Assessing%20Risks/Challenges%20in%20Energy%20Cooperation

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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
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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.
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The Evolution of the Energy Security Risk Focus
in Northeast Asia
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.
Cost of Energy
Impact on Economic Efficiency
Price Stability Efficient fuel type adaptability
Geo-political Risk
Freedom of Navigation Security of Physical Supply
1970s
1990s
2000s
Time
main focus
risk management outcome
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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.

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Challenges for cooperation

• Infrastructure policy
• small group cooperation and preferences
• environmental parameters
• government agreements

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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

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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!

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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

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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

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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

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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

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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