Transporting Turkmen Energy to Europe: a New Approach

The importance of the launch of the Caspian Energy Grid initiative at the Research Institute for Energy Management & Planning of Tehran University (RIEMP) on June 20 should not be understated. It saw an agreement between Dr Hossein Iranmanesh, of RIEMP, representing Iran's public & academic energy sector institutions; Professor Mir Mohammad Sadeghi, of the Education & Research Institute of the Iranian Chamber of Commerce & Mines (ICCIM), representing Iran's private energy sector, and myself, representing a consortium of energy service providers and experts known as Petro Scotland.

The concept first saw the light of day at a UN Conference in Ashgabat in December 2014 on 'Reliable & Stable Transmission of Energy,' the principal purpose of which was for the EU to enhance its energy security through accessing Turkmen gas through a new pipeline under the Caspian Sea to extend the Southern Gas Corridor (SGC) to the East.

The Iranian delegate in Ashgabat – Dr Azizollah Ramazani, the chairman of National Iranian Gas Exports Company – pointed out in his speech that it made more sense for Turkmenistan to install state-of-the-art 60% efficient gas fuelled power generation, and link it to Azerbaijan via a high-voltage direct current (HVDC) link, than to export natural gas thousands of kilometres to Europe with all the wasted energy that implies.

Caspian Energy Grid

Dr Ramazani's suggestion, and his accompanying reference to achieving energy efficiency through the adoption of Least Carbon Fuel cost, were consistent with the presentation I made at the conference as a UN energy expert on the subject of a Caspian Energy Grid.

Although my presentation proposed triangular HVDC links between Kazakhstan, Azerbaijan and Turkmenistan (which I referred to as the 'KAT Core' to begin a Caspian Power Grid) the electrical energy flowing through these links – which would initially be gas-fuelled but subsequently powered by solar and wind energy – is not the only flow of energy in the Caspian and wider region, which also extends to oil, gas and oil products.

There are several innovations in relation to what I like to term a 'Natural Grid' which transcends the National Grids of the Caspian littoral states.

First, the architecture of energy generation and distribution throughout this Natural Grid would be in accordance with the 'Least Carbon Fuel Cost' principle – which is to say that carbon fuel use is minimised for any given use of electricity, heat/cooling and power.

As Denmark has demonstrated over the 40 years or so since the Oil Shock cruelly exposed their exposure to oil prices, this is the only constructive way in which carbon fuel use (and as a beneficial consequence CO2) may be reliably and consistently reduced.

Denmark's energy infrastructure was funded directly or indirectly by the Danish public sector, but the fundamental problem for market economies is that this 'Least Carbon Fuel Cost' principle conflicts with the tendency for market participants to apply what is a 'Least Dollar Cost' principle, which leads to very different outcomes.

Energy as a Service

The second innovation, which is in development financing and long term funding of energy infrastructure. Petro Scotland proposes the widespread use of energy swaps of two types: firstly, location swaps, whereby energy flow into one location is exchanged for energy flow out of another (such as the Caspian Oil Swap) and category swaps, such as gas for power, oil for products, fuel for transport, and many more.

But perhaps the most important form of swap was made as long ago as 1778 by the great Scottish inventor and engineer James Watt when instead of selling his new and efficient steam engines to Cornish tin miners to pump out water, instead supplied or leased them in exchange for 33% of the coal they saved.

This exchange of the value of the use of technology for the value of carbon fuel savings may be seen either as a Capital Partnership or as 'Pumping-as-a-Service'. The outcome was to align James Watt's interests with those of the tin miners: the more he improved his engines, the more coal was saved.

So the first key element of the Caspian Energy Grid initiative will be the use of energy swaps to fund renewable energy and energy efficiency capital investment.

Energy Credits

The problem with energy swaps of flow is that the supplier of fuel or technology may not have a use for his entitlement to energy flow.

The key innovation here is the pre-pay energy credits, which enable investors and/or customers to invest by 'paying it forward'. The energy supplier simply issues, in exchange for value received, his promise to the acceptor, which he will then accept in payment for energy supply. This form of funding is not debt, since there is no obligation to pay money; it is not a derivative, since there is no delivery obligation, and it is not ownership (equity). In fact, this funding instrument pre-dates modern finance capital by millennia.

In order to create a Caspian energy financial platform within which participating energy producers will accept each others' credit instruments it is necessary to create an accounting system, a messaging system and a system of mutual risk assurance known as a Protection & Indemnity (P&I) Club – which has been in use to cover shipping risks for over 140 years, with risk management by a service provider who assesses limits on credit issuance.

A Smart Market

The Caspian Energy Grid initiative will combine an optimally efficient physical energy grid with networked trading and financing which connects producers directly with consumers. The Smart Market outcome is that the power generation which is operated to dispatch energy to consumers will no longer be the generator which operates at 'least dollar cost' – with perverse outcomes – but is that which operates most energy efficiently at 'least carbon fuel cost'.

Next Steps

The plan is now for a series of themed domestic and regional workshops aimed at rapid deployment of proof of concept projects in the energy themes being addressed.

It will be seen that the concept aims to replace destructive competition for upstream sales of energy as a commodity, with co-operation to share costs throughout the region through implementation of energy as a service.

As I remarked in Tehran, solutions to problems will never come from within a system, and policy initiatives are frequently taken more seriously if they come from an outsider like me. I believe that Iran's exclusion from global markets and banking systems uniquely places it in a position to suggest practical and demonstrably effective policy solutions (as applied by Denmark for over 40 years for energy security reasons) which will implement in practice the agreement in principle reached in December at the COP 21 meeting.

Chris Cook is a former director of the International Petroleum Exchange. He is now a strategic market consultant, entrepreneur and a commentator.