Almost every facet of modern life - from driving to the grocery store to turning on a light - relies on inexpensive and abundant fossil fuels. When burned for power, these fuels yield emissions of carbon dioxide that accumulate in the atmosphere. They are the leading cause of global warming.

Assuring ample energy services for a growing world economy while protecting the climate will not be simple. The most critical task will be curtailing emissions from coal; it is the most abundant fossil fuel and stands above the others in its carbon effluent. Strong lobbies protect coal in every country where it is used in abundance, and they will block any strategy for protecting the climate that threatens the industry. The only practical approach is to pursue technologies that burn coal much more cleanly.

Such new technologies exist on the drawing board, but governments and regulators are failing to bring designs into practice with deliberate speed. Instead, most of the policy effort to tackle global warming has focused on creating global institutions, such as the Kyoto Protocol, to entice change. Although noble, these global efforts usually fall hostage to the interests of critical countries. After negotiating the Kyoto treaty, for example, the United States refused to sign when it found that it could not easily comply with the provisions. Australia did the same, and Canada is also poised to withdraw. Nor have treaties like Kyoto crafted a viable framework for engaging developing countries; these countries' share of world emissions is rising quickly, yet they are wary of policies that might crimp economic growth.

Breaking the deadlocks that have appeared in the Kyoto process requires, first and foremost, a serious plan by the United States to control its emissions. The United States has a strong historical responsibility for the greenhouse-gas pollution that has accumulated in the atmosphere, but little has been done at the federal level. (A few states are implementing some policies, and they, along with rising political pressure, might help to catalyze a more aggressive federal approach.) It will be difficult, however, for the United States (and other industrial countries) to sustain much effort in cutting emissions unless its economic competitors in China and the other developing countries make some effort as well. Without a strong policy framework to contain emissions throughout the world, levels of greenhouse-gas pollution will reflect only the vagaries in world energy markets. We need a proper strategy for moving away from harmful emissions.

A few years ago, many analysts thought that market forces were already shifting away from coal. They predicted the growth of natural gas, a fuel prized for its cleanliness and flexibility. That vision was good news for the climate because electricity made from natural gas leads to half of the carbon-dioxide emissions of electricity from coal. But natural-gas prices, which tend to track oil prices, have skyrocketed over the past few years, and, unsurprisingly, the vision for the growth of natural has dimmed. Natural-gas plants, which accounted for more than 90 percent of new plants built in the 1990s, are harder to justify in the boardroom. Most analysts now see a surge in the use of coal. One hundred new coal-fired plants are in the planning stages in the United States. Absent an unlikely plunge in gas prices, coal is here to stay.

Despite the challenges of handling coal responsibly, the potential of research and deployment of advanced technologies to help the United States and the major developing countries find common interest on the climate problem is great. In advanced industrialized countries, the vast majority of coal is burned for electricity in large plants managed by professionals - exactly the setting where such technology is usually best applied. In the United States, for example, coal accounts for more than four fifths of all greenhouse-gas emissions from the electricity sector.

Most of the innovative effort in coal is focused on making plants more efficient. Raising the temperature and pressure of steam to a "supercritical" point can yield improvements in efficiency that, all told, can reduce emissions about 20 to 25 percent. Boosting temperature and pressure still again, to "ultra-supercritical" levels, can deliver another slug of efficiency and lower emissions still further. Encouraging investments in this technology is not difficult: most countries and firms are already searching for gains in efficiency that can cut the cost of fuel; a sizeable fraction of new Chinese plants are supercritical; India is a few steps behind, in part because coal is generally cheaper in that country, but even there the first supercritical unit is expected soon. Across the advanced industrialized world, supercritical is the norm, at least for new plants. A few companies are taking further steps, investing in ultra-supercritical units. Two such plants are going up outside Shanghai, using mainly German technology, evidence that the concept of "technology transfer" is becoming meaningless in the parts of the world economy that are tightly integrated. Markets are spreading the best technologies worldwide where their application makes economic sense. In other countries, technologies to gasify coal - which also promise high efficiency - are also being tested.

