As world energy sources transition, ‘energy security’ must be part of the equation

As the world embarks on the transition from high-carbon forms of energy to lower carbon dioxide-emitting systems, a key issue that must be addressed – but may well be lacking thus far in terms of policymakers’ interest – is energy security. Put another way, in the past half century many countries have invested significant time and effort into reducing oil supply vulnerability, but similar security-related considerations for new forms of energy have yet to receive comparable analysis.

One energy thought-leader who has been studying this issue is Mark Finley, Fellow in Energy and Global Oil at Rice University’s Baker Institute for Public Policy Center for Energy Studies in Houston, Texas. In late 2019, he wrote, ‘In addition to geopolitical risk, the reliability of energy supplies has recently been threatened by factors ranging from weather events (the frequency and intensity of which are exacerbated by climate change) to terrorist activities, industrial accidents, and cyberattacks’.¹ In the early months of 2020, he added the impacts of the global COVID-19 pandemic to his list.² Simultaneously he has said that renewable energy is rapidly increasing – and will continue to do so – as a percentage of total world energy consumption.³

All of this has led Finley to assert that ‘Policymakers in the US and around the world are grappling with how to understand the security implications of an energy system in transition – and if they aren’t, they should be’, adding, ‘New energy forms can help reduce vulnerability to oil supply outages, but they also have the potential to introduce new vulnerabilities and risks’. ⁴

Finley is particularly well suited to think about the future of energy based on his 35-year professional experience working at the intersections of economics, energy and public policy. Before becoming part of the Baker Institute, named for former US Secretary of State James Baker, Finley was BP’s senior US economist. During this time the BP Statistical Review of World Energy was under his direction.

Using a ‘three-part’ framework

As a young energy analyst, Finley adopted an approach to evaluating energy security based on three components: vulnerability, risk and offsets. Over the years, he has applied this ‘framework’ to energy security in the context of oil security. Now he believes that the same framework can be used in the context of ‘an energy system in transition – in particular, a transition away from coal and oil toward natural gas and renewables in part due to climate change’.⁵

Finley defines the components in this manner:

• Vulnerability is the exposure of an energy system to a shock: ‘This could include the size of the energy input to the economy (in absolute terms and especially in financial value), the degree of substitutability, and the concentration in key sectors, such as the importance of oil in transport’.⁶

• Risk takes account of the possibility of a shock: ‘Considerations must include not only the probability of a disruption but also an assessment of the potential magnitude and duration’.⁷

• Offsets assess the timeline and capacity to react to a shock: ‘This could include the ability to increase production elsewhere, draw supply from inventories, switch to other energy sources, and/or reduce demand by conserving energy’.⁸

Applying the framework to the forthcoming energy system

Assessing an energy future is extremely difficult. However, Finley begins his consideration of the transition by assuming that the share of energy provided by oil will decline while the share derived from renewable energy and gas will increase.⁹ Despite the lower-carbon footprint of renewables and natural gas, vulnerabilities still need to be considered.

With respect to vulnerabilities, while it is true that almost all renewable energy is produced domestically – a significant energy security benefit – it needs to be considered that materials needed to build out the renewables infrastructure (eg, wind turbines, solar arrays, etc) are concentrated in a relatively few countries. For example, important components in the renewables infrastructure such as rare earth minerals and cobalt are concentrated in a few countries (China and the Democratic Republic of Congo, respectively). Additionally, key materials needed for batteries to store renewable energy will require more mining.¹⁰

Moreover, an energy future that involves additional use of natural gas is not without risk. For instance, the US has experienced significant supply disruptions associated with hurricanes, and geopolitical disputes can also impact the supply of natural gas.¹¹ On the other hand, power grids that use ‘smart software’ that allows a more connected system might be a target for cyberattacks.¹²

Finally, in terms of offsets, ‘international trade of natural gas and critical metals needed for renewables and batteries is growing, but global markets are much less deep and liquid compared to oil’. Furthermore, while there are large US inventories of natural gas, there is no ‘government stockpile’ and ‘electricity – unlike oil or gas – cannot currently be stored economically at scale; the future will depend on the economic and technical development of large-scale, grid-connected batteries’.¹³

In summary, Finley believes that with the world’s energy future in transition, more attention must be placed on collecting data ‘on the relevant indicators for new energy forms’, adding ‘While the application of this framework to the new energy system … is by no means definitive, it may serve as a useful starter to the conversation’.¹⁴

