Climate & Sustainability

The Energy Industry: Changing the Balance of Power

Former U.S. Defense Secretary William Perry joins the head of the U.S-China Energy Forum to explain why shale gas may be a game changer.

July 16, 2012

| by Stanford GSB Staff

In a relatively short time, U.S. shale gas production has lowered the price of natural gas in the United States to a quarter of the price in Europe and prompted some utilities to scrap plans to build coal-fired electricity plants. Meanwhile China is gearing up to apply the technology known as hydraulic fracturing, or fracking, to its shale deposits in hopes that its growing energy demand can be met with gas instead of dirtier coal-fired plants.

The energy source was the hot topic at a recent conference on “smart, green cities,” sponsored by Stanford GSB’s Program on Regions of Innovation and Entrepreneurship. Energy technology and policy experts from Taiwan and the United States said they had not even discussed shale gas at a similar conference held last year, but now found themselves discussing how it could shake up the energy industry and world politics.

Here are edited excerpts from comments made by Dennis Bracy, CEO of the U.S.-China Clean Energy Forum and the Washington State China Relations Council, and Stanford Professor William Perry, the 19th U.S. Secretary of Defense, in response to questions from conference attendees.

Dennis Bracy

Let me give you a little bit of an overview, not because the U.S. and China are everything, but the math is pretty simple. The U.S. and China together consume half the energy on Earth, nearly half the energy and nearly half the greenhouse gases. In coal, we, combined, consume 62% of the coal on Earth. And coal, by the way, represents 40% of global greenhouse gas emissions, so it’s something we have to focus on.

Our energy pie in the U.S. is growing at about 1% per year. China’s demand is growing at 1% per month. If you heard that China is doing everything possible in renewables, absolutely true. But they’re also building a lot of new coal plants and hydro. We work together on these things that are perhaps not as sexy, but really, really important to the whole scheme of things.

This new national gas phenomenon seems to be changing everything. I hope it works out. I hope fracking is everything the industry says and nothing that the opponents say. But it has changed the balance of power in the industry where coal plants are now shifting to natural gas.

China is wildly seeking this, because they don’t have any natural gas to speak of. They’ve got pipelines coming into China. But it affects not only our two countries’ energy policy, but also worldwide geopolitics. China clearly has a plan. You can see it all over the world, lining up resources, lining up strategic relationships. If gas turns out to be the magic elixir in this, then that will drive a whole set of decisions.

William Perry

If we continue to pursue efficiencies, we should be able to offset increased energy demand with increased efficiency [in the United States]. So I see this as a break-even state. But how can we do better than that so we can actually decrease our use of coal plants? Solar and wind are still too expensive. I think it will take at least 5 years to get the cost down to grid parity. And even with grid parity, it will be 10 to 20 years to increase the contribution of renewables from 1% to 10% of grid electricity. So in sum, alternative fuels are potentially important, but their contribution is still small, and it will take a long time for them to play a significant role.

Shale gas is truly a game changer. It is a huge resource in the United States. Some have called us the Saudi Arabia of gas with more than a century of supply. The technology is mature. It was developed in the United States more than 10 years ago, and its success has already greatly exceeded anyone’s expectations. It’s already at scale — it went from 10% to 20% of the total U.S. [electricity] production in a 10-year period, and we have gone from an importer of natural gas to an exporter. Most interestingly it has been demonstrated to be cost effective. It has already resulted in lower prices for gas, which has had a ripple effect on other sources of energy.

As you mentioned, shale gas could be a game changer for the next 100 years. Do you have any comment on the influence of shale gas on renewable energy development and on carbon dioxide emissions for the next several decades?

I can’t answer the question fully but here are a couple comments about it: Shale gas is twice as good as coal but it still has emissions, so it is not a panacea. Solar and wind is the more desirable option, but I find it hard to be optimistic soon. Grid parity [for solar and wind] is going to be harder and harder to reach as the cost of natural gas goes down.

Natural gas has three negatives associated with it. It does have carbon dioxide emissions. Secondly, it’s the enemy of alternative energy sources — it makes it harder and slower for them to reach grid parity, and it’s also the enemy of nuclear power because nuclear power used to be the cheap source of electricity.

Could you comment about water pollution potential with fracking?

I can comment, but not authoritatively. I’ve read on both sides of the argument. One side says it is causing water pollution. This is particularly [true] in Western Pennsylvania where people are saying it is getting into their water supply, and the drilling companies say that can’t happen, we have this pipe totally encased so the water can’t get out. I don’t know what the truth is. I suspect the truth is that if drilling is done properly the water can’t get out. If, indeed, fracking is going to damage the water supply, that is a huge barrier to moving forward. Everything I’ve been able to read from engineers says that does not have to be the case.

There are other environmental issues that are almost fundamental, such as people who live in the area being annoyed by all the trucks and activity that comes with the operation. That’s a fact of life. But I think the water issue can be dealt with.

With the development of shale gas, will the U.S. become more supportive of international targets on greenhouse emissions reduction set for 2025?

I would like to see us become more supportive of that in any case, but any such international agreement meets automatic resistance in some circles. It’s part of the political deadlock we have right now. International agreements are right up there with carbon tax as an issue that is politically volatile. I’m not optimistic about our ability to make political decisions, but I do think technically our ability to achieve those goals could be much enhanced by shale gas.

But again, shale gas is only a halfway house in terms of the environment. It has about half the carbon emissions of coal but it still has emissions, and in the strategy that I have laid out, I started with a fallback position until zero or low carbon emissions can become a reality. It’s here and now, and we can move very quickly to replace coal-fired plants with gas-fired plants, and we should do that.

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