Energy policy paralysis and lessons learnt: What is energy policy and energy mix ?

By Nalin Gunasekera

Energy consultant

At present, there is a global challenge in achieving an appropriate mix of primary energy sources, limiting emissions,along with balancing energy security, energy independence and affordability.There have been missteps in reaching an optimal balance in defining an energy policy that have posed threats to energy security, resulting in nations that are unable to supply a reliable electricity supply without interruption.A decade of volatile energy prices, alongside increasingly dire warnings of climatic disaster and emissions related ill-health, has pushed energy security and climate change steadily up the global policy agenda. The rhetoric within governments and the public has emphasized the immediate need to deal with all these challenges concurrently.

However, challenges such as energy security, energy affordability and climate change do not always align. Many important decisions in primary energy sources including natural gas, coal, oil and renewables involve complex tradeoffs and force policymakers, their advisers, the public and the media to be confused, unable to navigate these complicated issues. This requires a defined National Energy Policy.There is a need to understand the factors that influence an energy policy, the history of energy security over the last 100 years and learn from lessons learnt from other countries. Some regions have been referenced in the three part article namely India, Australia, Europe and Singapore (from which there are lessons to be learnt) who all face entirely unique challenges. Some have made missteps and remedial measures are being taken to learn from.

SL is unable to secure a continuous and reliable power supply. This is evident from the regular power shortages we face and the increasingly unaffordable price of electricity. The recent debacle which resulted in severe shortage of petrol illustrates this highly insecure situation. Furthermore, coal fired power plant emissions create a virtually inhospitable environment.

We do not have a crystal ball. We do however have a method that serve us well, imperfect though it may be in understanding the past and anticipating the future. Underneath the current disorder and confusion our task is to try to see the order and to anticipate what events, technology that order will bring forth via rational feasible informed analysis. Countries such as SL faces an entirely different risk profile given its relatively high ‘country risk’ unlike projects in richer countries or those with credible sponsorship such as by major oil companies (able to provide parent company guarantees) which makes projects easily bankable . The writer has spent 30 plus years in both opposing global extremes reviewing projects and the risk profiles which face entirely different challenges which have to be understood by the energy policy makers.

What is Energy Mix?

Every country in the world is being challenged today in its attempts to achieve its most appropriate mix of primary energy sources, to provide a guaranteed energy supply. To meet its energy needs, each country uses the energy available to it, in different proportions. This is what is known as the ‘energy mix’. While it varies significantly from one country to another, fossil fuels account for over 80% of the global energy mix. See Figure 1. The process of defining the energy mix is the energy policy.

The energy mix also refers to how the final energy consumption in a given geographical region breaks down by primary energy source. It includes fossil fuels (oil, natural gas and coal), nuclear energy, waste, and the many types of renewable energy (biomass, wind, geothermal, water and solar). These primary energy sources are used to generate electricity and other applications and those such as oil provide fuel for transportation, industrial applications, heating (although not in Sri Lanka) and cooling residential and industrial buildings. There is no global energy governance in the multipolar world in which we live, an idea mooted by some western political leaders, obviously unsuccessfully.

For each region or country, the composition of the energy mix depends on:

• The availability of usable resources on its territory or the possibility of importing them
• The extent and type of energy needs to be met, and
• Policy choices determined by historical, economic, social, demographic, environmental and geopolitical factors.

An energy mix should also be able to meet any energy shocks such as sudden rises or spikes in the global market, perhaps due to unforeseen circumstances such as events in the Middle East, until the status quo has been re-established. This can be accomplished by either a suitable buffer, a strategic petroleum reserve, usually for 90 days’ supply,and/ or by having agreements with other countries to share their reserves, as is already practiced jointly by some countries.

Energy should not only be driven only by the demand for electrical power, but by all other end users of primary energy sources as well, such as industrial applications for direct use of natural gas.

Transitioning from

fossil fuels

With the entry of natural gas into the energy mix worldwide, global energy policies could now be entering a new norm. Natural gas is expected to grow faster than oil or coal, with the LNG’s rapid growth increasing the accessibility of gas across the globe. .A central feature of the energy transition is the gradual, continued decarburizationof the fuel mix as promoted by the eventual transition to renewable in the long term.(See Figure2). Although there are rapid improvements in the competitiveness of renewable energy, it is as yet unable to provide complete energy security.

The near-future overall contribution from renewable energy toward the global mix remains low, unfortunately partly driven by the vested interests of the powerful oil lobbies. Figure 1below illustrates the inability for renewables to compete with fossil fuels in the near future at the current rate of development on an overall global basis, even with the generous subsidies offered by some countries for renewables.

The fluctuating global energy mix and consequential difficulty in formulating a national energy mix is evidenced by the changing landscape as shown above —contributing to a national energy policy paralysis.These trajectories are a ’snapshot’ of today’s assessment projected to the future and may change should there be technological breakthroughs in the development of affordable storage facilities for renewable energy. Given the rapidly advancing research, this may even take place perhaps overnight. As such, any national energy mix should have the flexibility to manage such changes with minimum penalties payable, and with a vision into the future. None of us live in a perfect world. No government or institution will have all the information necessary to take a risk-free decision, based on all the information required to do so. That never happens. There is a need for a government to take decisions based on what we know and what the country needs in an imperfect world.