But power-plant efficiency alone won't account for the necessary deep cuts in emissions. Already the growth in demand for electricity is outstripping the improvements in power plants such that the need for more plants and fuel is rising ever higher, as are emissions. This is spectacularly true in fast-growing China.

A radical redesign of coal plants will be needed if governments want to limit emissions of carbon dioxide. Here, the future is wide open. One track envisions gasifying the coal and collecting the concentrated wastes. Another would use more familiar technologies and separate carbon dioxide from other gases. All approaches require injecting the pollution underground where it is safe from the atmosphere. This is already done at scale in oil and gas production, where injection is used to pressurize fields and boost output. The consequences of injecting the massive quantities of pollution from power plants, however, are another matter. Regulatory systems are not in place or tested, and public acceptance is unknown.

While these technologies can work, they won't be used widely before they progress on two fronts. First, they must become commercially viable. Despite the huge potential of adopting them, it is striking how little money is being spent on advanced coal technologies. The U.S. government has created some financial incentives to build advanced coal plants, but much of that investment is slated for plants that are not actually designed to sequester CO2. In fact, the uncertainty of American policy gives investors in power plants an incentive to build conventional high-carbon technology, because it is more familiar to regulators and bankers. Worse yet, increased emissions today might actually improve a negotiating position in the future when targets for controlling emissions are ratcheted down from whatever is business as usual. Some private firms, such as BP and Xcel, are putting their own money into carbon-free power - but the totality of the private effort is small compared with the size of the problem. There are good mechanisms in place for encouraging public research and private investment in such technologies; the real shortcoming is in the paucity of the effort.

The second problem is that countries such as China, India, and other key developing nations won't spend the extra money to install carbon-free coal. Yet these countries' share of global coal consumption has soared almost 35 percent over the past ten years.

The inescapable conclusion is that the advanced industrialized countries must create a much larger program to test and apply advanced coal technologies. Electricity from plants with sequestration might eventually cost half more than from plants without the technology. That's not free, but it is affordable and is less than the changes in electric rates that many Americans already experience and accept.

State and federal regulators need to create direct incentives - such as a pool of subsidies - to pay the extra cost until the technology is proven and competitive with conventional alternatives. That subsidy, along with strict limits on emissions, will set a path for cutting the carbon from U.S. electricity without eliminating a future for coal. They must also extend the same incentives to the major developing countries, which have no interest in paying higher rates for electricity because their priorities do not rest on controlling CO2. Yet these countries' involvement now is essential. Averting emissions has a global benefit regardless of where the emissions are controlled. And developing countries are especially unlikely to shoulder more of the burden themselves, in the more distant future, unless they are first familiar with the technologies.

Solving the climate problem will be one of the hardest problems for societies to address - it entails complicated and uncertain choices with real costs today, and benefits in the distant future. Yet the stakes are high and the consequences of indecision severe. Serious action must contend with existing political constituencies and aim at existing resources that are most abundant. The technologies needed to make coal viable will not appear automatically. An active policy effort - pursued worldwide and initially financed by the industrialized world - is essential.

Originally published in the January/February 2007 issue of Boston Review.

Every day, the United States burns through 20.7 million barrels of oil. China, the world's second largest consumer, uses about 6.9 million barrels a day. Although the United States is the third leading oil producer in the world (behind Saudi Arabia and Russia), its appetite is so enormous that it overwhelms the country's production capacity. Its known reserves, about 21 billion barrels, would supply only enough to keep the country running at full speed for about three years.

So when STANFORD gathered five faculty members to talk about the implications of U.S. dependency on foreign oil, we expected grave declarations of alarm. But their concern did not square with the growing chorus of citizens and elected officials about why reducing this dependency is so important.

On the next five pages, faculty from political science, economics, law and engineering explain why the debate about energy security is missing the point, and what they think needs to be done.

STANFORD: How would you frame the issue of dependency on foreign oil? What should we be concerned about?

