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The Need for a Wiser Energy Transition

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Joseph Xu's picture
Water Engineer Jacobs Engineering

An environmental engineer who is interested in the energy transition. Currently working in the water and utilities industry. Has a keen interest in economics, public policy and climate change...

  • Member since 2022
  • 2 items added with 336 views
  • Jul 5, 2022
  • 336 views

In recent years, there have been calls for a just and urgent energy transition to combat climate change. This has led to a flurry of regulatory changes, market interventions and changes in capital allocation from investors pertaining to energy investments. The fact that a large portion of the world’s energy comes from countries with governance challenges and potentially hostile countries is also well established.

Given the urgency, the perceived need to perform within the electoral cycle, and ideological purity (in some circles), the decisions over the past few years have come to bite us in the rear in the forms of surging inflation and systemic vulnerability.

This has resulted in widespread pain, not just for residents of major powers (like the USA) but also for small and middle powers who are largely price takers of commodities and finished goods. In some other countries, the risk of power cuts in the deep of winter loom.

As much as it is tempting to blame politicians (to fuel rage in self-righteousness), such behaviours do not contribute productively to the solutions. Rather, we should approach this with a spirit of humility, acknowledging that even in the best situations, it is challenging to forecast what the future will bring.

Recent events can teach us a few lessons that can be applied across a range of domains

  • National security is primarily the responsibility of governments: Governments may co-op companies into National security efforts but governments would be negligent if they should totally outsource that responsibility. After all, companies will do what is in the best interest of their shareholders: to maximise profit and minimise losses.
  • The risks of transition have to be carefully considered and managed:  A common refrain of people advocating for urgent climate action is that we have to consider the cost of not acting. The direct costs of acting are quite easily identified. Some indirect costs, especially those on communities have been identified in recent years, leading to a call for a just transition. That is to be applauded. However, systemic risks throughout the value chain of critical goods and services are still poorly identified and managed.
  • Concurrent /sequential scenario planning is helpful: As much as there is acknowledgment that scenario planning is a critical tool in identifying how organisations and counties may be exposed to climate physical and transition risks, there appears to be a lack of the use of scenario planning to identify the risks of transition. It is also wise to consider the concurrent occurrence of multiple events to gauge one’s vulnerability. In the case, it is not concurrent events, but rather, a sequence of events without adequate time for the system to recover. Sequential events should also be considered in scenario planning.
  • It is always time to plan for war: There is a saying “In times of peace, plan for war”. I suggest changing this to, “always plan for war” (figuratively at least). The world had just started to emerge from the pandemic-induced supply chain crunch before the expansion of the war in Ukraine. There was barely any time to take a breath! We cannot afford to take our eyes off monitoring and planning for risk events.
  • Do not over-rely on countries with poor governance and unaligned values: Recent history has taught us that increasing or maintaining reliance on countries with poor governance practices and unaligned values serves to enrich them, allowing them to build up their arsenals. Countries should weigh up the short term benefits in terms of profits and lower costs against the longer term threat. Countries with weak institutions (think governments, democratic institutions, press, education etc.) can also prove to be unreliable allies. The risk of relying on such countries should also be managed.
  • Regulatory certainty is important to facilitate transition: The rise of ESG investing, social pressure and  government intervention in the market (in the form of regulation and rhetoric) has affected the deployment of capital. This has caused companies and investors to shy away from investing in traditional energy infrastructure such as refineries in fear that their assets would not be built (due to green tape and social opposition) or be left stranded. Building on the previous point, if the risk identification highlights a critical national security risk from the lack of critical energy infrastructure, governments should work closely with the private sector to enable traditional energy infrastructure to continue operating (and adapted) till such a time when the alternatives are adequately robust and the secondary risks adequately low. The regulatory framework should facilitate this transition.  Should such assets be required in the future, governments and asset owners should work together to develop industry roadmaps to help adapt the assets to future market requirements. Examples include “hybrid solutions” such as making petroleum refineries compatible with the production of sustainable fuels and flex fuel (gas and hydrogen) turbines. Having governments working with private enterprise helps assure investors that they are not fighting the government. Sovereign risks of investments also have to be reduced, ideally by having an apolitical body be in charge of planning and regulating the development and operations of critical assets.
  • The price of resilience and a lack thereof: Risk mitigation may increase costs to companies and consumers. However, this could be seen as insurance premiums, which will shield consumers and shareholders from extreme cost shocks when risk events occur. Government leadership is critical in communicating the rationale and obtaining the buy in from their stakeholders.
  • Rethinking the fungibility of commodities: Commodities such as oil, gas and minerals are traded internationally (as long as the transport infrastructure is there). However, surges in global commodity prices have led to high local commodity prices and shortages (and pain for local customers). Export controls and local reservation of these commodities have been implemented as reactive measures during times of extreme shortage or prices. These introduce sovereign risk and disrupt fulfilment of contracts.

