Geopolitics of Electricity, with Chiara Lo Prete

NIKOLAS GVOSDEV: Welcome, everyone, to this edition of The Doorstep podcast. I am your co-host, senior fellow at Carnegie Council Nick Gvosdev.

TATIANA SERAFIN: And I am Tatiana Serafin, also a senior fellow here at Carnegie Council.

Nick, I have been thinking a lot about electricity lately because it is getting warmer, I am looking at the switch to air conditioning, and I forgot my charger the other day and my phone died. It is all around us, and I wanted to look at the infrastructure and what it means.

I have been doing a lot of reading, and Bloomberg estimates demand for electricity globally will increase by 60 percent [by 2050]. International interconnections are on the rise, there is more and more being built, and in areas more and more electricity is being used as a tool for geopolitical reasons, and I thought, We need to talk about that. We need to talk about this new term "electricity foreign policy."

At a New York University (NYU) event a couple of weeks ago I met Chiara Lo Prete, and I invited her to come on and speak with us about this very important topic that needs to get some more attention. Chiara is the associate professor of energy economics in the John and Willie Leone Family Department of Energy and Mineral Engineering at Penn State University and a faculty member in the intercollege graduate degree program in Energy, Environmental, and Food Economies at Penn State, and she is the perfect person to explain what is going on globally, what is going on with Russia, and what is going on with China, these big questions that I think we need to address in electricity markets. She joins us now.

Thank you so much for joining us today, Chiara. Nick, I told you I met Chiara at NYU when we had a panel in February on global geopolitics and energy right before the first anniversary of Russia's second invasion of Ukraine, and I was so impressed with Chiara and her discussion of the geopolitics of electricity. I thought, This would be perfect for our listeners and our audience. We encourage you to join us on Twitter and share your questions so that we can engage in this discussion, which I think is so interesting in looking at electricity not just at the doorstep, as this small thing that happens in my house when I turn on the light, but as a global issue that we should be discussing more broadly.

I want to just give an anecdote. We are all talking about higher electricity prices. That has been a problem since last summer. We are talking about green energy and changes, but it really hit home to me when I was in the theater for a Ukraine fundraising event and the lights went out and the voice of President Zelenskyy of Ukraine came on and said, "You're in the dark"—I'm paraphrasing; it was much more eloquent and powerful—"This is how we live now." It got me to deeply thinking how much we rely on electricity every single second of our life. We need to elevate this conversation.

Chiara, thank you so much for being with us to help us elevate this conversation about electricity and about why we need to look at it on a global scale, that it is not just about oil, because that is all everybody talks about. Even driving in the other day, "Oh, the price of oil shot up because the supply has gone down." Nobody ever talks about electricity this way. Can you tell us why we should and why this needs to be part of our conversation? Why have we traditionally only been focused on oil and gas? Part two of that, of course, is how electricity grids entail geopolitical risks.

CHIARA LO PRETE: First of all, thank you very much for having me. It is a pleasure to be here with you today.

Yes, definitely. Over the past three to four decades, all studies of the intersection of energy and geopolitics have basically centered around fossil fuels and the use of oil and gas exports as a weapon. There has been a lot of attention given to that.

Electricity has not received as much attention, as you correctly pointed out. I think that is due to a number of reasons. First, unlike oil and natural gas, electricity is not a globally traded commodity. Were the Strait of Hormuz to be shut down, consumers filling up at the pump in the United States would immediately feel the pinch, but there is no analogous situation for electricity.

The second point that is often made is that electricity trading tends to be more reciprocal than trade in oil and gas because oil and gas flow in one direction, from an exporter to an importer, while trade in electricity between countries flows both ways. This implies that unlike trade in natural gas, which requires a fixed transportation infrastructure such as pipelines or liquefied natural gas terminals, the relationship between sellers and buyers of electricity is less exclusive.

Even if, say, an exporter of electricity acquired a dominant position with respect to an importing country, the asymmetry could not easily be used—this is the argument; I am making the argument why this should not be a problem—as an instrument of geopolitical pressure because countries have a number of options at their disposal: They could produce the electricity themselves, they could import electricity from neighboring countries. In other words, the fact that electricity exporters are part of a very complex web of interdependencies between importers and exporters would tend to curtail the potential to use electricity as a geopolitical weapon.