David Victor: The problem is not dependence per se. In fact, dependence on a world market produces enormous benefits, such as lower prices. Nor is the problem that energy's essential role in the economy means that dependence must be avoided. The real problem is that energy - oil, especially - doesn't operate according to normal market principles. Something like 75 percent of the reserves of oil and gas are controlled by companies that are either wholly owned or in effect controlled by governments, and there's enormous variation in how those companies perform. Some of them are just a disaster, like [Mexico's state-owned oil company] Pemex, and others can work at world standards, like Saudi Aramco or Brazils Petrobrás. Some of these governments, such as Venezuela, use oil revenues for political purposes that undermine U.S. influence. High prices do not automatically generate new supply or conservation, partly because suppliers can drop prices to undercut commercial investment in alternatives. Second, we have what has become known as "the resource curse." There'sa lot of evidence that the presence of huge windfalls in poorly governed places makes governance even worse. Revenue that accrues to oil-exporting governments is particularly prone to being misspent, often in ways that work against U.S. interests.

Scott Sagan: I agree that calling the problem "energy dependence" and therefore seeking energy independence is the wrong way to think about this problem. Talking about energy independence feeds the xenophobic impulse that occurs all too easily in American politics. And it suggests to other countries that they should seek independence rather than a more cooperative approach. I see very negative consequences politically in the signal that attitude sends. Think about the current nuclear crisis with Iran. Iran claims that it needs independent uranium enrichment capabilities to have "energy sovereignty." Such uranium enrichment production could be used, however, for civilian nuclear power or for making a bomb, creating enormous nuclear weapons proliferation problems. We're feeding into that kind of thinking when we use the same language about independence when referring to oil. And it produces uncooperative effects elsewhere. The Chinese, for example, cut a deal with Sudan as a means of creating energy security for themselves. It inhibits efforts of the international community to encourage that government to behave responsibly.

John Weyant: There is a distinction between dependence, meaning how much of the oil the United States consumes is imported, and vulnerability, meaning how at risk our economy and our social order are to oil-supply disruptions. That vulnerability is defined by how much of the total supply of oil in the world market comes from unreliable sources. So you have to look at oil supply on a global scale, not just in the United States. It's the instability of the supply that affects price.

Victor: I like John's term "vulnerability," and it leads us to various kinds of actions to reduce our vulnerability to the market rather than trying to make us completely independent. One of them has been around since the '70s - building and coordinating strategic stockpiles so that they are supplied into a single world market. Traditionally that could be done by the major Western countries because they were the major oil consumers. One of the big challenges for policy makers today is how to get India and China to think about the operation of this world market in the same market-based way that we think about it, and to get them to build up those stockpiles and coordinate them with our own. There's some evidence that that kind of coordination can reduce our vulnerability.

Weyant: There's this fallacy among the public that if we don't import so much oil, other oil-exporting countries are going to be hurt and we will be unaffected if oil supplies are cut off. But these countries are sometimes major trading partners of allies, and asking those allies to take a hit on our behalf just leads to other economic problems. If the economies in China and Europe and Japan, who are all major trading partners, go down, it affects how much they can buy from us. It's another reason we can't be xenophobic and just look inward on an issue like this. You get these international trade flows outside the energy sector that could be pretty devastating.

STANFORD: Last summer we saw crude oil prices hit $70 a barrel and gas prices went well above $3 per gallon nationwide. That momentarily changed consumer behavior, and reduced demand. Are high prices a good thing?

Michael May: The key factor in normalizing market conditions is assuring the market that high prices are here to stay. Major oil companies like Exxon and bp have been putting their money to other uses than exploration. They have been buying back shares and increasing returns to stockholders because that's the way Wall Street drives them. That might change if prices stayed high. It probably won't be $70 a barrel, but even $50 a barrel as a base price is almost twice the historic average. The extent to which investors become convinced that that's going to be the future average will have some bearing as to how much money they spend on exploration. Toyota and General Motors and others can make hybrids or much more efficient cars, but it takes billons of dollars of investment, and if the price of gasoline goes down, they have less incentive. When gas is cheap, driving an SUV is not such a big deal.

