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Every time we turn on a tap, switch on a light or drive to the shops we are relying on the infrastructures that make our modern economy work. These infrastructures are being developed to meet new challenges we face, such as climate change. However, the constituent parts are not always moving ahead together or with sufficient urgency.
The UK’s National Infrastructure Plan, which has been updated this week, is an illustration that government now takes this agenda seriously. Last year’s iteration of the plan recognised that infrastructures are interdependent – for example, the uninterrupted supply of good-quality water requires energy for pumping and treatment as well as control systems reliant on information and telecommunications technologies.
However, the UK is still a long way from the plan’s aspiration for a cross-cutting and strategic approach to infrastructure planning, funding, financing and delivery.
The latest version will need to be complemented by more ambitious and concrete mechanisms for getting a governance system which support a more joined-up approach. It is also worth acknowledging that sustainability is not yet embedded fully in the commissioning of key projects. The 2013 edition of the plan did include a number of high-profile, low-carbon electricity projects, but it also prioritised road schemes and airports – which at best have ambiguous implications for targets to reduce greenhouse gas emissions.
There are at least three different rationales for delivering a more co-ordinated approach which takes seriously the links between infrastructures.
First, co-ordination can provide immediate economic benefits by combining activities, perhaps upgrading urban areas such as the West End in London while building and maintaining large new office buildings.
Second, interdependencies have led to new risks to services. The pervasiveness of new technologies means that more attention needs to be paid to cybersecurity within other infrastructure sectors such as electricity.
Third, and perhaps most challenging, there is a need to reduce the incidence of conflicting demands on infrastructure providers by government or regulators. Our research for the UK Infrastructure Transitions Research Consortium (ITRC) on the water and electricity sectors has highlighted the problems that water companies have faced in meeting higher water quality standards while reducing the carbon emissions associated with their operations. For example, some water companies invested in renewable energy but were not always permitted to pass on the cost of these investments to consumers or use them towards carbon-reduction obligations.
This year has seen the creation of UK Regulators Network (UKRN) which has been addressing co-ordination issues across infrastructure sectors. Other government bodies have been actively addressing the second area of cross-sectoral risks. For example, the Centre for Critical National Infrastructure provides advice to infrastructure providers about risks to security, including cross-sectoral risks. However, more will be required to achieve a genuinely cross-cutting approach.
A top-down solution?
To do this, it is tempting to think that the solution may be simply to break down governance barriers between sectors. There could be mergers between regulators so that water, energy and transport sectors are managed in an integrated way. Alternatively, the UK Regulators Network and the Treasury could have significantly enhanced powers to co-ordinate and direct sector regulators to address interdependencies where they arise.
But there are problems and risks associated with these kinds of top-down solutions. Merging regulatory bodies could mean a loss of transparency and would increase the potential impacts of poor regulatory decisions. It could also mean a loss of focus on the particular characteristics and policy goals for each sector.
They operate in very different ways and have different mixes of competition and regulation, different technological and investment challenges, different environmental impacts and different degrees of decentralisation. Furthermore, such mergers would not deal with the tensions that can arise when policies from more than one government department affect the same sector.
A more plural approach?
By contrast, efforts to promote co-ordination should start by recognising that infrastructure governance involves a large number of interests. Governance has moved outwards from government departments into economic and environmental regulators. Some powers have also moved upwards to international bodies, particularly the European Commission. In some cases, the role of local authorities is also strong – for example in governing road networks and waste management – and some are looking to broaden their role to include the development of energy infrastructures.
This spread of governance responsibility suggests that a plural approach to infrastructure co-ordination may be required. This would focus on understanding the specific nature of the interdependencies themselves while strengthening institutions which can bring together regulators and government departments to identify and resolve significant problems.
This kind of bottom-up co-ordination could build on existing initiatives such as Local Resilience Forums. Examples include Lincolnshire’s Critical Infrastructure and Essential Services Group. These forums already bring together infrastructure providers and public sector agencies to identify risks to services. Their remit could be extended to include joint investment and identifying where policies impose conflicting obligations.
We would see stronger top-down incentives for better co-ordination, combined with bottom-up processes that build on local synergies between infrastructure sectors and institutions. That might give us a chance to take on the challenge of moving towards more sustainable infrastructure sectors, where significant incentives are required for the innovation, demonstration and deployment of new technologies and business models.
This will be an essential change which can cut across traditional sector boundaries. An example of this in action can be seen in the projects across electricity, telecommunications and transport taking place through the Ofgem Low Carbon Networks Fund. And as our colleague Mariana Mazzucato has pointed out, there is significant scope for government to take a more entrepreneurial approach to economic development and to innovation. If it is successful, the state can then share any benefits and reinvest them. The need to get infrastructure provision right has never been more pressing.
Prof Jim Watson, is Research Director at the UK Energy Research Centre. Ralitsa Hiteva is Research Fellow at University of Sussex
Much has been made of the agreement signed by Moscow and Beijing to get gas flowing from western Siberia to China. There is talk of Russia using the deal to offset its isolation from the west and circumventing the sanctions imposed over the Ukraine crisis.
