Insuring Against Disruptions of Energy Supply – INDES
Ensuring a reliable supply of energy is regarded as a prime responsibility of governments. Traditionally, the main risk to security of energy supply has been Europe’s dependence on imported fossil fuels, often from politically unstable regions. Some studies project that European dependence on imports for its oil requirements will rise to 90% by 2020. This project focuses on the risks to Europe’s energy supply, the costs of an energy supply disruption, and ways to insure against such costs.
Ensuring a reliable supply of energy is regarded as a prime responsibility of governments. Traditionally, the main risk to security of energy supply has been Europe’s dependence on imported fossil fuels, often from politically unstable regions. Some studies project that European dependence on imports for its oil requirements will rise to 90% by 2020.
This project focuses on the risks to Europe’s energy supply, the costs of an energy supply disruption, and ways to insure against such costs.
The overall aim of the project is to develop, within a network of European researchers and research institutes, a methodology for identifying a potential micro-macro gap in energy security in Europe, and to provide, in co-operation with stakeholders, a first plausibility test of the suggested hypothesis.
To this end the proposed project develops a methodological framework for analysing micro- and macro security needs taking into consideration a number of factors that are influencing changes to the status quo in Europe. These include:
- Europe’s rising dependence on imported fossil fuels;
- the move towards liberalisation and thus the shifting of responsibility of protecting against supply disruptions from public bodies towards private operators that are now expected to pay an "insurance premium" to protect against supply interruptions and market competition;
- Europe’s environmental obligations.
Upon consideration of the above, the project aspires to produce a first descriptive map of security challenges and economic agents’ responses in the supply and consumption chain, an indication of possible policy response and the research required to build the foundations for such responses.
The project puts considerable emphasis on a wide dissemination of results so as to initiate a broader debate in both the academic and policy communities.
Ensuring a reliable supply of energy is regarded as a prime responsibility of governments. Traditionally, the main risk to security of energy supply has been Europe’s dependence on imported fossil fuels, often from politically unstable regions. Some studies project that European dependence on imports for its oil requirements will rise to 90% by 2020.
In the past, governments not only intervened to manage risks to supply interruption; they also did so with little regard to cost. These measures ranged from subsidies for national sources – coal and nuclear – and stocks of imported fuel, to championing national champions abroad, government-to-government contracts and even military intervention. Many of these approaches are no longer feasible, given that European energy companies operate in a free market or will soon do so.
The EU is currently assessing whether security of supply can be achieved without additional government intervention under conditions of energy market liberalisation and privatisation. Key security-relevant results of liberalisation are thought to be (1) diversification, both geographical and regarding fuels for larger users; and (2) flexibility, i.e. through open networks.
The implicit assumption is that private operators in the supply chain will each pay an "insurance premium", i.e. they will assume economic costs in their contractual and investment decisions to protect against supply interruptions. These may include fuel stocks, redundancies in supply networks, mixing secure high-cost sources with cheap open market supplies, investing in dual-use capability in generators, etc.
A second assumption is that the sum of these micro-economic investments in security (the metaphorical "premium") will be equal to a macro-economic (not to mention a political/strategic) optimal premium.
The question of the need for a public calculus of security is relevant to the development of innovative energy solutions in the European Union. Such solutions, whether they involve energy saving or alternative sources of supply, usually have two qualities: initial costs higher than current market costs; and an in-built "autarchy" premium. They are also invariably oriented towards the longer term and include security considerations, like climate change, which is not concerned with interruptions to supply but dangers from (certain) supplies. Government is therefore willing to intervene in narrowing the gap between short-term market prices and the initial high costs of alternative energy. The discovery of a security deficit could add a further socio-economic rationale for the support of research and introduction of innovative energy solutions.
The proposed project is designed to develop a methodology for identifying a potential micro-macro gap in energy security and to provide, in co-operation with stakeholders, a first plausibility test of the suggested hypothesis.
This project develops:
- a methodological framework for analysing micro- and macro security needs;
- a first descriptive map of (1) security challenges and (2) economic agents’ responses in the supply and consumption chain;
- an indication of possible policy responses and the research required to build the foundations for such responses.
The research tasks are explored by individual members of the consortium and discussed and amended in two workshops. The first workshop ia mainly analytical and involves academics. The second includes agents and other stakeholders.
Studies preparing the analytical workshop include:
Risks: An up-to-date assessment of the types of and probability for external and internal (e.g. a major nuclear accident) supply crises.
Costs: A calculation of the macro-economic costs and, in some cases structural adjustment costs, of such supply crises. This calculation includes country differences of risks and costs, e.g. as a result of differences n energy supply, liberalisation policy and characteristics of domestic energy production and use
Costs: A calculation of the micro-economic costs of such crises, e.g. to private operators in the supply chain, taking into account off-sets, such as higher prices
Evidence of "security premiums" being paid in contractual and investment decisions by operators.
Future scenarios of energy supply, particularly with regard to renewable sources but also nuclear power, taking into account the concerns of climate change and, more recently, vulnerability to terrorist attack
Long-term technology investments, energy demand management and approaches in the transport sector
The stakeholder workshop is aimed at:
- offering invited participants to comment the results of the analytical work
- gathering suggestions from stakeholders, including economic agents, EU and national officials, parliamentarians and non-governmental organisations (NGOs) regarding possible policy options
- identifying gaps in knowledge regarding the economic mechanisms involved, the behaviour of agents, and underlying data and forecasts that should inform a future research effort.