abu Dhabi campus, Copyright INSEAD 2013.
Staff Writer
Lorem Ipsum is simply dummy text of the printing and typesetting industry. Lorem Ipsum has been the industry's standard dummy text ever since the 1500s, when an unknown printer took a galley of type and... More by Staff Writer
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