As politics and energy are forever in the headlines, this week we are examining what the main drivers are for creating energy policy.
Over the last century, Western prosperity and industrialisation has been based on the production and refinement uses of hydrocarbons, namely coal, oil, and gas. Now, developing countries, led by China, want a piece of that prosperity.
Energy policy was always about satisfying demand and keeping prices affordable. Western governments increasingly saw markets providing the solution. However, pressures on the free markets now approach us. It was hoped that climate change could be solved with the use of carbon credits, but it can now be argued that is one of the market’s biggest failures. A growing demand due to growth in population in the developing world has added significant pressure on energy.
We now face a ‘trilemma’ of competitiveness, energy security, and sustainability.
Competitiveness was once a realm of corporations, but now, especially in terms of energy, it’s spread to countries as well. China once had cheap energy. It was able to lower its production costs and enjoy double digit economic growth. Now with shale gas and oil production, this benefit has shifted to Mexico and the US.
Which leads us to issues with energy security. Importing energy is costly, causing bills to increase. In Japan’s case, turning off nuclear and importing natural gas has proved to be too costly and nearly crippled their economy.
The last piece of the trilemma, sustainability, relates to using non-fossil fuel based energy, the ‘going green’ of energy, which enhances energy security by producing your own energy rather than importing or using domestic fuel sources. Germany at some periods has 50% of energy from renewables. At what cost to the economy is yet to be seen.
Aside from these three, there is also a fourth potential: politics. Increasingly, energy is being used as a power play. For example, Russia and Iran are taking a more interventionist approach by ordering private companies with production and export. Politics is now using energy to shape foreign policy and the energy markets. In the UK, when politicians discuss their energy plan, it can have devastating effects. For instance, Ed Miliband’s pledge to freeze energy prices caused panic on the stock market, subsequently wiping over 6% off the value of Centrica and SSE’s share price each.
The future of energy policy will largely be dictated on where money is being spent. We are seeing an increase in spending in energy efficiency projects, which will help assist the trilemma. Combining a low-carbon transition to economic growth will lead to healthier economies.