These are good arguments, they are valid points, but I would argue also that if network topology allows a single nation to cut off electricity supplies to another country, such a cutoff would actually pose risks that are even more serious than a fossil fuel disruption. This is primarily due to the current inability to store very large amounts of electricity economically. We need to balance electric power systems at all times, so any power interruption could result—you just mentioned before—in blackouts and failures that cascade across infrastructures in neighboring countries while, for example, the delay of an oil tanker would not lead to failure of an energy system. In this sense I would argue that electricity grids are much more vulnerable to disruptions than the current fossil fuel supply.

The answer to your question is, yes, I definitely think that cross-border interconnections can entail geopolitical risks, so the potential use of electricity as a weapon deserves closer scrutiny than it has received so far.

TATIANA SERAFIN: That is super-fascinating, and I am fascinated by this term "electricity foreign policy" that I think you are hinting at with this discussion of geopolitics. I think it is important to understand the idea of grid interconnections across borders because it is something I do not think the average person thinks about. We are alluding to the fact that there are these interconnections. Can you talk a little bit more about what that means in practice?

CHIARA LO PRETE: Cross-border interconnections, interconnections between different countries, have several potential geopolitical bottlenecks that can hinder these cross-border grid interconnections. I want to mention a few and bring some examples of geopolitical hurdles that hinder these interconnections.

Circling back to what we were discussing, interconnections may be discouraged if there is fear that this interconnection will create and institutionalize some relationships based on asymmetric dependence, which then can be used by one partner against the other. Of course a certain degree of asymmetry is almost like an inherent feature of energy trade relations, but as dependency rises the less-dependent party can extract gains from the dependent party, drawing on the asymmetry. By gains I am referring to, for example, political concessions, trade gains, and there may be other gains.

These gains may be achieved by the partial or complete interruption of electricity flows. An example is cross-border integration of electricity in the Mekong Basin because it has been argued that further integration in this electricity grid is actually suppressed by the fear that China will attempt to use interconnection as a means to extract political concessions from other partner countries such as Vietnam and the Philippines on the disputed offshore energy exploration in the South China Sea. This is a factor that again prevents further integration in that particular regional grid.

Another factor is lack of trust, generally due to past unstable and bitter political relations. The example I want to give here is a very interesting study I was reading that was published in Energy Policy a few years back. Between 1991 and 2015 there were ten attempts made to connect electricity grids between Israel and its neighbors, and in the Energy Policy study the authors examined several Israeli archives, including documents that present the positions and interests of key actors in the negotiation processes for grid expansion and construction during peace building times—I am referring to the Oslo peace process beginning in 1990 and 1991—but also during periods of political conflict between Israel and the Palestinians. The paper looks at this evidence and finds that for a number of proposed transmission lines the perception of this dependence bottleneck and lack of trust led Israel basically to block several grid interconnections because Israel feared that its electricity imports may be used against it by exporting countries for some sort of coercive foreign policy objectives.

On the other hand, there were other international grid connections in the area that were supported and went on. The grid was actually built when these efforts appeared to lead to peace dividends or to strengthen peace, even when the economic rationale was marginal. In this case the dependency argument, the security economy bottlenecks, were overcome.

Another issue that I would point out are the so-called "zero-sum" considerations. What is a zero-sum game? In economics a zero-sum game is a situation where one actor's gain is equivalent to the loss of another actor, and this brings the collective payoffs to a sum of zero.

Zero-sum thinking is very common to the governance of energy resources. Negotiations basically focus on maintaining existing resource allocations rather than opting for cooperation strategies that will increase the sum of net benefits. In this case, despite the potential increase in the gains of the country from electricity interconnection, cooperation may actually fail if the other country perceives these gains as their own losses.

Again, an example of when this might have happened, and I want to refer to the Desertec initiative, this idea of producing green electricity in the desert of North Africa and exporting it to Europe. This is a project that drew a lot of political and economic attention in maybe 2009 and 2010 but eventually failed for a number of reasons, which we can talk about more, but one of the key reasons was exactly the zero-sum considerations on the European side.

TATIANA SERAFIN: That is so fascinating, this idea that we can all be more globally interconnected in electricity and yet there are these factors that are preventing it, to your point with the zero-sum considerations.

