Brian Fallow: The tricky trilemma of energy policy

The World Energy Council's best case scenario would still have fossil fuel use in 2050 at similar levels to what it is today. And it could be 60 per cent higher.Picture / AP

Security, equity and the environment are the three factors that have to be balanced in power planning.

On Monday week we will get the carefully considered collective view of hundreds of experts on the likely impacts of climate change, including the impacts on New Zealand.

They have spent four years trawling through all the relevant peer-reviewed research. They have responded to a staggering 48,000 review comments on earlier drafts.

Their conclusions cannot be airily dismissed.

They will not make cheerful reading.

So it is sobering to hear from the World Energy Council (WEC), whose secretary-general Christoph Frei was in New Zealand recently, that we have no show of achieving the sort of emissions reductions required to limit global warming to the levels governments profess to be aiming for by mid-century.

Policymakers are too focused on the supply side, on trying to change the mix of energy sources we rely on, and not doing enough to unlock the gains that can be made on the demand side through greater energy efficiency.

Christoph Frei, secretary general of the World Energy Council

Its best case scenario - and this assumes major gains in energy efficiency and a doubling in the share of energy production coming from renewable sources - would still have fossil fuel use in 2050 at similar levels (10 billion tonnes of oil equivalent) to what it is today.

And it could be 60 per cent higher.

"Even in the best case we will see a near doubling of greenhouse gas emissions by 2050 compared with where we should be to meet the 450 parts per million CO2 reference adopted by many," it says.

Frei argues that climate policy cannot be divorced from energy policy and that the latter is a matter of balancing the three sides of a trilemma - the need for energy security, the need for equity (which includes the issue of energy poverty) and the needs of the environment (both global and local).

Policies which address one side of that trilemma but fail one or both of the others will simply not endure.

Policymakers are too focused on the supply side, on trying to change the mix of energy sources we rely on, and not doing enough to unlock the gains that can be made on the demand side through greater energy efficiency, Frei says.

And they are making the unsafe assumption that sufficient capital will always be available for investment in the energy sector, ignoring a buildup of uncertainty, complexity and risk which has meant it is no longer the darling of the financial markets.

While some progress is discernible at the geopolitical level on climate change, the reality is a number of countries still struggle with giving priority to carbon emissions, Frei said.

It is very easy to introduce subsidies but it is difficult to target them correctly and even more difficult to remove them when you have introduced them.

Christoph Frei

"But energy efficiency is a no-brainer for everybody. Yes it is not fully aligned with the emissions objective but probably you can get a consensus around energy efficiency because China needs it to get pollution down, Russian needs it so it can export more gas, Europe needs it because its competitiveness is down and so on."

The thirstiest cars on the market use five times as many litres per 100km as the most fuel efficient ones.

"The question is do you leave that totally open to market forces?"

Governments around the world spend over US$500 billion ($581 billion) a year on energy subsidies. If that sort of budget is available it would be better directed at encouraging energy efficiency, the WEC believes, rather than encouraging consumption.

"It is very easy to introduce subsidies but it is difficult to target them correctly and even more difficult to remove them when you have introduced them," Frei said.

He cites German subsidies for solar power. Aided by a steep fall in the cost of photovoltaics, the policy objective of moving the technology from niche to mainstream has been achieved.

"But that creates a real problem. You have vested interests. The beneficiaries of the subsidies have become a significant proportion of voters."

In New Zealand's case the WEC's trilemma analysis would highlight the equity side, and particularly energy affordability, as the most serious issue to look at, Frei said.

He approves of the programme to upgrade the insulation standards of the housing stocks.

"It would be a pity if the dynamics behind such a success were to slow down."

By contrast he is unimpressed by populist calls in Britain by Ed Miliband, Leader of the Opposition and a former energy secretary, for a freeze on tariffs.

That sort of political risk, when combined with the risk around prices (oil, gas and carbon) and technological change (the rapid growth of US shale gas production for example), means capital markets no longer see the energy sector as boring, slow-moving and safe.

In addition there is a poor understanding of new, emerging risks such as extreme weather events, cyber attack or social activism.

"The shared understanding among governments, the financial sector and infrastructure companies [about those risks] is not there. And that is another reason capital is shying away," he said.

"As long as governments feel free to improvise, that political risk is very high. The more you take a systematic approach to balancing between the three sides of the trilemma, the more you neutralise the political risk and the more capital will find its way to infrastructure investment. That's our recipe."

There might be a case, he suggested, for devolving energy policy to an independent body on the model of central banks. "Central banks have a critical set of objectives seen as fundamental to the economic health of the country."

Those functions have been taken out of the direct control of the government and entrusted to an independent, but accountable, agency whose decisions are not hostage to the exigencies of an electoral cycle.

"One could argue that one should view energy policy in a similar way," Frei said.