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'The Big View' January 2012 (Part 2)

The power of paradigms: The EU and Global Energy policy

Nick Sitter and Andreas Goldthau, CEU

 The European Union faces a number of challenges that are the direct consequences of dramatic changes in the global energy market. In order to decrease its dependence on other countries for its energy supply and be at the forefront of efforts to combat climate change, the EU has embarked on an ambitious energy transition. But even as it does so, each of the drivers that shape global energy markets is being redefined: markets, policy agendas, geopolitics, and actors. The global setting for energy policy is changing, but the new contours have yet to emerge. At this stage, we can assert with some confidence that the post-Cold War market-liberal paradigm is on its way out, but we can say less about what is replacing it.

Why paradigms matter

In public policy, paradigm changes are important because they constitute changes in the lenses through which we see reality. Not only do they help define the problem, but they also provide indications of where to look for its cause and for possible solutions. This in turn defines and dictates the policy tool box. This point holds for public policy in general, and it holds particularly well for energy policy. The central question is how policy makers think of energy, and in particular of its public and private goods characteristics. This is shaped more by economic thought than by energy markets. In a state centered paradigm, for instance, energy is considered a public good, and energy policies are consequently designed to provide across-the-board coverage of the population; in contrast, once a market paradigm takes over, energy becomes a private good, and policies are centrally designed to make the price mechanism work to facilitate individual consumer choices, to foster competition among providers and to make end users benefit from resulting lower prices. Both ways to think about energy cater for one and the same strategic goal: providing for reliable and affordable energy supply for national security purposes and economic prosperity. But, the ways to get there are fundamentally different.

A shift in paradigm

Global energy policy is going though a paradigm shift. The market-liberal regime of the 1990s and 2000s that replaced the state-dominated post-war regime may now itself be giving way to a new, more fragmented, regime. Politics plays a more significant role both in the EU’s own energy market and in those of its neighbours. Energy security and geopolitics shape energy markets, and cause high price volatility. Oil and gas markets are being decoupled, and price, environment and security of supply questions play out differently in these two sets of markets. Our central point is that these are not merely important changes in the world of energy, but that they amount to a fundamental change in the way energy markets are perceived – a change in paradigm.

Energy is, and has always been, a strategic good for European governments. It is of fundamental importance to the economic life of all industrial nations. The answers to the question of how to secure stable access to energy at acceptable price have reflected a combination of prevailing economic thought and strategic expedience. Since the industrial revolution, executive governance in the energy sector has primarily been a matter of managing energy as a primary fuel. This, in turn, involves managing state – industry relations both at home and at the international stage. At the domestic level, it involves classical public policy choices between state- and market-oriented models; i.e. between monopoly and competition. At the international level it involves strategic choices that reflect a somewhat similar rationale: a choice between strategies that aim to circumvent international markets and those that aim to strengthen them; i.e. between cartels and competition.

In the post-war era the standard West European answer involved public utilities and state-owned companies. Energy policy was seen primarily in terms of security of supply, which at the time meant stable supply at reasonable prices. For electricity and gas this meant monopoly services, usually with state or local government ownership. Even in the oil sector, where companies competed domestically, international markets were dominated by the cartel of large western oil companies. However, as early as the 1970s some of the developments that would break up this paradigm could be identified: the rise of OPEC, oil price volatility, the growing cost of the public sector in the OECD world, and the consequent pressure for liberalisation and privatisation that would spread from oil in the 1980s to gas and electricity in the 1990s.

By the 1990s energy markets across the world were increasingly build on market liberal models or subject to reforms in this direction. In the EU the internal market dimension of energy policy outweighed environment and public service concerns, and the mid-1990s directives that liberalised EU gas and electricity markets were a triumph for the liberal paradigm. Even if these directives included political compromises that assuaged the worst of France’s fears for the future of her gas and electricity monopolies, they represented a victory for the principle of competition in the gas and electricity sectors pushed by the states such as UK and Netherlands.

New actors, changing geopolitics, energy transition and climate change

However, at the same time as the drive for liberalisation peaked at the EU level, the broader world of public policy began to see a blurring of the boundaries between the public and private sector. The modern centre-left of Clinton, Blair, Schroder and Kok and other European social democratic leaders encouraged a style of policy making where regulation was shaped by a combination of private and public actors. In the energy sector, the breaking down of national barriers and the integration of markets meant that upstream activities (exploration, production, power generation and even finance) came to involve a mixture of state-owned, private and hybrid actors. The same held for transmission and downstream activities (transport, storage, distribution, sales etc.). Whereas the trends in the 1990s seemed to be in the direction of transparent, integrated, international markets dominated by private actors or state-owned companies that operated as if they were private, the first decade of the new millennium saw state-owned companies play a new and more important role. China is experimenting with a mercantilist approach: competitive companies that ultimately rely on state backing.