Going forward there are still all these initiatives that are happening to try to increase interconnectivity. One of the ones we have talked about are China's Belt and Road Initiative. Electricity and working on the electric grid sections is a huge part of that. People tend to think it is about roads and maybe dams—we hear some of the dams are failing—but we do not often talk about the electricity part of it. Can you tell us more about what China's objectives are?

CHIARA LO PRETE: Yes. The Belt and Road Initiative was launched in 2013, and just like you said it is based on the idea of building connectivity primarily through the construction of infrastructure. Related to this, in kind of this realm, another parallel Chinese initiative is this proposal for the creation of a global energy grid, an idea that was presented I think for the first time around 2015.

What is the plan there? The vision is to connect different regions with high-voltage direct current or HVDC lines across the world. This would be done to harness wind from the poles and sun from the deserts, for example. These seed technologies offer several technical advantages over the more widely used alternative-current lines or AC lines. One key advantage is the low transmission losses over long-distance transmission again in comparison to AC lines. These DC grids are also known as "supergrids." Often times we hear this term, so we actually mean these DC grids.

The sound proposed in this Global Energy Interconnection may sound unrealistic, but actually it is based on realistic technical capabilities and considerations. From a purely technical point of view it is actually feasible. On the other hand, the project is incredibly controversial because it would raise questions over control and distribution of renewable energy sources that have in the past been the focus of the geopolitics of oil and gas.

The political feasibility to realize the vision is very difficult. There are several geopolitical hurdles. Probably the main one is this risk perception of the dominance of China in strategically important critical infrastructure. A global grid would kind of imply and entail a completely different definition of energy security to be achieved at the global level, but the trust—going back to the trust point we were making earlier—required to achieve the new approach is enormous, and energy security remains a national objective. That is the reason why even though the initiative might be feasible from a technical standpoint the geopolitical hurdles are substantial.

NIKOLAS GVOSDEV: I just wanted to touch on that and this question of trust, which I think is a critical one because you do not want to be in a situation where your economy is humming along, people have their power, you are in an integrated network, and then someone pulls a switch in another country and your power goes off, so trusting that these interconnections will be running and will continue to function even if there are disputes between countries becomes important.

As China is looking at creating this global energy interconnection, this brings to mind that we already have a test case in Eastern Europe from Soviet times with the Soviet bloc efforts to produce energy integration and then the assumptions after the collapse of the Soviet Union that energy interdependence among states would produce conditions that would alleviate conflict and so on. It seems that some of those assumptions may be questioned ever since the Russians restarted aggressive military operations against Ukraine.

We have talked a lot about integration, but now as you raise this question of national security what is happening with disintegration along the line in Central and East Europe? How are countries—particularly the Baltic States, which used to have an integrated electricity network with the rest of the former Soviet Union and particularly with Russia—handling this process of disintegrating or de-aggregating these cross-border electrical grids?

CHIARA LO PRETE: I think the history of interconnectivity in Eastern Europe provides a very, very clear example of the importance of geopolitics for electricity, so I am glad that you are bringing this up. I want to provide maybe a little bit more context before answering this specific question.

The Baltics joined the European Union in 2004, but importantly their grid is still part of the post-Soviet electricity grid, which is called the Integrated Power System or IPS. Their grid functions as a ring for Belarus, Russia, Estonia, Latvia, and Lithuania, and this ring is collectively known as the BRELL ring. The Baltic States are already integrated from a market standpoint with part of the European electricity market. They are part of Nord Pool, which is the electricity markets in the Scandinavian countries, and they have some electricity interconnections with European countries.

The decoupling from IPS and synchronization with Europe's continental grid have been on the agenda for some time now, and they are currently foreseen for 2025. The project has received approval from the European Commission, which designated it as a project of common interest, which opens the way to the EU's financial assistance to the project.

What are the implications of this desynchronization? First of all, there would be some actions that would need to be taken on the European side, some operational adjustment and further market integration measures, and that is okay. One of the key points is that desynchronization also forces Russia to incur financial costs to take these operational adjustment measures. Perhaps even more importantly it reduces its sphere of influence and its ability to maintain very lucrative electricity exports to the Baltic States. Another thing to keep in mind is that Russia has historically counted on the Baltic transmission networks to supply Kaliningrad, which is the exclave situated between Poland and Lithuania along the Baltic coast.

