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Asian governments must respond to energy revolution

China's new ministry highlights need for administrative reforms

| China

China is making a monumental change in how it governs its energy sector: by giving itself an energy ministry. Beijing announced earlier this month that the country's vast oil, gas, coal and power sectors will be overseen by an energy ministry, which would replace an existing regulator. The timeline and other details of the planned ministry are not yet available, but given that this is China, what the government decides, the government does.

For the past decade, the country's energy sector has been administered by the National Energy Administration (NEA), which answers to the National Development and Reform Commission, a macro-economic management body. The new ministry, apart from its higher status, is also expected to be more effective as it would combine energy-related responsibilities that are currently distributed across several government agencies.

Beijing's approach may not be right for the rest of Asia. But its readiness to respond energetically to the energy revolution is a model others should study. Staying with old structures carries risks of trapping policymakers in old ways of thinking and keeping them beholden to established, vested interests. Reforms -- when properly planned and implemented taking into account local circumstances -- can help governments manage the crucial changes heading the way of the energy sector in Asia.

In China, the outgoing NEA has been responsible for formulating and implementing policies in new and renewable energy, environmental protection and climate change, all growing rapidly in size and importance, as well as the traditional sectors of oil, gas and coal.

But even the traditional energy portfolio demands novel approaches -- oil, gas and coal use must evolve in different directions in the coming years as China balances the twin imperatives of meeting its growing energy needs while reducing its emissions. Establishing an energy ministry separate from the NDRC is an acknowledgment, even if belated, that the sector is vital enough to be overseen by a more powerful entity than the NEA.

China overtook the U.S. to become the world's largest energy consumer in 2009, led by years of booming industrial and infrastructural activity amid an economic super-cycle. It also became the world's largest emitter of greenhouse gases. The governance that served the energy needs of the economic boom, dominated by a desire to simply secure adequate and low-cost supplies, whether from resources at home or overseas, is very different from what the country needs in the next few decades.

Chinese efforts are now focused on reducing its economy's energy intensity and combating climate change. From being at the forefront of introducing green technologies to slashing its coal and coal-fired power production capacity to planning a national carbon-trading system, China is beating down a new path in sustainable growth. There are challenges to achieving this without creating unwanted headwinds for the economy but guidance from a suitably staffed and empowered ministry is a step in the right direction.

Driven by technology and climate initiatives, change in the energy sector is increasingly getting compressed into shorter periods, blurring the distinction between the evolutionary and the revolutionary. China's journey to becoming the world's largest market for electric vehicles, for instance, was much shorter than the one to displacing the U.S. as the world's biggest crude importer. The country's energy ministry will need to juggle the past and the future, the traditional and the new energy. An advantage Beijing has in starting late is the opportunity to future-proof the energy ministry.

China is not alone in readying for disruption in the energy sector. Its neighbors in Asia, home to some of the world's fastest-growing economies, are in the same boat. A combination of high rates of population growth, economic growth and prosperity sets the stage for a sharp rise in energy demand in these emerging countries.

Ministries and other government bodies that have managed the 20th-century production and consumption of fossil fuels may be ill-suited to plan and execute the development of new energy. India, the second largest energy consumer in Asia after China, has a Ministry of New and Renewable Energy discrete from the Ministry of Petroleum and Natural Gas. The country also has separate ministries overseeing the coal and power sectors. The region's other big economies, Japan and South Korea, in contrast, have bundled the energy portfolio, including the power sector, within ministries responsible for overall trade and industry.

The oil and gas, coal and power sectors are interconnected and fall under the big umbrella of energy. There is no obvious right or wrong way to manage them as far as government structure is concerned. Bureaucracy, political will and vision, availability of funding and infrastructure are also factors that influence a country's ability to meet its energy needs efficiently and in an environment-friendly way.

While the traditional energy sector is evolving to address key challenges such as accessibility, security of supply and climate change, technological advancements present an even bigger external force. Rapid developments in renewables, battery storage, shared mobility, autonomous vehicles and electric cars have the potential to redraw the energy sector as we know it today.

Government targets and policies for new energy are now as much an element to be factored in for an oil refiner in Asia planning to spend billions of dollars expanding or upgrading capacity as scoping out future markets for fuels. The oversupply and oil price crash of 2014, combined with a "lower for longer" view on oil prices, has made the traditional oil and gas industry wary of major new investments. And yet, the base-case scenario of most reputed analysts is that the world will need increasing amounts of oil and gas for at least a few more decades.

The traditional energy industry is doing what it does best in the face of challenges -- becoming leaner, more cost-competitive, and expanding into the new energy space. But governments need to get out in front of this transformation too. Setting targets and policies is not enough. Countries need to re-examine governance structures -- are the agencies in charge of administering mining or electricity or oil refining or transportation appropriately positioned to collaborate and coordinate? Are they all aligned with the government's broad aims and equipped with the resources to do their job? Governments will respond to this challenge in different ways.

The evolving Chinese government structure is not necessarily a model for the region. But Beijing's willingness to respond to radical economic and technological change in a forthright way most certainly is.

Vandana Hari is the founder of Vanda Insights, which tracks energy markets. She has two decades of experience providing essential intelligence on the energy commodities sector.

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