One size does not fit all with energy trade models

American practices of energy trade are considered the gold standard around the globe. When countries look for models of best practices, they usually adopt U.S. regulatory and legislative systems.

However, as many countries around the globe are discovering, transplanting American systems of natural gas and electricity trade into their own markets creates its own set of energy security challenges. In recent months, several foreign states that adopted U.S. market-based models of energy trade decided extra state intervention is needed to promote local energy security.

{mosads}The most noteworthy of these policy reversals is the recent decision by the government of Australia to limit liquefied natural gas (LNG) exports and examine the building of a major domestic gas pipeline. While U.S. models of energy trade may work in large and liquid markets, where most energy is not imported, they create many policy challenges when transplanted to smaller, often energy-importing markets.

Consequently, foreign states should be cautious in their wholehearted adoption of these models. At the same time, it makes sense for Secretary of State Rex Tillerson, as he reviews the utility of various United States Agency for International Development (USAID) and State Department programs, to weigh the wisdom of continuing to fund the foreign export of U.S. models of energy trade.

Beginning in the second half of the 20th century, significant changes have taken place in the role of the state in energy trade and energy supply infrastructure. Many market-oriented states, including the United States and countries of the European Union, have significantly reduced government involvement in the energy sector; beginning first with oil trade, then power generation and natural gas trade.

The trade and supply of oil and coal, as fungible commodities, was amenable to market deregulation. However, the deregulation of trade and supply of natural gas, which requires extensive permanent infrastructure and large-scale investments in both production and transport, presents significantly different policy questions. Achieving security of supply of these vital utilities is rarely achieved without government intervention.

The energy trade regulatory system in Australia, like that of the U.S., has a very low level of government intervention. Despite being one of the world’s major natural gas producers and exporters, Australia has in recent years experienced domestic gas shortages.

In addition, natural gas prices there are so high that many Australian utilities and industries have continued to consume coal, even while the country’s gas was exported to markets in Asia, mainly China. In the last year, Australia has experienced several power outages and experts anticipate that, without a major policy change, there will be even more extensive power outages beginning in the summer of 2018.

In response to popular demands, the government of Prime Minister Malcolm Turnbull recently decided to reverse Australia’s long-standing non-intervention policy and authorized limiting if need arises of LNG exports (beginning July 1). Leaders are also considering tendering a 1000-mile, cross-country natural gas pipeline that would help more gas reach different parts of Australia’s domestic market.

Echoing U.S. President Donald Trump’s America-first approach, Turnbull justified the new policy by saying, “Australian demand, Australian businesses, Australian jobs and Australian families have to come first. It is ridiculous for us to be on the edge of becoming the largest LNG exporter in the world and not to have enough gas for our businesses and households.”

Last year, Australia exhibited further protectionism when it barred Chinese companies for bidding for ownership of Australia’s largest electricity grid, due to national security considerations.

As Secretary Tillerson reviews the utility of various State Department and USAID projects related to energy trade, it would be useful to study the lessons from Australia and other natural gas and electricity markets that have adopted a U.S.-type regulatory model.

As these countries realize that this approach does not necessarily keep the lights on, or at least keep energy affordable, it’s becoming clear that regulatory approaches that work in the U.S., may not work well elsewhere. This is especially true in smaller markets and those with national security considerations related to their energy infrastructure.

Brenda Shaffer is a specialist on energy and foreign policy. She is a visiting researcher and professor at Georgetown University’s Center for Eurasian, Russian and East European Studies and a senior fellow at the Atlantic Council’s Global Energy Center. She is the author of  several books, including “Partners in Need: the Strategic Relationship of Russia and Iran” and “Energy Politics”. 

The views expressed by contributors are their own and not the views of The Hill.