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Regulatory: The challenges of newfound energy wealth

While energy regulators struggle to address issues related to fracking, the U.S. could be missing out on opportunities to strategically use its new energy wealth

Since the 1973 Arab oil embargo, the United States has felt “energy poor,” heavily dependent on energy imports. The past few years have seen a revolution. Increased energy efficiency in every sector of the economy, rapid growth in renewable energy sources and, most importantly, the development of vast unconventional natural gas resources, so-called “shale gas,” have made America “energy rich” even though it continues to lead the world in per capita energy consumption.

The opportunities

This energy revolution—and this time, the label seems genuinely appropriate—offers great promise for the economy:

  • The development of natural gas creates tens of thousands of new jobs;
  • The move in power generation from coal to gas (with its 50% lower CO2 emissions) significantly reduces carbon emissions;
  • Energy-intensive industries are becoming more competitive and growing because of the availability of low-cost gas;
  • Consumers are seeing lower costs for heating and power; and
  • Dependence on energy imports and the associated balance of payments deficit are going down.

But revolutions present challenges, and this one is no different. Energy regulators at every level are struggling to address the new questions and challenges brought on by the abundance of cheap natural gas produced through “fracking”—previously an obscure term known only in the petroleum industry, but now the subject of daily newspaper headlines and even popular movies. Until regulators get their arms around the new issues abundant shale gas presents, the benefits will fall far short of the promise.

Too much gas?

Very low prices, made possible by the quadrupling of production in recent years, makes gas the fuel of choice for nearly every new power plant and for the repowering of old coal plants facing the prospect of costly environmental retrofits. Historically, fuel diversity was seen as a virtue, increasing the reliability of the power supply and providing a cushion against the price volatility that was associated with natural gas. Now, the price advantage of gas-fired power generation is so great that it is driving out not only coal, but also carbon-free nuclear and renewable energy. In addition, the gas pipeline delivery system was not structured around the need to meet peak power demands, particularly on very cold days when it must also meet peak heating demands. The Federal Energy Regulatory Commission has just concluded a series of regional conferences to evaluate the significance of the increased reliance of power generators on natural gas; ISO New England Inc., the operator of the New England power grid, called it one of the greatest risks to its power supply.

Too little gas?

Industry has seen the vast new gas resource as an opportunity to make the U.S. a gas exporter, competing in the world energy markets, where gas prices can be as much as six times higher. The U.S. Department of Energy must approve gas exports, however, and it has repeatedly delayed issuing studies it is conducting as it struggles to decide whether there is enough gas to share with the world. There seems little appreciation of the irony that the U.S. complained bitterly about China hoarding “rare earths,” minerals important to the manufacture of renewable energy equipment, but the U.S. is now holding onto its natural gas to the point where domestic production is being shut in because of over-supply and low prices. Likewise, there seems little recognition that the U.S. has likely almost “maxed out” on reducing its own carbon emissions by generating power with gas instead of coal because cheap gas is crowding out carbon-free power resources, while U.S. gas could achieve significant carbon reductions by displacing coal elsewhere in the world. If the necessary approvals are not forthcoming soon, Canada, Australia and other countries that are now just starting to develop their shale gas resources may beat the U.S. to this rich market opportunity.

Is it safe enough?

Federal, state and local regulators are trying to figure out how to safely produce shale gas while protecting the environment. Most notably in the Northeast, which has not seen much oil or gas production for nearly 100 years, the case can be made that there were some early abuses by independent producers anxious to exploit this new resource quickly. The environmental battles will likely continue for years to come, and the losers will be those in industry who fight for too little regulation and the communities who fight for too much regulation. Development will move to places where a reasonable balance is achieved.

Contributing Author

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Mary Anne Sullivan

Mary Anne Sullivan is the practice group leader for Hogan Lovells’ energy regulatory practice and a former general counsel of the U.S. Department of...

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