When looking at which countries or governments are handling the transition most effectively, Finley points to the European Union. ‘If you think about reducing carbon dioxide emissions in particular, you could say that the EU – in a global context – has done a pretty good job of diversifying into lower carbon sources’, he has said.¹⁵ He also has noted that the United States has achieved the largest absolute reduction in carbon emissions, partly because of the development of renewables but mostly because of fuel switching from coal to natural gas for use in power plants.¹⁶ Moreover, Finley notes that many major oil and gas companies are aware that the ground under their feet, in a manner of speaking, is shifting. European companies in particular are looking towards a reduced carbon future. ‘But at the end of the day, the issue of reducing carbon emissions is a policy question: how do you price the externality of carbon. How you do this is a classic externality question and only governments can answer these issues’, Finley says.¹⁷

Major new developments

From time to time, I will share some of the major new developments that the journal is following. We encourage you to share developments from your part of the world that I can then share with our readers. The following have caught my attention recently.

One of the major news events that caught my attention was an editorial in The Lancet, the UK-based medical journal that is one of the world’s most prestigious publications of its kind. In a late July 2020 editorial titled ‘No More Normal’, The Lancet called attention to the ‘fragility in our systems’ including the health care and food systems. It also underscored the need for climate policy to be moved up the list of priorities. ‘Pandemics, climate disasters, and financial meltdowns might feel exceptional, but they are not unexpected. We ought to recalibrate our priorities towards resilience to have a chance of coping with them’.¹⁸ The editorial went on to emphasise the

need to focus on sustainability for health, society, and the planet. The idea of a Green New Deal, which links the climate agenda to economic justice and redistribution, and a green and healthy recovery from the pandemic, have been gaining political support, at least in rhetoric, but they will only scratch the surface of what is needed. The opportunity to sharply accelerate climate policy must be embraced.¹⁹

Meanwhile, the threat of economic shocks associated with climate change was emphasised in a first-of-its-kind September 2020 report issued by the US Commodity Futures Trading Commission (CTFC)’s Climate-Related Market Risk Subcommittee of the Market Risk Advisory Committee.²⁰ The report, which was described by one prominent US energy publication as a ‘watershed document’,²¹ stated, ‘Climate change poses a major risk to the stability of the US financial system and to its ability to sustain the American economy’, adding, ‘Climate change is already impacting or is anticipated to impact nearly every facet of the economy including infrastructure, agriculture, residential and commercial property, as well as human health and labor productivity’.²² Several elements of the report were especially noteworthy. First, the work of the task force was requested by all five CFTC commissioners, each of whom President Donald Trump appointed.²³ Second, the subcommittee’s conclusions were unanimously agreed to by the individual members including representatives from BP, ConocoPhillips and the Nature Conversancy.²⁴ Among other observations, the report noted that the US is not a member of various international groups that are addressing climate risk, including the Central Banks and Supervisors Network for Greening the Financial System, the Sustainable Insurance Forum or the Coalition of Finance Ministers for Climate Action.²⁵ Bob Litterman, New York-based Kepos Capital founding partner and subcommittee chair, said, ‘We have to slam on the brakes [to incentives that don’t consider climate change], and that’s what this report says in no uncertain terms’.²⁶

Finally, an article in late August 2020, published in The New York Times, ran under the headline ‘Europe’s Big Oil Companies Are Turning Electric’.²⁷ The article noted that in late July Royal Dutch Shell won a tender to construct a major wind farm off the coast of the Netherlands in the North Sea, while last year France’s Total announced plans to develop a wind farm near Scotland and solar energy in Spain.²⁸ As reported in the article, ‘For some executives, the sudden plunge in demand for oil caused by the pandemic – and the accompanying collapse in earnings – is another warning that unless they change the composition of their businesses, they risk being dinosaurs headed for extinction’.²⁹

In this issue

We begin this issue with two articles about African electricity issues. The first article is ‘Power market coupling: towards harmonised electricity policies in the East African Community’ by Geoffrey A Mabea and Pontian N Okoli. It is followed by an article about Nigeria, titled ‘The Nigerian electricity regulatory framework: hotspots and challenges for off-grid renewable electricity development’, by Ngozi Chinwa Ole. Before leaving Africa, we consider groundwater law in South Africa in ‘Critical perspectives on South Africa’s groundwater law: established practice and the novel concept of public trusteeship’, by Germarié Viljoen.

