Energy policy in context

Although fuel and electricity account for a relatively modest part of national economies and household budgets, energy is absolutely central to everyday life. Almost like the air we breathe, its fundamental importance is such that most are fortunate enough to take it for granted. This is the case at least until the lights go out or the price goes up sharply, reminding us that the mobility, comfort and economic growth to which we are accustomed depend wholly upon the continued supply of low-cost energy. Recognising this, it is not surprising that governments have sought to influence the supply and demand of energy through more or less explicit policies. The shape of those policies has varied over time, sometimes involving direct public intervention and at other times placing more reliance upon 'market forces'.

Energy policy is inevitably embedded in wider politics, and is often ill defined or implicit. It has unstable and permeable boundaries, shaping and being shaped by fiscal policy, foreign policy and other government concerns. Considerations of inflation, employment, the balance of payments, regional development, technological innovation and poverty alleviation have all figured in governments' formal or informal energy policies at different times and to different degrees. Currently, however, the 'energy triangle' (of supply security, market liberalisation and environmental protection) presents the central challenges for policymakers in the industrialised world.

Energy policy embraces diverse objectives and instruments and the mix changes over time. In the second half of the twentieth century, industrialised countries shifted from the public provision of adequate supply to a greater emphasis on competition, market forces and private initiatives. Before the late 1980s energy policy was government-led, embracing public ownership, long-range planning and direct control of markets. But in the last two decades of the twentieth century, governments became less concerned with supply issues, in part because of the apparent abundance of low-cost fossil fuels.

The change in emphasis not only reflected developments in energy markets, but also wider political and economic changes. Major energy projects, both before and after 1980, have reflected and served the overarching political agendas of their day. In the earlier period, energy policy issues were largely perceived to be supply side problems with supply side solutions. This translated into long-term, capital-intensive projects premised on ambitious forecasts of rising demand. In the later period, as energy came to be regarded as 'just another commodity' (DoE, 1982), policies of privatisation and liberalisation became the norm. These were pioneered by the United Kingdom (UK) and Chile but subsequently spread throughout the world.

This embrace of the market coincided with increasing recognition of the environmental damage (and wider 'market failures', to use the economists' term) associated with energy production and consumption. The debate about the sustainability of the modern energy economy began with concerns over nuclear waste, resource depletion and 'acid rain', and has become more urgent over the last 20 years as a result of growing understanding of the nature, causes and consequences of climate change.

At the turn of the twenty-first century, it appeared that the key challenge in energy policy was to reconcile some fundamental market failures in the environmental domain with an increasingly market-driven framework for pricing and investment. Put simply, how could the energy system be made more sustainable at the same time as market forces were prioritising short-term and low-cost solutions? For many the solution was 'more market', meaning the use of mechanisms such as energy taxes and emissions trading to 'internalise' environmental costs and to encourage behavioural change and the adoption of more sustainable technologies. The conventional policy wisdom was to create, extend and adjust markets to rectify the problems identified as market failures.

The market-based approach has triumphed but the context appears to be shifting yet again, this time in ways that may not be so easy to reconcile with liberalisation. The central element of this shift is the re-emergence of energy security as a priority. Crude oil prices increased from an average of US$ 24/barrel in 2001 to US$ 130/barrel in early 2008, driven by steady economic growth in the industrialised world, the rapid industrialisation of India and China, falling production from nations outside the Organisation of Petroleum Exporting Countries (OPEC) and the erosion of spare capacity in the Middle East.

Rising energy demand has focused attention upon the long-term availability of energy resources, and also on the potential for shorter-term use of these resources as a political 'weapon' on the world stage. Oil and gas reserves are increasingly concentrated in countries and regions that are seen as unstable or even hostile (IEA, 2007b). Of course, such concerns may be misplaced and previous estimates of both energy reserves and of energy demand have often been wide of the mark. Moreover, past attempts to use energy as a tool of diplomacy, let alone a weapon, have proved unsustainable. Nevertheless there is an increasing perception of vulnerability, particularly among the governments of the major energy-consuming nations. Not for the first time, energy has become a geopolitical issue, with energy producers seeking to translate their energy power into political influence and major energy users seeking to translate their political power into influence over energy (Yergin, 2006; Hoyos, 2007).

Advocates of market liberalisation see unfettered competition as the best guarantee of market access and secure supplies. This view remains the orthodoxy in almost all energy policymaking institutions (at least officially), and it continues to frame policies and shape financing decisions in both national governments and international agencies. This context is changing, however, and state ownership or control has some strong advocates. A growing number of energy-importing industrialised countries appear wary of losing too much control (McGowan, 2007b), while several exporting nations have challenged the terms on which foreign investors secured energy assets. Governments in the developing world and former socialist states, most notably Russia, have sought to revisit what they considered to be unfair agreements, often renationalis-ing the assets or asserting greater control.

Competition for resources and international power games involving energy are long-standing causes of national insecurities. In the early twenty-first century, energy security fears appear more acute than at any time since the 1970s and are being compounded by fears about the potential effects of climate change. For example, there are growing concerns about water shortages and cross-border conflicts over access to water resources, together with threats to food security and the impact of large-scale migration of populations. Moreover, some policy responses to energy security could exacerbate such problems - most notably in the case of biofuels.

In January 2004, the UK's chief scientist Sir David King identified climate change as 'the most severe problem we are facing today - more serious even than the threat of terrorism' (King, 2004, p. 176). He went on to berate the United States (US) government for doing too little, and questioned the role of the market: 'The Bush Administration's current strategy relies largely on market-based incentives and voluntary actions. The market will certainly be valuable for choosing among mitigation approaches. ... But the market cannot decide that mitigation is necessary, nor can it establish the basic international framework in which all actors can take their place. That requires a political decision based on sound scientific evidence' (King, 2004, p. 177).

In this context of enlarging energy politics, several countries are revising their liberalisation goals and even retreating from market approaches - a process that could accelerate in the future. This is transforming the context in which energy policy is made. More government intervention seems inevitable, but this can take many forms, and the political legitimacy that is required is far from guaranteed. The pathways open to governments are wide enough, but taking real action to deal with the root causes of the problems is fraught with difficulties. It seems inevitable that the ways we harness, buy, sell, transform and use energy are set to change dramatically in coming decades, causing significant economic and institutional disruption and political fall-out. In the coming transition, even well governed and wealthy nations may experience some severe 'energy shocks'.

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