In the initial stages of this negotiation Russia tried to persuade the Baltic States and the European Union to stop synchronization. This was done, for example, with diplomatic means. There were some claims that the Baltic withdrawal would actually disconnect Kaliningrad, which could not function in isolation from the IPS, but Russia did not attempt to deliberately destabilize the Baltic's power grid.

What are some of the most recent developments? Russia started developing energy infrastructure to prepare for the desynchronization of the Baltic States from the IPS before the states are ready to do so themselves. While in the early stages of discussion the interdependence between power grids constrained Russia's use of electricity as a weapon because that would have endangered Kaliningrad's power grid, the constraint may no longer apply after these infrastructural upgrades we are talking about are completed because at that point Russia would be at least in principle in a position to threaten to prematurely disconnect the Baltics from BRELL, which may result in blackouts and potential repercussions on grid balance and stability in Eastern Europe.

The situation is again in flux. We are waiting to see what happens before 2025, but there are several moving pieces. Again this is a case in point where we want to say that geopolitics and electricity are not disconnected.

TATIANA SERAFIN: Taking us back to the point of Ukraine that I mentioned at the top of the conversation, this is also through in Ukraine and Moldova, and you mentioned 2025. Russia is in a war with Ukraine, Finland just joined NATO, Russia is not happy, so I am wondering what are some ways that these interconnections are influencing in a way that maybe we are not discussing? We are discussing weapons and drones, but we are not discussing the electricity problem in Ukraine and that interconnection. Can you talk us through those interconnections and why we need to factor in that interconnection and that grid in the geopolitical discussion?

CHIARA LO PRETE: I think this is a great point. I want to reference a good article in Foreign Affairs published a few weeks ago that I read about Ukraine's electricity crisis. The author makes this argument that there are not just military battles being fought in Ukraine but also infrastructure battles. The infrastructures battles do not receive as much attention, but they are important, and actually the outcome of the infrastructure battle may affect the outcome of the conflict in general.

A key part of what is happening in the crisis in Ukraine from an electricity standpoint is related to these transformers. Let me explain very briefly what these are.

Electricity grids are complex machines, probably one of the most complex machines ever devised by humans, and they consist of five categories of facilities and equipment: We have the generation plants, then we have the transformers that increase the voltage for transmission from the plant to the transmission lines, we have the transmission lines themselves that carry current from one place to another, we have transformers that lower voltage at intermediate substations, and finally distribution networks that bring power to homes and businesses.

The Achilles heel of electric grids are these large transformers that raise and lower the voltage of electricity. These are called generally "step-up" transformers. These devices are massive. They weigh hundreds of tons. They must be transported by special rail cars and trucks, and importantly by necessity these transformers need to be placed in open spaces to allow the free circulation of air for cooling. This open-air design makes them a prime target for long-distance attacks by bombers, missiles, and drones, and this is exactly what has happened in the Ukrainian conflict. These transformers have been a prime target for attacks.

The procurement of transformers is now a very urgent priority for Ukraine, but obtaining replacements is not as easy as you might think. In fact it is very challenging, not just because there are no funds because these are expensive devices, but also because these are very hard to transport. There are often custom-designed components whose manufacturing is concentrated in just a handful of countries including China, India, Japan, and South Korea.

I would definitely encourage everybody to read the article that I am referring to, which I really enjoyed as an electricity nerd. I think the key point is that the war in Ukraine has exposed several vulnerabilities in the supply chains for this key critical equipment. There is a need to think about different solutions as stopgap measures in situations like this.

TATIANA SERAFIN: I have to admit I was not even thinking about the equipment angle and the vulnerability of the equipment supply chain. You mentioned Japan, China, India, and South Korea. China is always a factor on the supply side, for the actual grid or thinking of a global grid for the Belt and Road, and for the actual physical parts.

I am wondering if you could talk a little bit more about the U.S.-China relationship. Does electricity factor into that? Bring it home to the United States. How does the United States think about electricity? Are we worried here? Should we be more worried?

CHIARA LO PRETE: First of all, I want to make a comparison with Europe. In Europe we talked about BRELL, we talked about the European continental grid, which forms the center within the European Union, but in fact in Europe there are five synchronous but connected direct-current lines, and the Baltic grid is one of them.

In the United States back in the early 2000s the Federal Energy Regulatory Commission promoted the concept of independent system operators (ISOs) and regional transmission organizations (RTOs). ISOs and RTOs operate the transmission system independently of wholesale market participants in about two-thirds of the United States, and they foster a competition for electricity generation for the creation of energy and auxiliary service markets.