From Africa, we move to the European Union with this issue’s fourth article titled ‘Congestion displacement in European electricity systems – finally getting a grip on it? Revised safeguards in the Clean Energy Package and the European network codes’, by Julius Rumpf. From the EU it is on to Iran with ‘Exploration, development and production of Iran’s fields and reservoirs through the Iran Petroleum Contract (IPC)’, by Elaheh Ghorbani. From Iran we transition to a more global focus with ‘Judgements: the increasing value of environmental litigation and judicial practice in strengthening the environmental rule of law’, by Cameron Diver.

These articles are followed by a timely and important commentary, ‘Rethinking international taxation and energy policy post COVID-19 and the financial crisis for developing counties’, by Raphael J Heffron and Jack Sheehan. This issue concludes with a book review: Canadian Law of Mining, 2^nd edition, authored by Barry Barton and reviewed by Allan Ingelson.

The Willoughby Prize for 2019

Each year the Willoughby Prize is awarded to the author or authors of a Journal of Energy & Natural Resources Law article of outstanding merit. The winners of the 2019 Willoughby Prize are Scot W Anderson, Korey Christensen and Julia LaManna, authors of ‘The development of natural resources in outer space,’ which was published in the May 2019 issue. The authors are attorneys at the Denver, USA, office of Hogan Lovells. Mr Anderson is the former global head of the firm’s Energy and Natural Resources group and is currently the Vice President of the Rocky Mountain Mineral Law Foundation. Judith Aldersey-Williams, a member of the Willoughby Prize trustees, said the ‘subject matter was novel, its treatment clear and comprehensive, and its discussion of the potential of international law to extend to space was fascinating’.

The Willoughby Prize is awarded in memory of Geoffrey Willoughby (1936–1989), a leader in the development of UK energy law. Over the years, the Willoughby Prize has been awarded to a continuing series of top-flight articles. The Journal provides its sincere appreciation to the Willoughby Prize Committee for making this prestigious award possible.

Notes

1 Mark Finley, ‘Energy Security and the Energy Transition: A Classic Framework for a New Challenge’, Rice University’s Baker Institute for Public Policy: Report, 25 November 2019, 1 https://www.bakerinstitute.org/media/files/files/844c4e55/bi-report-112519-ces-energytransition.pdf accessed 16 September 2020.

2 Mark Finley, ‘Energy Security, Transition, and Pandemic’ (presentation at the Rocky Mountain Mineral Law Foundation Virtual Annual Institute, 23 July 2020).

3 Ibid.

4 Finley, ‘Energy Security and the Energy Transition’ (n 1), 1.

5 Ibid, 2.

6 Ibid.

7 Ibid.

8 Ibid.

9 Ibid, 5.

10 Ibid, 6.

11 Ibid, 7.

12 Ibid.

13 Ibid, 8.

14 Ibid.

15 Author’s interview with Mark Finley, 28 August 2020.

16 Ibid.

17 Ibid.

18 ‘No More Normal’, The Lancet (18 July 2020) https://www.thelancet.com/journals/lancet/article/PIIS0140-6736(20)31591-9/fulltext accessed 16 September 2020.

19 Ibid.

20 Commodity Futures Trading Commission, ‘Managing Climate Risk in the US Financial System’ (9 September 2020) https://www.cftc.gov/sites/default/files/2020-09/9-9-20%20Report%20of%20the%20Subcommittee%20on%20Climate-Related%20Market%20Risk%20-%20Managing%20Climate%20Risk%20in%20the%20U.S.%20Financial%20System%20for%20posting.pdf accessed 16 September 2020.

21 Avery Ellfeldt, ‘“Slam the Brakes”: Regulator Flags Climate Risk in Markets’, E&E News (10 September 2020) https://www.eenews.net/climatewire/2020/09/10/stories/1063713349 accessed 16 September 2020.

22 Commodity Futures Trading Commission (n 20), i.

23 Ellfeldt (n 21).

24 Ibid.

25 Commodity Futures Trading Commission (n 20) vi.

26 Ellfeldt (n 21).

27 Stanley Reed, ‘Europe’s Big Oil Companies Are Turning Electric’, The New York Times (17 August 2020) https://www.nytimes.com/2020/08/17/business/energy-environment/oil-companies-europe-electric.html accessed 16 September 2020.

28 Ibid.

29 Ibid.