Securing energy’s future

The lessons of California have taught the market the valuable lesson of ensuring sufficient installed capacity to meet demand. The events of 11 September have not changed this message

Before the terrorist attacks of 11 September, most of the world’s major economies had embarked on major energy policy programmes, the twin focal points being energy security and reliability. Post 11 September the focus was still on energy security, but the perspective had changed. In truth very little has altered fundamentally in the past month from an energy perspective. The economy remains weak, which has impacted on energy demand and consequently prices. Those that prophesied an energy crisis, fearful of supply dislocation in the Middle East, have the proverbial egg on their faces. While the economy has weakened further, and prices have fallen further, there is no certainty that the attacks were the only catalyst. Indeed, it could be argued that the economy was already on a downward spiral as witnessed by the successive rate cuts by the US Federal Reserve before 11 September. But what has changed has been the psychological perception of the energy market and in particular the perception of security.

For security, now read increased protection of energy facilities, particularly nuclear plants and refineries. This increased security will add to the cost of energy and electricity tariffs will probably rise to recoup the additional costs. Security also extends to security of information. The US Congress has argued for freely available market information to be restricted, the rationale being that freedom of access to energy flows and storage is a red flag to terrorists. The irony here is that some of the larger US utilities have been trying to block this information on commercial grounds for years as a result of increased market competition. Now politicians, originally against such moves, are endorsing it. And if the freedom of energy information is blocked then market transparency could be impacted. Once blocked it will be difficult to change back.

These changes point, potentially, to a more isolationist energy market and could indirectly work against the ethos of fee market competition. But are these actions really necessary? Does the world really face an energy crisis, as some forecast? And, more importantly, how secure is energy’s future? First, the energy market has been relatively unaffected by recent events. Europe, in particular, has been largely immune. But the markets have been spooked and governments have taken various measures to protect energy, ranging from the sublime to the almost ridiculous. In Thailand, for example, the government decided that officials would now have to wear their suit jackets so as to conserve electricity requirements through reduced air conditioning.

Energy security is no more important today than it was a month ago. The lessons of California have taught the market the valuable lesson of ensuring sufficient installed capacity to meet demand. The events of 11 September have not changed this message. No energy plants have been attacked. Indeed there was as much chance of plants being attacked before 11 September as there is now. There was no real energy crisis before 11 September and arguably this situation has not changed in the weeks following.

As to the security of energy’s future, this is still in the hands of the West. It remains dependent on the energy rich Middle East and Russia, but can reduce this dependence by investing in new domestic energy sources. Europe can, for example, invest in more nuclear and renewable energy to reduce its dependence on gas imports. Similarly it can make further investment in clean coal technology to utiliise its coal reserves. And, from a political perspective, the West can tailor its actions to ensure it does not dislocate Middle East energy market supplies and thereby restrict price volatility. In short, the energy market is as secure as the West wants to make it.