The case for an energy NATO

Nicholas Butler - Professor at Kings College London

• A new sustainable approach is needed with a collective approach to energy security.
• The trend is maximising domestic production and promote self-reliance
• New trust-based structures are essential – an energy NATO?
• The reconstruction of Ukraine should lay the foundation for a modern low carbon economy, capable of full integration into the European market.
• The development of a mutually advantageous alliance with key allies such as Poland

Events in Ukraine since the unprovoked Russian attack on February 24^th are forcing radical new thinking on the future of the international energy market. Across Europe it has become obvious that funding Russian aggression through purchases of oil and gas is intolerable. It is clear that we will need a new sustainable approach with a collective approach to energy security.

Paradoxically, one unintended consequence of the Russian invasion is that Ukraine because of its location and resource base can become central to a new energy alliance, a new energy NATO.

Standing together in response to energy insecurity

The first, natural response from each country to energy insecurity is to maximise domestic production and to promote self-reliance. That is happening now across Europe from Germany to the UK. Local oil and gas resources are to be developed along with wind, solar and in some countries new nuclear.

All that will have some impact, but most countries simply do not have the resources to be self-sufficient. A collective response is required with infrastructure and trading agreements in place to build up available energy supplies and to share them when necessary.

Those who could be vulnerable to attempts by Russia or any other suppliers to use energy supplies as leverage in times of conflict need to stand together rather than be picked off.

New trust-based structures are essential

NATO’s identity was created in the 1940s in response to the needs of the time. The clue is in its name. Times, however, have changed. The nature of the risks has altered. In the 1940s energy was predominantly a matter of local supply, mostly of coal. Now modern economies rely on a mixture of resources, including increasingly electricity. Trade has become part of normal day to day life. The trend cannot easily be reversed. Transport systems which rely on oil are not about to scrapped overnight. Nor are the industrial facilities which rely on gas. The patterns of trade which have developed over the last half century widen the geography of energy security beyond the North Atlantic and a new energy security alliance should reflect the reality of the new world. What matters just as much as in the 1940s is trust. If we can no longer trust a supplier on whom we have depended, new trust-based structures are essential.

The response is a natural extension of the NATO alliance created in late 1940s as a defence and deterrent against the risk of Soviet aggression. The difference now is that new countries can contribute to such a defensive alliance. Ukraine is one obvious candidate for membership of a new energy NATO.

Ukraine’s potential as an energy supplier

Since the February attack, we have seen Ukrainian energy system maintaining stable operation and since March Ukraine has started supplying electricity to the European energy system. A move which can with time reduce electricity prices in Hungary, Slovakia, and Poland. The scope for a close energy alliance with Poland in particular would enhance energy security and reduce the potential for Russia to use its energy supplies in hostile ways.

That is just the beginning and the potential trade which can be built up over time is enormous. Ukraine has the scope to expand their production of low carbon sources of power such as wind and solar helping countries such as Germany, where the availability of land could otherwise be a constraint on production. Ukraine also has the potential to supply the rest of Europe with substantial volumes of modern biofuels.

War has destroyed parts of the existing energy system within Ukraine. An extensive reconstruction programme will be essential once the conflict comes to an end. That reconstruction should replace what has been lost with the facilities and infrastructure of a modern low carbon economy, capable of full integration into the European market.

Ukraine can be at the heart of a new structure – an energy NATO which can both bring in gas supplies from shale production in the US and additional gas from Norway as short-term replacements for Russian imports and simultaneously develop the new low carbon energy economy.

Ukrainian resilience has turned what Mr Putin must have believed would be an easy victory into a humiliating defeat. A country which likes to think of itself as a superpower is losing a war against a significantly smaller neighbour which has far fewer weapons and soldiers. But defeat is not enough. Even if the fighting stops and troops are withdrawn Russia will remain a threat – wounded but resentful. The imperative is to be prepared for a long period of distrust. Protecting and securing access to energy supplies is one crucial element of the necessary strategy of containment and deterrence.

The article is published in a series of articles in Obserwator Finansowy written by governors of central banks and distinguished economists. The series is under the special patronage of the Governor of Narodowy Bank Polski, Professor Adam Glapiński. The authors of the articles have agreed to waive their fees for writing the texts, and in exchange NBP shall donate the amount equivalent to the fees onto the account of the National Bank of Ukraine in order to support the NBU during the war. Below is a foreword by the Governor of NBP to the whole series:

On 24 February a huge tragedy occurred, in the face of which it is impossible to simply move on as if nothing had happened.

Nobody can remain indifferent to the misfortune that has befallen the Ukrainian nation.

All of us are shocked by the press reports, and particularly by what we see in the mass media.

Fighting Ukraine is not only its brave soldiers, but also an army of thousands of civilians trying to preserve normality in a country stricken by Russian aggression.

This army includes the staff of the National Bank of Ukraine, with whom NBP is in constant contact.

Aware of our Ukrainian colleagues’ needs, we have invited several central bank governors and eminent economists to share their knowledge on the economic processes taking place around the world.

It is rare for such a distinguished group of authors to feature in Obserwator Finansowy, which is published by NBP. It is also worth underlining that all the authors have waived the fees for their articles in order to donate them to meet the needs of our colleagues working in the National Bank of Ukraine.

I believe that you will find the series of these articles interesting, especially since they not only share the knowledge and experience of their authors, but also express goodwill towards the war-afflicted NBU.

Prof. Adam Glapiński, Governor of NBP

Nicholas Butler - Professor at Kings College London

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