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    Global Energy Governance: Meeting The Challenge Of The Energy Transition

Summary

Policymakers worldwide face the Herculean task of making the energy system more sustainable and climate friendly. While the world has seen other energy transitions, this one is different. In the past the world switched from one energy source (wood, coal, oil, electricity) to another, and the fuel switch was driven by major inventions (steam engine, combustion engine, light bulb).

by: Kirsten Westphal, Oxford Institute For Energy Studies (OIES)

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Global Energy Governance: Meeting The Challenge Of The Energy Transition

These transitions happened organically, reflecting technological life and innovation cycles and without too much concern about lock-in effects. This time, a whole range of new, climate-friendly energy sources and applications must be deployed, and this must happen rapidly.

Past energy transitions brought about profound systemic changes beyond the energy system—affecting economic and financial structures, societies, and cultures, and even shaping states’ political organization. Learning from these past experiences can help us to grasp the magnitude of the transformation that is ahead of us now.

The Paris Agreement and subsequent annual climate change conferences by the COP and UN FCCC reports have highlighted the urgency of climate change mitigation. This time the energy transition has to take place in a rapid and rigorous manner. Article 2.1 of the Paris Agreement stipulates that nationally determined contributions should be formulated in line with the goal of keeping global warming to less than 2°C over pre-industrial levels, preferably no more than 1.5°C. The Paris Agreement establishes a bottom-up governance process to achieve the climate target.

Besides climate change mitigation, there is the broader goal of sustainability and respecting planetary boundaries. Sustainable Development Goal 7 aims to provide ‘affordable and clean energy’ by 2030 for a population that is expected to reach 8.5 billion by then (United Nations, The 17 Goals). The goal of sustainable growth has grown more acute, given the socio-economic consequences of the COVID-19 pandemic and the world’s search for blueprints for a better recovery. The EU’s Next Generation recovery programme of €750 billion reflects a political understanding that the huge public expenditure should lay the foundation for better living conditions for future generations.

The energy transition encompasses incremental changes (e.g. in energy efficiency), structural ruptures (e.g. those created by the coal exit), and systemic shifts (e.g. towards electrification, digitization and hydrogen). At the same time, the security of fossil fuel supplies has to be ensured during the transition without perpetuating the existing energy system. Phasing-out and decommissioning challenge the system’s robustness and functioning.

The energy transition also has to take place at all levels and stages of the energy production chain, from producers to end users. Yet its pathways look very different across the globe in terms of starting and end points, speed, and components. Transitions imply uncertainty and unpredictability, as they profoundly alter the supply-and-demand balance in incumbent markets, affect business and financial models, and change the political economy of energy.

Neither the energy transition nor energy governance start from scratch. The challenge is to make use as efficiently, inclusively and effectively as possible of the existing system while fostering the changes needed to navigate current and future changes.

The governance task: Meeting targets, balancing objectives, and reducing uncertainty

At least in the OECD, energy governance has been guided by three principles: security of supply, affordability, and sustainability. Globally, this constituted the trilemma of addressing security of supply, ecological sustainability, and energy justice simultaneously, as the World Energy Council has put it. The overarching target of fighting climate change and addressing sustainability rests on the belief, for good reason, that a sustainable energy system will create synergies between the three goals.

In the past, the balancing of energy policy objectives and priorities has usually taken place at the national or regional level. In international relations, governance approaches have been traditionally directed to energy security, which was defined as national energy security. The international governance organizations (e.g. IEA and OPEC) were built to address supply and demand security. During the 1990s and after the end of the Cold War, human security moved into focus, putting a spotlight on individuals and their living conditions. A new emphasis was placed on the global commons. This meant a paradigm change, and today the guiding principle of sustainable energy security is bridging the gap between the individual and the global commons. These paradigm changes are also reflected in new governance organizations such as IRENA (the International Renewable Energy Agency).

What we are witnessing since the turn of the first decade of this century is a new model of governing through goals and targets. With regard to the task of governance, the targets for the energy transition were declared by the UN’s Sustainable Development Goal 7 for 2030 and set in a binding manner by the Paris Agreement for 2050. The latter has been translated into regional and national commitments to climate neutrality by 2050 (e.g. the EU) or carbon neutrality by 2060 (e.g. China).

This new governance model was a way out of the governance crises that emerged from the inability to steer an energy transition from the top down. It provides states with flexibility, and the hope is that the objectives will be achieved from the bottom up. The national pledges and nationally determined contributions are expected to help achieve the common goal.

What does this mean for the mechanisms developed to achieve the targets? The global climate regime calls for a recurring sequence of reporting, monitoring, and increasing ambitions. This requires translation into specific national and regional energy policy measures, such as emissions-trading schemes, and these may differ markedly from one country or region to the next, creating a high level of uncertainty about the future pathways of different players and their interactions regionally and globally. Even if the endpoint is agreed on, the type, timing, and sequence of measures linked to specific energy carriers and solutions are not. To reduce transaction costs, limit free-riding, and create as big and level playing fields as possible, converging and harmonized instruments have to be developed by ‘coalitions of the willing’.

Finally, energy is obviously a cross-cutting issue that intersects with climate, environmental, economic, and industrial issues. The energy transition is part of an industrial revolution, as are digitalization and artificial intelligence. The challenge to govern the energy transition on these different levels is paramount. The existing energy governance architecture is outdated; it has not kept pace with changing energy pathways and security perceptions, and it is not fit to govern the energy transition in line with Sustainable Development Goal 7 and the Paris Agreement. Energy governance and its targets have gone through a fundamental paradigm shift. The search for effective and legitimate governance measures and instruments is on.