Major oil companies such as Total, Shell and ExxonMobil are keeping pace with these changes, transitioning themselves from the earlier oil and gas exploration and production business model, eventually to power generation. These brave policy changes are being made by them facing global uncertainties, without having all the information required to do so. These oil majors could be participating in SL’s energy needs given their oversupply of LNG, should the GOSL have the competency to understand the complex global oil and gas business and engage them, as some countries have succeeded.

There is much confusion due to the recent significant reduction in the price of LNG, which has had a

global impact as a ’quick fix’ to energy security. This has led to about 80 LNG regasification projects being planned. Some are rushed and poorly planned without any techno-economic feasibility and optimization studies, and without environmental impact assessments. Without an informed risk analysis and a means of mitigation will lead to bankrupting governments with a multitude of failed projects. They may not reach fruition and risk being abandoned or will have very high penalties being payable over their notoriously complex leased contracts. Their technical complexity arises from both marine offshore oil and gas standards being prescriptive with unclear boundaries. Further these contracts fall under multiple jurisdictions with typically the contract, dispute resolution under arbitration and any payment guarantees, none being governed under domestic jurisdiction. This is based on the writer’s experience in many other countries with similar credit rating and ‘country risk’ as SL.

Thus, any irrational exuberance in installing multiple LNG re-gasification plants (with three plants, currently being planned in SL)should be tempered given by GOSL’s past dismal record of such ventures in the oil and gas industry. The most recent foray was the USD 168mil loss in the oil hedging episode by the GOSL, an acute embarrassment although having procured oil since the 1960s, still unable to understand the vagaries of crude oil procurement. LNG procurement remains far more complex where India faced a USD 1 billion penalty in 2015 from Qatar, the world’s largest supplier.

The confusion in the energy mixes has been driven by policy blunders on renewable energy in some countries. This in turn has led to energy insecurity and an increased focus on Paris climate change targets. Obsessive posturing by interest groups, public servants, advisers and regulators on sources such as renewables offering the ‘final solution’ have seen unintended consequences and given rise to power shortages, such as in Australia, although blessed with large fossil fuel reserves.

The absence of a clearly specified energy policy in defining an energy mix in SL provides a disincentive for any private sector investment in relation to economic solutions for long term power generation. This has become an incentive for IPPs (Independent Power Producers) to supply emergency electrical power at the most uneconomical rate using diesel. As is well known, this is at an unaffordable cost to the economy, and is bankrupting the country.

In the past, some countries have called for energy independence and self-sufficiency at the expense energy security or reliability. This has led to unintended consequences such as a power crises and excessive charges on the consumer for electricity.

Policymakers, however, should consider whether energy ‘independence’ is really necessary to achieve these goals, including energy security. In fact, the answer is probably no. The real issue is not independence from all foreign primary energy sources, but in optimising and changing the energy mix appropriately and in managing this change into the future. This requires diversifying our supply of energy sources and ensuring that any emergency could be catered for with a reliable resource supply. Understanding how to reach it however, requires us to know more about our sources, uses of energy, and the realities of energy supply and demand. This is no easy task given the in-depth knowledge and the skill-set and the long years of global exposure required to understand the major powers and events that navigate and influence the industry. (The writer recommended the establishment of an Energy Study Centre as in other countries, staffed by those with the global exposure to guide the government rather than rely on ministries and academics having no exposure or relevance to the global dynamics of energy. However there is a greater risk by staffing such intuitions with bureaucrats and academics with no relevant experience, who could mislead the government)

Governments and nation states are starting to realise that only economically poor countries are energy independent. It is telling that all the powerful economies of the world are energy dependent, including all G20 and G8 countries, except Russia. Some of the most powerful economies such as Germany and Japan are almost 100% energy dependent. Even the US imports almost 50% (gross) of the crude oil requirement and is energy dependent. Some of the most energy independent countries, such as Venezuela and Nigeria, have very poor, unstable economies and face social instability. While SL’s energy independence may be unattainable in the immediate future, energy security is a realistic and achievable goal.

Governments have made commitments to lower emissions and be energy secure in the future, but the pathway is blocked by uncertainty about how to get there. If we don’t take immediate action, or even if we continue along our current trajectory, SL risks being left behind with costly and unreliable electrical power being generated in a toxic environment. Managed well, SL will benefit from a secure, low cost and reliable energy future. Managed poorly, our energy future will be less secure, more unreliable and potentially unaffordable for decades due to the governments’ missteps. These leased LNG FSRU contracts remain notoriously complex in the oil and gas industry in the writer’s experience in managing similar projects under multiple jurisdictions and risk. Usually these contracts transfer all risks to the end user of the gas. The public justifiably has concerns over the GOSL’s competency given its dismal track record to navigate these complex engagements without incurring further debts given the recent assessment by the World Bank as follows:

"World Bank Country Director for Sri Lanka and Maldives, Dr. IdahPswarayi–Ridihough said recently that a staggering loss amounting to Rs. 460 billion was suffered by the 400 State-owned enterprises (SOEs) in 2016. She added that the government is "contributing more to its public-sector enterprise than receiving from it." These losses continue to have high negative impact on our fiscal costs. Over the years, most of these establishments have reported significant persistent operating losses. As the World Bank Country Director says bailing out these public enterprises by the Government will be an unimaginable task."

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