Nav­i­gat­ing the en­ergy rev­o­lu­tion

Financial Mirror (Cyprus) - - FRONT PAGE -

For decades, the in­ter­na­tional en­ergy land­scape has been rel­a­tively sta­ble, with pro­duc­ers like Saudi Ara­bia, Iran, and Al­ge­ria sell­ing oil and gas to con­sumers in the United States and Europe. In a few years, how­ever, the en­ergy ter­rain is likely to be un­recog­nis­able, as dra­matic tech­no­log­i­cal, eco­nomic, and geopo­lit­i­cal changes re­shape com­mer­cial re­la­tion­ships world­wide.

What is needed is a new gov­er­nance struc­ture, one that moves be­yond tra­di­tional bi­lat­eral re­la­tion­ships be­tween pro­duc­ers and con­sumers. In a rapidly evolv­ing world, guar­an­tee­ing en­ergy se­cu­rity will re­quire the care­ful man­age­ment of mul­ti­ple, in­ter­lock­ing re­la­tion­ships. Only an in­clu­sive in­ter­na­tional fo­rum, in which com­plex ideas can be shared and de­bated, is likely to prove ad­e­quate to the task of nav­i­gat­ing the new era of en­ergy use, pro­duc­tion, and con­sump­tion.

The on­go­ing changes are pro­found. In many en­er­gy­ex­port­ing coun­tries, do­mes­tic con­sump­tion is ris­ing steeply. His­tor­i­cally, th­ese coun­tries have treated en­ergy as a cheap re­source. To­day, they are in­creas­ingly tak­ing steps to re­move sub­si­dies, in­tro­duce mar­ket prices, and in­crease ef­fi­ciency – poli­cies that are more typ­i­cally as­so­ci­ated with en­er­gy­im­port­ing coun­tries. BP pre­dicts that in the Mid­dle East, with its ex­ten­sive fos­sil-fuel re­serves, pri­mary en­ergy con­sump­tion will grow 77% by 2035.

At the same time, some tra­di­tional im­porters are tap­ping new sources of en­ergy and be­com­ing pro­duc­ers, chang­ing the di­rec­tion of en­ergy flows. The shale-en­ergy rev­o­lu­tion in the US is per­haps the best-known ex­am­ple of this shift, but it is not the only one.

The rapidly grow­ing re­new­able-en­ergy industry is an­other fac­tor dis­rupt­ing tra­di­tional re­la­tion­ships be­tween pro­duc­ers and con­sumers. In the first half of 2014, 13% of elec­tric­ity in Ger­many came from wind en­ergy alone. Den­mark, a coun­try that in the 1970s was al­most en­tirely de­pen­dent on en­ergy im­ports, is now the Euro­pean Union’s only net en­ergy ex­porter, of­ten gen­er­at­ing more than 100% of its elec­tric­ity needs from wind power.

Mean­while, ad­vances in en­ergy ef­fi­ciency are also re­duc­ing de­mand for tra­di­tional pro­duc­ers’ ex­ports. Highly ef­fi­cient build­ings of­ten can be eas­ily heated with lo­cally pro­duced re­new­able elec­tric­ity and sup­plied with hot wa­ter from so­lar col­lec­tors. The in­tro­duc­tion of the Near Zero En­ergy Build­ings stan­dard for new build­ings in the EU is set to re­duce dras­ti­cally de­pen­dence on gas for heat­ing.

The risk is that th­ese rapid changes will com­bine with desta­bil­is­ing geopol­i­tics to trig­ger a re­treat from global en­ergy mar­kets. If coun­tries be­gan to de­fine en­ergy se­cu­rity as en­ergy in­de­pen­dence and try to sup­ply all their own needs, the re­sult could be ex­pen­sive over­ca­pac­ity, mas­sive price dis­tor­tions, slower tech­no­log­i­cal progress, and weaker eco­nomic growth.

With the need to main­tain trust in the com­pet­i­tive, po­lit­i­cally charged, and of­ten un­pre­dictable en­ergy sec­tor both greater than ever and more dif­fi­cult than ever to meet, an in­ter­na­tional fo­rum ded­i­cated to ad­dress­ing con­cerns and eas­ing ten­sions could be a pow­er­ful tool. But it must have the right fo­cus. For ex­am­ple, it should not aim at pro­duc­ing le­gally bind­ing de­ci­sions. Plenty of bod­ies, such as the World Trade Or­gan­i­sa­tion, the En­ergy Char­ter, and the En­ergy Com­mu­nity, al­ready do an ex­cel­lent job of de­vel­op­ing rules or en­forc­ing com­pli­ance in the en­ergy sec­tor.

More­over, though such a body should be in­clu­sive, it need not have global am­bi­tions; it would be im­prac­ti­cal to try to bring ev­ery­body to the ta­ble. And while its founders should take care that it not be led or dom­i­nated by a sin­gle coun­try or bloc of coun­tries, there is no harm if it starts small, with only a few coun­tries, be­fore be­gin­ning to ex­pand.

In­deed, the Euro­pean Com­mis­sion, which is work­ing to­ward cre­at­ing an en­ergy union, is well placed to ini­ti­ate an open di­a­logue with non-EU coun­tries on long-term en­ergy poli­cies. The EU is the largest en­ergy im­porter in the world, and it would be well served to join the dis­cus­sion of its en­ergy strat­egy to a con­ver­sa­tion with the world’s main ex­porters. As the EU re­vises both its en­ergy and for­eign af­fairs poli­cies, it should not miss the chance to in­te­grate an open en­ergy pol­icy di­a­logue into its plan­ning.

In this con­text, one of the com­mis­sion’s tra­di­tional weak­nesses – that for­eign and en­ergy poli­cies are usu­ally de­cided by in­di­vid­ual mem­ber states – could serve as an im­por­tant ad­van­tage. The com­mis­sion will be seen as a fa­cil­i­ta­tor of the dis­cus­sion, rather than a leader or a dom­i­nant player.

Given a proper fo­rum for iron­ing out dis­agree­ments, the rapidly chang­ing en­ergy land­scape could be a source of new pros­per­ity. The al­ter­na­tive is a world at risk of ten­sions and mis­un­der­stand­ings – ones that could eas­ily jump out of the realm of en­ergy pol­icy into in­ter­na­tional re­la­tions and se­cu­rity.

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