Seven priorities for global energy governance
Energy Ministers of the G7 recently signed a joint statement on energy security. The fundamental principle they subscribed to was that energy security is a common responsibility. One country’s energy security relies on energy security in neighbouring countries and on coordinated solutions to overcome weaknesses. However, the foundation for a successful international collaboration on energy security or greenhouse gas emissions for that matter must be built on robust and importantly on balanced policy frameworks in every partner country.
It is estimated that 48 Trillion US$, or 60 percent of a world GDP, will need to be invested in energy infrastructure over the next two decades. This represents roughly half of the global capital expenditures every single year. The ongoing energy infrastructure expansion, renewal, modernisation and transition require every single country to mobilize large amounts of capital. However, political and regulatory risk is considered the major factor preventing the mobilisation 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 mobilisation of the required capital and delivery of long term energy security. The World Energy Council calls this approach – balancing the “Energy Trilemma”. This framework ultimately promotes prosperity and competitiveness of individual countries. Yet, the Council’s annual Energy Trilemma Index illustrates that much work remains to be done at national level as most of the 129 rated countries struggle with the Trilemma balance.
What keeps Energy Leaders most awake at night?
The energy risks & challenges landscape is effectively illustrated by Council’s 2015 World Energy Issues Monitor. This work shows that energy leaders from over 80 countries remain most concerned about energy and commodity price volatility, climate framework uncertainty and also the fear from market distortions through stop & go energy subsidies and trade barriers (tariff and non-tariff barriers including for environmental goods and services) as well as outdated market design. These issues often lead to unintended consequences, inefficiency or even market failure, keeping political risk high and investment levels below the required levels.
Seven priority areas for international collaboration & governance in energy
While the specific national context requires that every country finds its individual solution to the best Trilemma balance it is clear that many energy challenges will have their most effective solutions in cross-border collaboration. The three guiding questions that should drive international cooperation in energy are:
1.Which are the fundamental energy related prosperity objectives that can only be achieved through international cooperation?
2.Which existing market distortions or failures prevent effective solutions to (1.) and require internationally coordinated fixing?
3.Which strategic technology areas support (1.) and deserve priority status for internationally coordinated R&D?
With these challenges in mind international collaboration and governance efforts should be focused on the following seven priority areas:
•efficient resource sharing through regional integration of infrastructure
•universal access through promotion of adequate policies, skills development, innovative business models and financing schemes
•mitigation of CO2 emissions through an international climate framework agreement and burden sharing
•sun-setting of distorting fossil fuel subsidies that discourage energy efficiency
•sharing of green technologies and solutions through elimination of tariff and non-tariff barriers
•revision and regional alignment of outdated market design in electricity and natural gas
•coordinated RD&D in system critical components with a focus on electric storage and carbon capture / utilisation and storage (CCUS)
Building on existing institutions
Clearly, all of these issues urgently need greater international cooperation and further progress than has been observed over the past two decades. The Council is promoting and advancing these issues through our own studies, programs and focused Energy Leaders dialogue. However in the context of increasing geopolitical tensions the path to progress has become stonier. Many intergovernmental organisations and initiatives struggle to make meaningful progress with current efforts often focused on merely avoiding back-tracking. It is often easy to criticise existing intergovernmental institutions for lack of progress yet creating effective and relevant new institutions may be even more complex and suffer from a lack of alignment and focus from key stakeholders. The real challenge is to empower existing institutions to become stronger and adapt to the changing energy landscape.
The International Energy Agency (IEA) for example institutionalises the joint approach among the Organisation for Economic Co-operation and Development (OECD) member countries regarding the strategic petroleum reserves (SPR). However, having China and India as full members will be critical for the future credibility of the effort. Regional organisations promote the complex objective of cross-border infrastructure integration in all regions, generally with only limited or slow progress but this is an area where real progress can be made. The United Nations Framework Convention on Climate Change (UNFCCC) and the United Nations Sustainable Energy for All initiative (SE4All) face the most challenging objectives. These can only be achieved through stronger international cooperation to deliver universal access to modern energy services and avoid climate destabilisation.
On the trade side, more than the currently involved 17 countries need to join and put serious effort behind the environmental goods negotiations that are expected to present findings later this year at the WTO ministerial in Nairobi; further, regional trade platforms must pick up where the World Trade Organisation’s (WTO) progress is slow and ensure that environmental 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 green technologies at lowest possible prices which can facilitate and accelerate the unstoppable 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 clear that there can be no effective implementation of international climate framework or substantive movement on many of these issues in the absence of strong and balanced national energy policy frameworks. Setting up an international climate framework without nationally well-structured balanced national energy policy frameworks or “trilemma frameworks” is about as meaningful as winding up a clock without clockwork in place.
Can we use the window of opportunity?
As we look to the future we must keep ambitions high for the 21st Conference of the Parties (COP21) meeting later this year in Paris. The UN’s SE4All process has generated new dynamics in the international understanding, correctly identifying that energy access is critical for the entire development agenda. Yet, the issue must now move from the heart to the feet and this is where the energy sector has a clear role to play in supporting this agenda.
2015 provides ample opportunities for existing global governance institutions and processes to demonstrate that they are mastering the challenges they were set up to address. Delivery of a clear, unambiguous and equitable international climate agreement in Paris at COP 21, the definition of energy access as a Sustainable Development Goal and delivery of an implementable roadmap for universal energy access are vital. Another key opportunity this year is the WTO Nairobi conclusion on tariff limitations for environmental goods. It is our all moral responsibility to use these opportunities and actively support these institutions and initiatives.