But this deal is a preliminary gas-supply agreement that’s been a long time in the making. It is not something that has suddenly come about since falling out with the West over the Ukraine crisis, nor can Russia simply offset sales to Europe with sales to China.
Just as Russia’s state symbol depicts a double-headed eagle that looks both west and east, so its energy strategy has long sought to develop an eastern pivot to create new markets in Asia to balance trade with Europe. The Russian government’s energy strategy predicts a substantial eastern swing over coming decades, with the share of oil exports going to the Asia-Pacific region rising from 12% now to 23% in 2035, and gas imports increasing from 6% today to 31.5% by 2035.
Russia’s plans to develop gas exports to Asia are enshrined in Gazprom’s 2007 Eastern Gas Programme. Granted, little progress was made until the US$400 billion pact reached in May 2014, but these long-held plans underwrote the process. An agreement was made to deliver gas from new fields in eastern Siberia and the Far East to northeast China, a region not currently reached by imports of liquefied natural gas (LNG).
But this is not without its problems. Gazprom’s programme also envisages continuing the pipeline to deliver gas to a planned LNG plant at Vladivostok. This extension, however, is now looking doubtful because of the impact of Western sanctions on potential investors and buyers and the prospect of a second deal to deliver a further 30 billion cubic metres (bcm) of pipeline gas from fields in western Siberia via the so-called western or Altai route. There are also ongoing misunderstandings over who is paying for the costs of developing the pipeline, even though Gazprom has started building it.
In terms of the second deal that has just been celebrated at the APEC summit, this is a preliminary arrangement – really an agreement to agree on a firm contract down the line. The Russian government expects to firm up the all-important details in the first half of next year. The final price has yet to be agreed, but China will want a lower one than initially agreed, as the imported gas will have to travel some distance within China to find centres of demand.
It has taken a decade of negotiations to get to the stage where Russia appears to be in the position to seal the deal on the export of 68 bcm. The feed gas for the second pipeline will come from West Siberia and will be easier to develop than the new production for the eastern route. Taken together, the two deals will make China by far the most significant importer of Russian gas, surpassing Germany, which is currently the most important market, bringing in just under 40 bcm in 2013.
In the context of current events in Ukraine and Europe’s determination to limit its future dependence on Russian gas imports, it is easy to see the current deals as a movement away from Europe to Asia. But this is a rather simplistic interpretation when this eastern pivot has long been a goal of Russian energy strategy.
Europe is still crucial
Despite this eastern pivot,Gazprom will not want to see a significant decline in its gas exports to Europe. According to Gazprom’s financial report, in 2013 exports to Europe accounted for 58% of its revenue. It is true that Gazprom has been losing market share in Europe, but it has been increasingly flexible and sales rebounded in 2013.
So, even before the crisis in Ukraine began, it was clear that Europe doesn’t present a growth opportunity for Gazprom. European gas demand is stagnant at best and likely to decline in the face of aggressive climate change policies and growing concerns about security of supply.
That said, European companies remain contractually committed to importing gas from Russia. This is pointed out by the the Oxford Institute for Energy Studies in a recent study. It shows that “up to the mid-2020s, European companies are contractually obliged to import at least 115 bcm/year of Russian gas (approximately 75% of the 2013 import level), a figure which reduces to around 65 bcm by 2030”. Their modelling also suggests that Europe may need as much as 100 bcm of Russian gas into the 2030s.
The final factor to consider is the profitability of these new deals to Gazprom and the Russian state. Most commentators suggest that the price agreed, particularly if oil prices remain low, will only provide a modest return. This means that maintaining revenues from European exports will remain important for Gazprom’s balance sheet and the government’s coffers; especially as income from oil exports is likely to start to fall in the 2020s.
Given that all energy projections show that future demand will be concentrated in the Asia Pacific region, it is no surprise that Russia, along everyone in the global LNG industry, sees the region as the locus of future demand growth.
Just how much gas China will consume in the future and how much will be imported remains uncertain. China has already secured significant pipeline imports from Central Asia and Myanmar and has rapidly expanded its LNG import capacity. It also has ambitious, but so far frustrated, plans to develop its substantial shale gas reserves. Russian pipeline exports will not scale up until the early 2020s, but they will potentially impact on China’s appetite for additional LNG supplies now and may serve to establish a benchmark price for new gas supplies in China.
There is no doubting the strategic significance of Russia being able to demonstrate its ability to reorient energy exports away from Europe to new markets in Asia. But these deals have been a long time in the making and some important issues still remain unresolved. Putin would like to be able to threaten to divert Europe’s gas to Asia, but the reality is that Russia needs to swing both ways and cannot afford to turn its back on Europe.
Mike Bradshaw is Professor of Global Energy, Warwick Business School at University of Warwick. Mike receives funding from the UK Energy Research Centre (UKERC).