Using a framework based on vulnerability, risk and offsets provides valuable insights for evaluating the security of an energy system in transition, according to a new issue brief by an expert in the Center for Energy Studies at Rice’s Baker Institute for Public Policy.
"Energy Security and the Energy Transition: A Classic Framework for a New Challenge” is authored by Mark Finley , fellow in energy and global oil at the Baker Institute.
"Policymakers in the U.S. and around the world are grappling with how to understand the security implications of an energy system in transition - and if they aren’t, they should be,” Finley wrote. "Recent attacks on Saudi facilities show that oil supply remains vulnerable to disruption. New energy forms can help reduce vulnerability to oil supply outages, but they also have the potential to introduce new vulnerabilities and risks.”
The U.S. and its allies have spent the past 50 years building a robust domestic and international response system to mitigate risks to oil supplies, but similar arrangements for other energy forms remain limited, Finley said. His paper offers a framework for assessing energy security based on an evaluation of vulnerability, risk and offsets. This approach has been a useful tool for assessing oil security, and it can be relevant for assessing energy security in an energy system in transition, Finley said.
The first element of the framework is vulnerability, which is how exposed the U.S. and global energy systems are to a shock, Finley said. "This could include the size of the energy input to the economy (in absolute terms and especially in financial value), the degree of substitutability and the concentration in key sectors, such as the importance of oil in transport,” Finley wrote. "Vulnerability has loomed in public perceptions as an economic consideration, experienced as either price spikes and/or physical shortages. Other vectors of vulnerability can include potential adverse effects from a disruption for diplomatic, strategic or military objectives. In recent years, environmental objectives - especially climate change - have emerged as increasingly important to assessing vulnerability.”
In addition, risk assesses the chances of a shock, Finley said. "Considerations must include not only the probability of a disruption but also an assessment of the potential magnitude and duration,” Finley wrote. "A large but brief shock (such as the one seen recently in Saudi Arabia) may be less disruptive than a small but long-lasting one.”
Finally, offsets include the capacity and timeline to counter a shock, Finley said. "This could include the ability to increase production elsewhere, draw supply from inventories, switch to other energy sources and/or reduce demand by conserving energy,” he wrote. "The purpose of these interventions is to cushion the impact of the shock while giving markets - both producers and consumers - a chance to respond in a more orderly fashion. Energy security policy can aim to address any of these dimensions. For example, vulnerability can be reduced by diversifying the fuel mix, risk can be managed via diplomacy or military power and a strategic stockpile can be used to offset lost supply.”
Finley concluded, "The domestic and international assessment of - and policies aimed at improving - energy security must evolve along with the energy system. Growing reliance on natural gas and renewable energy help mitigate vulnerability to future oil supply disruptions. But with these alternatives playing a much larger role in the global energy economy, and with mining of base metals and manufacturing of new energy components concentrated abroad, these same dynamics also raise the prospect of new vulnerabilities and risks that must be understood and managed. ... Moreover, a robust set of capabilities and institutions has been built up over the past 50 years for managing oil supply risks, but such capabilities are limited for other energy forms.”
Finley said data collection "is always a good place to start; cooperative efforts to systematically gather information on the relevant indicators for new energy forms is in its infancy. ... The framework of assessing energy security by analyzing vulnerability, risk and offsets - and building domestic and international policies to address these three factors - can be a useful approach in tackling this emerging challenge.”