Christoph Frei, World Energy Council: “Grand transition” requires new vision of energy security

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Christoph Frei, Secretary General World Energy Council

Christoph Frei, Secretary General World Energy Council

The energy sector is going through a “grand transition” that will radically change the way energy security should be approached, says Christoph Frei, Secretary General of the World Energy Council, on the eve of the ONS Summit, a high-level meeting on energy security in Stavanger‎ on August 28-29, hosted by the Munich Security Conference and the ONS Foundation‎. In particular, the role of gas in the European energy system will change, says Frei. The good news is that sourcing of gas will become much less of a concern. The bad news that the refinancing of existing gas infrastructure is at risk.

The Munich Security Conference, a major global forum for the discussion of security policy, is not confined to the famous annual gathering of that name in the Bavarian capital. Since a number of years, the Munich Security Conference also organises high-level events on particular regions or topics. Energy security is one of them.

As part of the MSC Energy Security Series, Munich Security Conference and ONS Foundation are organising a joint Summit on energy security and security of supply in Stavanger on 28 and 29 August 2016, immediately preceding the bi-annual ONS Conference and Exhibition.

The international oil companies are shifting from oil to gas but also increasingly looking at electricity

The event, supported by the Norwegian government, will see some of the biggest names in energy getting – including CEOs and executives of Shell, Statoil, Petrobras, Eon, NIOC (Iran), ConocoPhillips, Saudi Aramco and Kuwait Petroleum Corporation, ministers and senior policymakers, and independent experts such as Daniel Yergin of IHS Cambridge Energy Research Associates.

Unstoppable dynamic

Christoph Frei, Secretary General of the World Energy Council, the UN-accredited global energy network which has more than 3,000 member organisations in over 90 countries, will also be there. And he will have a message that may come as a surprise to those who are inclined to think about energy security primarily in traditional geopolitical terms – including policymakers in Europe who tend to view energy security through the prism of EU-Russia relations.

The world is going through a “triple transition”, says Frei, which will fundamentally change the global and European energy security equation. According to Frei, there are three key drivers for change that make up this “grand transition”. The first is decarbonisation, a “dynamic that’s unstoppable after COP21 in Paris last December”.

Energy Security Roundtable Muenchen 12 Feb 2016-slider

Energy Security Roundtable in München on 12 Feb 2016

The second is “linked to decarbonisation, but it’s different. We are seeing fundamental changes in market design and business models. This is the result of the growth of zero-marginal cost energy, low entry barriers to the market, decentralisation and digitisation.”

Thirdly, there is the challenge to the “resilience” of energy companies. In September, the World Energy Council will present the third chapter of its three-part study into three factors that are putting great strains on the energy sector: the increase in extreme weather events as a result of climate change, the so-called Energy-Water-Food nexus (with water availability playing an increasingly important role in energy generation) and the growing risks of cybersecurity threats. For Europe, says Frei, with its highly interdependent and digitised market, the cybersecurity risk is probably the most critical one.

Shale gas will take the geopolitics out of the gas market to a certain extent. The gas market will be much less exposed to geopolitical risks

These three drivers are occurring mostly independently, says Frei. “But it’s how we manage them, that will determine how well we will be able to ensure secure energy supplies. Will we stay at the frontiers of new technologies, at the right side of innovation? Will we be able to create the right market structures and models? Those are the key questions.” Clearly this is a much broader framework at which to look at energy security than is often assumed by traditional geopolitical thinking. In any case, the World Energy Council views energy security as one of the three dimensions of the famous “Energy Trilemma” developed by the Council, the other two being affordability and environment.

Market depth

What does this mean for the gas market, particularly in Europe, where the discussion around energy security is focused mostly on Europe’s dependency on Russian gas? Frei notes there are two major changes taking place in the gas market. First, as part of the energy transition, the role of gas is changing. “In the past, gas was primarily bought to obtain energy, both in the heating and electricity sector. Today, with the growth of renewables, gas is increasingly bought for systems services, as a source of flexibility, certainly in Europe. This means that the volumes go down, but the value may be greater.”

There seems to be a dispirited aura around gas in Europe sometimes. But gas offers a lot of new opportunities

Secondly, as a recent report from the World Energy Council shows, at the global level we may expect to see large growth of unconventional gas over the coming decades. “The US shale gas revolution has already changed the market fundamentally, but other countries will also develop their unconventional gas resources: China, Australia, but also Saudi Arabia, Argentina, and others. That will increase market depth. There used to be only three large suppliers, now there will be many more. That will take the geopolitics out of the gas market to a certain extent. The gas market will be much less exposed to geopolitical risks.”

This last does not mean there is nothing to worry about anymore. At this moment, says Frei, there are no market signals to capture the new role gas will play in the European market. “The market model that we currently have does not incentivise the new use of gas. That means the refinancing of existing infrastructure could be at risk. And that’s critical for energy security.”

In other words, when it comes to gas, the focus of European policymakers should shift from a narrow focus on sourcing of gas supplies to ensuring a proper market design which ensures investment in infrastructure. “When we talk about market design, or energy market reform, we are not talking only about electricity. You are also talking about the underlying gas infrastructure, which is a critical part of the electricity and energy system.”

What is absolutely critical to understand is that the electricity world is changing radically. In the past big was beautiful. Now the market no longer favours scale

Frei emphasizes that the story of gas in Europe does not have to be a negative one. “There seems to be a dispirited aura around gas in Europe sometimes. But gas offers a lot of new opportunities. As a source of flexibility. As transport fuel. As a source of energy storage. We have great gas infrastructure that we can use to great effect, if we develop the right business models.”

Oil majors

The effects of the “triple transition” will not be confined to gas. Other parts of the energy value chain will also be affected, says Frei, with major implications for energy security. Take the international oil companies, who have up to now formed an important economic backbone of our societies. “We see that they are shifting from oil to gas but also increasingly looking at electricity. What is absolutely critical to understand is that the electricity world is changing radically. In the past big was beautiful. Now the market no longer favours scale. If you want to go into renewables, you can’t do it on the basis of the old business model.”

In the end, says Frei, it’s “innovate or die”. That will be more important for our energy security than any geopolitical developments.

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