Assessing Risks/Challenges in Energy Cooperation

Christopher Findlay

Asia Pacific School of Economics & Management

The Australian National University

Presented to the Korea Energy Economics Institute,

18 October, 2002, Seoul, Korea

Main Propositions• The efficiency of local production and

consumption is central to achieving stable and secure energy supply.

• Domestic deregulation of energy related infrastructure is central to energy security by enabling pro-market structural adjustment.

• Regional cooperation needs to be contestable to achieve global best practice in energy through the contribution of foreign capital, innovation and entrepreneurship.

A more detailed discussion of the issues in this presentation are set out in a Background Paper.

The Evolution of the Energy Security Risk Focus in Northeast Asia

Geo-political Risk

Freedom of NavigationSecurity of Physical Supply

Time= main focus = risk management & outcome

Impa

ct o

n E

cono

mic

Eff

icie

ncy

1970s 1990s 2000s

Cost of Energy

Price StabilityEfficient fuel type

adaptability

Economic Security

Develop geographic proximate resources.Emphasise regional

cooperation.Pro-market regulatory

regime in home markets.Promote foreign capital,

technology & entrepreneurship.

Mitigate environmental risk & potential Kyoto

Protocol sanctions.

Key Messages on the Evolution of Energy Security Risk

• Economies gain from measures that assist with the efficient absorption of world price instability.

• This can be achieved through a thoughtful and carefully designed pro-competitive regulatory regime.

……that will achieve allocative efficiency in the short term (ie decision making based on prices which reflect costs at the margin) and will support the necessary investment to underpin new competition and technology across the energy supply chain.

These are critical elements of an enduring solution to the lack of energy security.

Challenges for cooperation

• Infrastructure policy

• small group cooperation and preferences

• environmental parameters

• government agreements

Infrastructure policy

• Domestic– debate on price now vs investment later

• investment in critical

• Cross border– same challenges arise in a more difficult setting

• cooperation at government level required– value of looking at some models

» including within countries, eg Australia

Small group arrangements

• Preferential structures– risk of locking-in inefficient solutions

• imposing costs on downstream users

• value of openness and competition– including in provision of services/technology not just

resources

– are there any bargaining gains from promoting local supplies?

• Let the market decide - the “premium” provides the incentive!

Environment

• Now a key element of decision making in energy policy

• Complication for cooperation is when participants or potential participants have adopted different positions– eg on Kyoto

• opportunities may be lost/risk of sanctions applied

• positions need to be reviewed and reevaluated

Government agreements

• Reduce risks in projects by making credible commitments to each other on policy

• Or provide other mechanisms for shifting that risk (development bank models)– and in Northeast Asian context the two-way links with

security may demand more participation by governments than in other regions

– issue then is making explicit the burden and meeting it efficiently

Private sector

• Value of deregulation in domestic markets and private participation in domestic and cross border projects– imposes a test on commercial grounds (the project

finance model)

– and constrains ability to pass on costs of inefficient forms of cooperation

Value of a dialogue

• Agenda items – infrastructure policy (at home and across borders),

environment/Kyoto, how to apply the principles of open regionalism

• might also include – design of tax on energy projects

– research priorities

• Value of interaction not only by governments but also the private sector– eg on policy priorities and contract design

Value of a dialogue

• Consistent with the open regionalism and contestability principles– a Northeast Asian dialogue within a larger

grouping that includes other major suppliers• Australia, Southeast Asia

– the data shows they continue to be major suppliers to the region