Governments/regulators may consider including local reservation of commodities as part of the extraction licences. They may also consider having the locally reserved commodity trade as a different good/market from the international market. This allows local industries and customers to be shielded from the wild fluctuations in global commodity prices (and hopefully from the paws of speculators).

  • Less grandstanding and more cooperation required: The challenges of climate change and national security are too big for one group to solve. Pitting parties against each other in hope of scoring political points is counterproductive: no one has a monopoly on ideas and no one has the ability to identify all risks.  This is the time to embrace diversity in perspectives. It is critical that governments take the leadership to reach across the aisle, partner with the private sector, community and NGOs to derive solutions. However, fundamental to cooperation is the need to come to a common understanding of what is “good”. This is a huge challenge in societies that place the interest of individuals or groups over the collective. Being focused on a common goal is critical for national security. Afterall, if a nation is already divided, it does not take a significant external force to cause the country to fall apart. But that is a separate topic…
  • Think carefully before openly making enemies: Virtue signalling based on morals and self-righteousness is cathartic and may appeal to one’s base. However, such actions are not helpful when one has not clearly evaluated systemic risks and effectively mitigated them. It is wiser to address the systemic risks before making enemies (if at all). A more nuanced foreign policy may serve the country better than pounding the pulpit.

These lessons from energy transition are relevant to other cross-boundary challenges. Unfortunately, unless calmer, wiser heads prevail, we are doomed to make the same mistakes over and over again.

Questions for discussion

What other lessons can we learn?

How can we avoid the same costly mistakes? 

How would you apply these lessons in other domains outside energy?

 

About the author: The author comes from the water industry but is generally interested in politics, international relations, #climatechange and economics. He comes from a small Southeast Asian country which is easily rocked by global events.

Note: Specific recent events are alluded to without being specifically identified given the hyper-partisan environment and sensitivities.

#energytransition, #energypolicy, #governance, #ESG, #energyinvestment, #wisdom, #riskmanagement

 

Joseph Xu's picture
Thank Joseph for the Post!
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Matt Chester's picture
Matt Chester on Jul 5, 2022
  • National security is primarily the responsibility of governments: Governments may co-op companies into National security efforts but governments would be negligent if they should totally outsource that responsibility. After all, companies will do what is in the best interest of their shareholders: to maximise profit and minimise losses.

These seems obvious to say, but I think what's perhaps most important to keep in mind in this respect is simply what can fall into the category of national security. We're now seeing how supply chains are critical to national security, for example

Joseph Xu's picture
Joseph Xu on Jul 6, 2022

Thanks for bringing this up Matt.
- Economic security,
- Energy and resource security
are just some components of national security. Supply chains are key to to the both. 

Given that such supply chain issues can affect national security, governments cannot simply leave things to free markets to work things out. If anything, the vulnerabilities we face today can arguably be attributed to market failures (in not taking externalities into account) and/or market distortions/regulations.

In the case of Singapore, which does not have any O&G and has limited renewable energy resources, the government setup the National Energy Transformation Office (NETO) under the energy regulator to plan and coordinate efforts across the Whole-of-Government to transform how energy is produced, transported. This includes transitioning the energy supply chain to cleaner energy sources. This involves working closely with the oil majors and renewable energy players. This assures current players that the rug would not be pulled out from under their feet, which would severely impact Singapore's energy (and thus national) security. This contrasts with the Biden administration's antagonism towards the oil companies.

Michael Keller's picture
Michael Keller on Jul 19, 2022

Seems to me your position assumes that decisions will be based on logic and reason. However, that does not work with religious zealots. Many in the green energy camp view global warming as catastrophic threat to the planet, with that conclusion based on essentially a religious belief. Such positions are used to justify any and all actions in pursuit of the purity of beliefs.

So how do you deal with those who approach solving problems from self serving extremist positions? Logic and reason are unhelpful.

At this point, I disagree with not blaming politicians. The offending extremist political class needs to be voted out of office and replaced by those who honestly seek balanced solutions. In the U.S. that type of change typically occurs after massive financial damage is inflicted on the poor and middle class who will then vote the extremists out of office.  Looks to me that we are on that path. At least in the U.S. we can vote the elitists out of office.

Paul Korzeniowski's picture
Paul Korzeniowski on Aug 1, 2022

Less grandstanding and more cooperation required:

Very true. Unfortunately, too much of it goes on, mainly to serve the business interests of the involved parties rather than he country itself. That along with the archaic local regulatory process makes it difficult to make the changes to bring energy production up to date.  

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