Energy Ministers of the G7 recently signed a joint statement in Rome on energy security
The fundamental principle they subscribed to is that energy security is a common responsibility. One country’s energy security relies on energy security in neighboring countries and on coordinated solutions to overcome weaknesses. However, the foundation for a successful collaboration on energy security is a robust policy framework in every single country. To deliver long-term energy security every single country has to provide a balanced policy framework that also includes energy affordability, energy access and environmental sustainability.
The World Energy Council calls this balancing approach the “Energy Trilemma” and it is clear that much work remains to be done at national level when it comes to balancing the Energy Trilemma and delivering on the energy security goal.
The ongoing energy infrastructure expansion, renewal, modernization and transition require every single country to mobilize large amounts of capital. However, political and regulatory risk is the major factor that prevents the mobilization of the capital required. Balanced policy frameworks in terms of energy security, energy equity and environmental sustainability are the best guarantee to avoid sudden and dramatic policy changes – ‘political risk’ – and therefore a condition for the mobilization of the required capital. Ultimately, a good Energy Trilemma balance is a strong basis for prosperity and competitiveness of individual countries.
While the specific context requires that every country finds its individual solution to the best Trilemma balance it is clear that many energy challenges have their most effective solutions in collaboration that goes beyond borders. The three guiding questions that should drive international cooperation are: First, what are fundamental energy related objectives that can only be achieved through international cooperation? Second, what creates energy insecurity that needs international fixing? And third, how to most effectively share uneven access to resources to the benefit of all involved.
WEC’s annual assessment of the issues that keep energy leaders most awake at night, the World Energy Issues Monitor, identifies that CO2 price uncertainty (in the absence of an international climate framework) has for many years been the number one issue keeping political risk high and investment levels below the required levels. Further critical issues include market distortions created through subsidies and trade barriers (including for green goods and services) as well as outdated market design, which often lead to unintended consequences and inefficiency or even market failure. Electricity markets lack incentives for backup capacity or storage; gas storage similarly suffers from a lack of incentives; and current CO2 markets fail to deliver a signal that mitigates emissions.
Opportunities for the storage of oil, gas and electricity are unevenly split as are resources themselves. This makes international collaboration and regional integration in terms of infrastructure and markets critical. The International Energy Agency (IEA) institutionalizes the joint approach among OECD countries regarding the strategic petroleum reserves (SPR). Regional organizations promote the complex objective of cross-border infrastructure integration in all regions, generally with slow progress only. The UNFCCC and UN SE4All face the most challenging objectives, which can only be achieved through international cooperation: achieve universal access to modern energy services and avoid climate destabilization.
Building on shared values
With these issues in mind, the real challenge when it comes to international collaboration are shared values and principles on our future climate framework, universal access, trade rules, subsidies, market design as well as burden sharing and coordinated RD&D in system critical components such as electric storage and carbon capture and storage (CCS). Clearly, all of these issues urgently need greater international cooperation and progress than what we have observed over the past two decades. We must keep ambitions high for COP21 next year in Paris. The UN SE4All process has generated new dynamics in the international understanding that energy access is critical for the entire development agenda – yet, the issue must now move from the heart to the feet. On the trade side, regional trade platforms must pick up the issues where WTO progress is slow and ensure that green goods and services are not prevented from reaching their markets due to high tariffs and other trade barriers. Low tariffs can unlock the use of new technologies at lowest possible prices and support the energy transition. Lastly, the German Energiewende has certainly in Europe emphasized the need for greater collaboration on joint electricity market design, which also affects the system critical role of natural gas.
It is important to highlight that the best foundation for collaboration in these areas, again, is strong and Trilemma-balanced national policies. This is specifically true for an international climate agreement: there can be no effective international climate framework in the absence of strong and balanced national energy policy frameworks. Well-functioning and balanced national energy policy frameworks are the only viable enforcement mechanism for an international climate agreement.
Bismarck said that politics is the art of the possible. In Rome the G7 energy ministers defined some specific areas for intervention: diversification of energy fuels, sources and routes; encouragement of indigenous sources of energy supply; enhancing energy efficiency; promoting sustainable energy technologies and infrastructure modernization. These are pragmatic steps that can support the Trilemma aspirations. However, the objectives agreed by the G7 energy ministers miss out on the more fundamental and difficult issues that we cannot afford to leave unsolved.
Are we heading for a catastrophe?
Pragmatism is not always the best recipe to avoid catastrophes. The issues at hand are critical for the global prosperity and require the full support of world leaders. Energy is the key to solving the poverty and climate challenges and the window of opportunity is rapidly closing. We know the implications of non-action. We understand what these mean to our children. They will look back in a few decades and judge the leaders of this generation on actions taken or delayed now. While energy is not on the formal agenda in Australia the G20 has a unique opportunity to acknowledge the need for action, identify the areas for intervention and commit to support the existing institutions to achieve the objectives upon which our future prosperity depends.