To go back to your point, the ISOs and RTOs often but not always span various states. To give another example, PJM Interconnection, which is the largest electricity market in the world, operates the transmission system in a region that includes all or part of 13 states in the Northeast and Mid-Atlantic, including Pennsylvania, which is the state where I live, and the District of Columbia, so 13 states plus the District of Columbia.

I would argue that, of course, there is no geopolitical conflict of the type we have been discussing in the United States, but policy choices that are made unilaterally by a state when the state is part of this kind of regional grid for sure affect outcomes in regional markets such as cross-border—in this case cross-border would be cross-state—electricity flows, and the implication is that there might be distortions in the electricity prices that are set across the network because clearing occurs at the regional level, but once again if policies are decided at the state level there might be an impact.

What is an example of this? If we go back a few years, the prospect of retirement by large base load generation facilities induced actions in several states to provide out-of-market compensation to financially distressed generation resources, and some nuclear plants requested and have been awarded subsidies through zero-emission credits (ZECs) or similar mechanisms. So a few years back there was a lot of discussion about these ZECs and how state subsidies might affect the outcomes of regional markets. There were a number of initiatives taken at the market level to try to mitigate the impacts of these actions taken at the state level.

Another example that I want to mention—but this I would argue may be less common—in some cases actions taken by market participants affect electricity flows across ISOs and RTOs, so kind of going up one level if we think about the connections between ISOs and RTOs. An example is the circuitous power-delivery schedules around the Lake Erie region, if we go back to 2008, so about 15 years ago. What happened in that case? Beginning in spring 2008 speculation grew that some market participants were increasing their transactions over indirect paths around Lake Erie. This was not in order to take advantage of the different pricing policies of the four RTOs surrounding the lake. The transactions were scheduled to exit the New York ISO, they were going to Canada and then flowing through the Midwest ISO, finally ending up in PJM, which is the regional grid operator in Pennsylvania and other states.

There were a number of discrepancies between the scheduled and actual flows, and these discrepancies caused transmission congestion and increased costs, causing market distortions. The impact on prices is relevant because it affects prices that we as consumers pay. That is the implication for us.

As a result of this situation, the Office of Enforcement of the Federal Energy Regulatory Commission initiated an investigation into the suspicious power flows. They eventually concluded that there was no market manipulation involved and that market participants were simply responding to price signals when they were placing these circuitous power-delivery schedules, but this is another example of decisions made by market participants that affect cross-border electricity flows.

TATIANA SERAFIN: I think that is a great example. So we not only have to look at policymakers and governments, but we now also have to factor in market participants. I think that is what makes this such a complex network. I appreciate you explaining it to us. I think it has made a big difference in my thinking and hopefully that of our audience.

Before we wrap, you mentioned Foreign Affairs as a trusted source. I did signal to you that I wanted to hear some more examples from you of what we should be reading to learn more about electricity markets and the complexities so that we can make more informed decisions and we can ask more of our policymakers to make the best decisions for us at the doorstep. Some suggestions?

CHIARA LO PRETE: I like listening to podcasts, and one of the assignments in my classes always relates to podcasts. I encourage my students to listen to podcasts and give presentations to the rest of the class and write little reports or expand on a certain topic.

I have three recommendations for podcasts. The first one is Resources Radio, which is a weekly podcast by Resources for the Future, that features interviews with researchers and experts about energy and climate change. That is the first recommendation.

The second one is a relatively less known podcast called How We Survive. This is more like a climate tech podcast. I really enjoyed season one. I think they have two or three seasons, so they are relatively new. Season One was called "White Gold," and it focused on the race to mine lithium, and it was just fascinating. I thought it was really interesting and well done, so I encourage the audience to check it out.

The last one is probably more well-known, the Columbia Energy Exchange, which features conversations with energy and climate leaders I think from government, business, and academia.

TATIANA SERAFIN: We also love podcasts here at The Doorstep. Thank you for those recommendations. Thank you so much for sharing your knowledge and insight, and I am so glad we met at NYU. I want to give a shout-out to another Doorstep guest that we have had, Carolyn Kissane, who is the connection through which we met on our own networking grid.

Thank you so much, Chiara, for your time.

CHIARA LO PRETE: Thank you for having me.