This emergence of a more complex and diverse set of actors is only one of four major shifts in the energy world. The other three shifts are linked to electrification, geopolitics and climate change. Whereas the shift from looking at energy as a strategic good, to looking at it as primarily a public good, to emphasising its private good characteristics, and back again to emphasising its strategic importance is directly a matter of paradigm shifts, these other three changes contribute to making the present paradigm shift more unpredictable.

Since the shift from biomass (and hydro-power) to coal with the industrial revolution, the world has been through several waves of energy transition, including the transitions to oil, gas, hydro-electric power, nuclear and possibly now also renewable energy. However, the present shift is not simply from one (dominant) source of energy to another, or even to a mixed set of energy sources as trade expands. It is a shift towards the use of energy in the shape of electricity (regardless of fuel source), driven by the ever-expanding access to tools and gadgets driven by this most modern form of energy. In this sense, at least, energy may be becoming increasingly fungible.

The geopolitical shift is driven by developments in the two big questions that have long dominated the geopolitics of oil and gas: the relationship between the OECD and OPEC, and the relationship between the USA and its great power rivals. For a decade or two following the end of the Cold War and the weakening of OPEC, the US enjoyed the world’s ‘uni-polar moment’. However, the re-emergence of Russia as a political and economic giant on the global energy scene, and the rise of new, predominantly Asian, economies is shifting the centre of geopolitical gravity eastwards. ‘Hard power’ has shifted from the US to new powers in an increasingly multi-polar world, and ‘soft power’ is changing even faster. As new economic heavyweights appear on the global scene, they offer alternative policy models to those of the EU and USA. A potentially significant new cleavage is opening up: the ‘politics of oil’ dominated by the cleavages between OPEC and the OECD may be supplanted by competition between established energy consumers and emerging ones. The political economy of ‘no-strings-attached’ investment and incentives is supplementing or even replacing more traditional power-politics.

Finally, the energy policy agenda is increasingly a matter of balancing security of supply and stable markets with environment concerns (and, increasingly, concerns about energy poverty, however defined). As climate change has assumed a top position on the international energy policy agenda, strong linkages are being established between the more traditional energy security concerns and this comparatively new issue. Whereas the energy policy agenda has long (for two centuries!) been characterised by oscillation between state- and market-drive models of governance, the climate change agenda has added a whole new dimension to energy policy.

Where next?

The energy world of the Twenty-First Century is more heterogeneous than it has hitherto been. Globalisation has added a layer to the complexity of energy policy making. Despite the integrating effects of globalisation, energy governance is also fragmented, because it involves political decision making at four levels – the local, national, regional and global – which are at best loosely coordinated. It is fragmented because it now involves a series of issues which are only partially related, and sometimes involve contradictory policy goals or policy tools (e.g. simultaneously addressing climate change and development issues). It is fragmented inasmuch as different commodities are traded in different ways and subject to different regulatory regimes, and to the extent that different regional regimes emerge for the same commodity. Whereas oil markets remain global (though are also sometimes bilateral), gas is predominantly traded bilaterally or regionally. A key characteristic of the new global setting for energy policy is thus the tension between globalization and fragmentation.

Having said that, we are now in a period of transition towards an uncertain future. This is of course the nature of transitions from one paradigm to the next: it can be relatively easy to identify the decline of one paradigm; it is by definition impossible to identify the characteristics of the next one until it has become recognised as such. Donald Rumsfeld’s “unknown unknowns” provide a particularly apt description of the present state of affairs. The era of the dominance of the New Right toolbox is over, but there is no prospect of returning to the 1970s toolbox associated with OPEC. Past game-changing developments can be readily identified with hindsight: the break up and decline of cartels, nationally (Standard Oil) and internationally (the Seven Sisters); the wars in the Middle East, nationalisation, OPEC and the price hikes of the 1970s; the collapse of oil-prices in the 1980s, the decline of the USSR, and the relative reduction of demand in the west; re-nationalisation (first in Venezuela) and the more prominent role assumed by large state-owned companies, and the role of Gazprom in particular, in last decade and a half. The crucial event for the next tipping point can of course not be determined at this stage, but we can try to identify important trends. The present research project therefore (ambitiously) turns to some of the more promising candidate for potential game-changing developments: the changing role of state-owned companies, the changing dynamics and priorities of energy policy making in Europe, the balance between state and market in both the oil and gas sector, and the impact of the climate change agenda on energy policy