Risk Management approaches to Energy Security
Dr Ross Lambie Resources and Energy Economics Branch, Office of the Chief Economist APEC Energy Working Group Workshop: Modern Risk Management Principles for Energy Security Canberra, Australia,10 May 2016
Overview
- Workshop objectives
- Rationale and background
- What do we mean by energy security?
- APEC policy context
- Energy security in the Asia Pacific region
- Changes in energy systems
- Reconsidering energy security and risk management
- Australia’s approach to energy security
- Energy as a complex system and systemic risk management
- Risk Management Framework for Energy Security
• Provide an overview of the detailed rationale behind
considering risk based approaches
• Provide information on Australia’s APEC funding proposal:
A Risk Management Framework for Regional Energy
Security, which is being considered by EWG51
• Provide the opportunity for discussion and open dialogue
between EWG member economies on how they see risk
management and energy security in a regional context
Workshop objectives
No single definition but common themes
International Energy Agency (2014): The uninterrupted availability of energy supplies at an affordable price. Long term energy security is concerned with timely investments to supply energy in line with economic developments and environmental needs. Short-term energy security focuses on the ability of the energy system to react promptly to sudden changes in the energy supply-demand balance.
Asia Pacific Energy Research Centre (2007): ‘the ability of an economy to guarantee the availability of energy resource supply in a sustainable and timely manner with the energy price being at a level that will not adversely affect the economic performance of the economy’. This definition leads to three fundamental elements and the ‘4 A’s’ of energy security: • Physical supply: availability and accessibility • Economic: affordability • Environmental sustainability: acceptability
What do we mean by energy security?
Toward a regional understanding of energy security
• In 2014, APEC Energy Ministers committed to championing: ‘[an] Asia-Pacific concept of energy security, featuring openness,
inclusiveness, cooperation and sustainability, and encourage economies to work together toward energy security goals’.
• In 2015, Energy Ministers reaffirmed that: ‘resilience to potential energy supply disruptions can be strengthened through effective, well targeted market and governance response mechanisms. We also encourage Members to promote energy supply diversity and energy efficiency and to reduce barriers to energy trade and investment in advancing resilience of the energy sector’.
APEC policy context
Key challenges
Long term outlook for APEC is dominated by rapid economic growth: • Total energy demand projected to increase by 44 percent by 2030 • By 2040, Asia the final destination for:
– 80 per cent of regionally traded coal – 75 per cent of oil trade – 60 per cent of natural gas trade
APEC is projected to remain an overall net energy importer: • High reliance on crude oil from unstable regions • Highly dependent on fossil fuels • Economies with highly diverse energy endowments, physical infrastructure,
social and cultural attitudes to risk, economic systems
Energy security in the Asia Pacific region
Increasing complexity, sophistication and depth of markets
• Energy supply and demand and the nature of energy markets have changed significantly over recent decades: – NOCs now play a greater role compared to IOCs – energy markets more interconnected, deep and highly
specialised – financialisation of oil and associated speculation – global consumption patterns have shifted towards non
-OECD economies – Greater diversity in the fuel mix
Changes in energy systems
Energy intensity Oil intensity per capita
Energy intensity is declining
US Energy information Administration IEA, World Energy Outlook 2015
Energy security in a broader context
• Energy security is inherently about managing risks throughout the supply chain, from production to final consumption, across energy types/sectors
• Energy systems and markets have always been characterised by volatility and uncertainty, potentially resulting in large negative economic impacts: – current collective risk management approaches created to deal with 1970s
oil supply shocks to reduce economic impacts from supply disruptions • Changes in the global economy:
– reduced dependence on oil (displaced by gas, coal, renewables) – different macro-economic settings (e.g., floating exchange rate) – emergence of energy (oil and gas) futures and other derivative markets
Diversity, complexity and interdependence has resulted in increased energy system resilience, but has also led to new vulnerabilities and challenges
Reconsidering energy security and risk management
• The Australian Government has an ongoing role in assessing Australia’s energy security and examining potential threats to Australia’s energy systems to ensure all Australians can access an adequate, reliable and competitively priced supply of energy
• The Australian Government assesses Australia’s energy security
through National Energy Security Assessments (NESAs) and monitors global and domestic settings to inform the development of energy policy and broader government policies
• NESA is an economic assessment of the effectiveness and anticipated resilience of Australia’s electricity, natural gas and liquid fuel systems in continuing to meet the long term requirements of domestic energy users
Australia’s approach to energy security
National Energy Security Assessment
A comprehensive picture of Australia’s energy security
Australia’s National Energy Security Assessment
No one definition of a complex system – varies across disciplines Key features: • Diverse and autonomous but
interrelated parts • Multiple pathways • Distinct properties arising from the
interaction of these parts (networks) • Interactions are non-linear (behaviour
of the whole cannot be predicted by the behaviour one individual part)
• Involves subjective judgements • Overlaps between different systems
(e.g., economic, technological, social)
Energy is a complex system
• Systemic risk approaches arose predominantly from the Global Financial Crisis – Highlighted potential for contagion within and between systems – Potential for rapid and cascading events as system reacts
• Systemic approach increasing reflected in regulatory responses: – Basel III Framework – Dodd-Frank Wall Street Reform and Consumer Protection Act (US) and the
Financial Stability Oversight Council (FSOC) – Other global events (natural disasters, pandemics) and regulators (OECD)
Complexity, interdependence and contagion
Systemic risk management
“ Financial stability, however, could be further enhanced by a more explicitly macroprudential approach to financial regulation and supervision in the United States. Macroprudential policies focus on risks to the financial system as a whole. A macroprudential approach would complement and build on the current regulatory and supervisory structure, in which the primary focus is the safety and soundness of individual institutions and markets”
Ben Bernake, address to the Council of Foreign Relations, March 2009
Australia's APEC project proposal
• Rapid changes and increased complexity in global systems has led to a significant reappraisal of approaches to risk management over recent years – More systemic, i.e., risks arising from system interdependencies
• Australia seeking to assess how these approaches could be applied to regional energy security objectives
• Will support and complement APEC key priorities areas: – Oil and Gas Security Initiative (OGSI) – Work on energy security indicators and indexation
• Proposal is to develop guiding principles and a theoretical framework to: – Capture key relationships between indicators and economies – Assess regional level risks and vulnerabilities – Provide the capacity to assess the costs and benefits of key regional
vulnerabilities and mitigation measures
Risk Management Framework for Energy Security
• Australia’s project proposal for risk principles and framework is Stage 1 – Will inform policy development for region and individual member
economies – Outline methodologies and implementation steps for further
development – Potential to apply to an integrate multiple energy priority areas (oil
and gas; Electricity, emergency management, infrastructure resilience)
• Seeking a collaborative approach with all APEC member economies • Multiple benefits to APEC economies:
– conceptual basis for identifying, assessing, and mitigating energy security risks associated costs and benefits
– support broader APEC energy security policy priorities and – capacity building benefits for developing APEC member economies.
Risk Management Framework for Energy Security Australia’s APEC project proposal
Summary and contact
• Risk approach to energy security is a new and unprecedented – Has the potential to make a major contribution to energy
security policy and decision making • Australia is seeking to closely engage and work with member
economies and international energy fora – Welcome ongoing engagement, and the knowledge and
expertise within the APEC region – Project contact: Victoria Carpenter, Department of Industry,
Innovation and Science [email protected]
Thank you
Conclusion