The search for a new governance model

The energy transition will profoundly change the energy world into one where value is no longer generated primarily from a fossil fuel resource such as coal, oil, or gas but rather at the stage of conversion into end-user energy or services (IRENA, 2019; Goldthau et al, 2018). The generation of rents from fossil fuel reserves will be increasingly difficult as the deposits are devalued. Instead, more and more value will be created downstream of the energy supply chain and in services, and profits will be generated by low-carbon technologies. New business and financial models will have to be developed and proven.

The new system will be more electrified, digitized, demand-side-driven, and distributed. Today’s energy system is divided into individual sectors (e.g. electricity, buildings, transport, heating and cooling, and industry), each characterized by a dominant mix of fuels. In the system of the future, the sectors will be coupled by the use of climate-friendly electrons and molecules. As a consequence of the changes in the system, a relocation of production and demand will take place. The parallel trends of supergrids and decentralized energy generation, combined with new battery and blockchain technologies, are increasingly blurring the boundaries of the existing energy system. This is challenging states’ traditional roles and responsibilities. The energy landscape is being remapped, and the process is guided less by geology than by political choice.

Energy regions with centres and peripheries may emerge. Energy efficiency and renewable energy are available and can be harvested anywhere. This is not only a plus for energy security, but also makes it possible to shape new energy communities and connections based on political choice rather than geologic necessity. Connectivity is defined politically, reassessing existing interdependencies, alleviating old sensitivities and vulnerabilities, but also creating new ones. This is particularly true for electricity grids and their different shapes (centralized or decentralized) and sizes (local, national, continental, or transcontinental). ‘Grid communities’ (Scholten, 2018) are a case in point.

Hydrogen is seen as the missing pillar for decarbonization of difficult-to-abate sectors. Hydrogen and its derivatives will be a centrepiece of the new industrial revolution, but will also create new cross-border value chains with knock-on effects on industrial locations, clusters, and production chains. Here too, the emerging trade and production patterns will be determined less by geology and more by common political interests and energy pathways.

Of course, these trends are far from comprehensive. The IEA’s World Energy Outlook 2019 clearly states that there is no silver bullet to stop or mitigate climate change. Rather, a combination of technologies (including energy efficiency, renewables, fuel switching, nuclear energy, and carbon capture) and, not least, behavioural change are needed to put the world on track. In this complex arena, three major challenges stand out:

  1. New energy governance institutions and instruments are needed to manage emerging energy spaces for which the current system is not well suited.
  2. The increasing complexity of governance calls for a ‘networked’ approach. This is necessary both to manage transnational energy flows, in particular where and when critical infrastructures such as electricity and telecommunications intersect, and to deal with corporations, non-governmental organizations, and civil society, whose role is increasing as the political importance of states and territories weakens in the international energy order.
  3. The energy transition brings major uncertainty and risks. In the OECD, the challenge is to guarantee energy security in the current system, without perpetuating it, and at the same time to accelerate incremental structural and systemic changes. The challenges elsewhere, for example in the global South, are very different. Managing the phase-out of the hydrocarbon trade can help to reduce vulnerabilities and hedge risks and costs on both sides of the value chain.

Conclusions

The goals for the energy transition are set. The question remains whether all states will deliver, and whether the contributions will suffice to achieve the goals. Commitment to the goals does not create a level playing field. Instead, it raises questions of the fair distribution of responsibilities, costs, and benefits. Inequalities, fragmentation, and regional heterogeneity may increase.

The next challenge is to develop policies and governance to smooth the transition. The pacing problem and the different measures and ambitions create an environment of competition and rivalry. To reduce costs and share the burden, joint horizonscanning and scenario-planning and early engagement are essential.

New governance institutions and measures have to be developed. A sustainable energy transition requires multiple components, from energy efficiency to renewables, hydrogen, carbon capture and storage, and behavioural change. Most of the components will require tailored governance approaches. The exchange on best practices and most efficient, effective, and legitimate policies should be part of governance. How to design best policies to break path dependencies, achieve catalytic effects, and best connect the different levels?

Multilateral governance has been in crisis. The energy world is likely to become more heterogenous and fragmented, which will result in scattered governance. Regional energy blocs might emerge. The fact that there is no common script for the energy transition and no single solution requires non-hierarchical, polycentric, and polythematic approaches in specific regions, coalitions of the willing focused on specific energy sources, carriers, and technologies.

Two decisive trends will have to be watched closely. First, will regionalization result in competitive regional governance, intensifying rivalry and fragmentation, or will regional governance provide stepping stones to global governance? Second, will the energy transition result in competitive and well-functioning new markets, or will states increasingly control key technologies and value chains?

Finally, energy is no exception to the overall trend of non-governmental and private governance. Even if ‘networked’ governance implies a multi-stakeholder approach, the nation state will remain important in certain functions. Efforts to create a level playing field and a rules-based energy system will help make the transition as smooth as possible. Free-riders and cherry-pickers as well as technological hegemony have to be addressed. The more norm- and paradigm-driven the international governance system is, and the more it strives for justice, inclusiveness, and solidarity, the more evenly costs and benefits will be shared.

This text is a revised and condensed version of M. Pastukhova and K. Westphal (2020), ‘Governing the global energy transformation’, in M. Hafner and S. Tagliapietra, eds., The Geopolitics of the Global Energy Transition, Cham, Switzerland: Springer Nature, 2020.

Originally publishes by the Oxford Institute For Energy Studies.

The statements, opinions and data contained in the content published in Global Gas Perspectives are solely those of the individual authors and contributors and not of the publisher and the editor(s) of Natural Gas World.