Victor: The reason some of these companies are buying back the shares is not just because of Wall Street but because they don't have a lot of truly attractive opportunities for investing in new production. Most of the oil reserves are either legally off limits for the Western oil companies or international oil companies generally, or they're de facto off limits because they're in places where it's so hard to do business. Although the public is seized by the high price of energy, the major energy companies are seized by concerns that prices are going to decline sharply. If there is a recession, which would dampen demand for energy, or the capacity to produce oil around the world improves, then prices will decline. It has happened in the past. That fear really retards a lot of investment because these investments have a very long capital lifetime, and you need to protect them against low prices over an incredibly long time horizon.

Michael McFaul: It's very important to understand that oil companies owned and operated by governments are not necessarily profit-maximization entities. Take Gazprom, the gas company of Russia. It is closely aligned with state interests, so profit isn't its only motivation. It will use its money for strategic purposes as defined by Vladimir Putin, not as defined by the shareholders of Gazprom. For instance, early in 2006, Gazprom cut off gas supplies to Ukraine, mostly for geopolitical reasons. Why is Hezbollah so well armed? Because of Iran, which uses oil revenue for strategic purposes; it is not used for investing in a company or investing in the market per se. This is part of the problem of the "resource curse" David referred to. If oil is discovered in a country before democratic institutions are in place, the probability of that country becoming democratic is very low. In countries where the state does not rely on the taxation of its citizens for its revenues, it doesn't have to listen to what its citizens want to do with that money. So instead of building roads or schools or doing things that taxpayers would demand of them, they use their money in ways that threaten the security of other countries, and, ultimately, their own.

Victor: It's important that we not overstate the extent to which users of energy are going to respond automatically to high prices, and the personal vehicle is a great example. Fuel accounts for about 20 percent of the total cost of operating a vehicle. Traditionally it's only been 10 or 15 percent, but we are much wealthier today than we were three decades ago when we had the [first OPEC oil embargo]. I think that helps explain a lot of the sluggishness in response in the marketplace. People are buying smaller, more fuel-efficient cars, but that trend will only go so far because there are other factors that determine what kinds of vehicles people purchase. In the United States and most advanced industrialized countries, most oil is used for transportation, where oil products have no rival. It is hard to switch. In most of the rest of the world, oil gets used for a variety of other purposes, including generating electricity. Those markets are probably going to be more responsive to the high price of oil because they're going to have opportunities to switch to other fuels. The United States used a lot of oil to generate electricity in the early 1970s and when that first oil shock came along, essentially all of that disappeared from our market. That's part of the reason why the U.S. energy system responded fairly quickly to the first oil shock, and why changes in behavior are harder to discern in the current crisis. There is no easy substitute for gasoline.

May: If we generally agree that high oil prices, on the whole, are a good thing because they cause investment in more production and more efficient uses of oil, then it would follow that the rapid growth in consumption in China is also a good thing and we should welcome it, right?

Victor: I disagree with that. In effect what we have right now is a "tax" that's been applied to the oil market due to the various dysfunctions of the way it operates and to unexpectedly high demand in the United States and China. The revenue from that tax is accruing to the producers, and if we think about how to get out of the mess here, then what we want to do is in effect apply a tax to the oil products. If we raise the price of these products to reflect the real total cost of our vulnerability to the world oil market, those companies have an incentive to go off and look for alternatives.

May: So you're saying the same thing: that high oil prices, whether from this tax or otherwise, are a good thing.

Weyant: It depends significantly on who is collecting the tax.

McFaul: Yes, the fundamental question is how the money is being spent. If I had high confidence that the money was going to reinvestment, then I could agree that high prices are good, but that's not what is happening. The Soviet Union's most dangerous adventures in the Third World correlated with the high oil prices in the 1970s. You can see the direct effect. And when the prices came down, the Soviet Union collapsed. The same is true with Iran today. They are being very aggressive in the region - in Iraq, in Lebanon, in Afghanistan - trying to become the Middle East hegemon. This would not be happening if they didn't have all these clients - Hezbollah, Hamas, their friends in Iraq - that they can support with millions of dollars. Going back a few decades, where did Osama bin Laden come from? Where did support for the Taliban come from? It came from this tax that David is talking about. If we're talking about security issues and oil, this is much more serious than supply disruption to the United States.

Victor: I agree with Mike 100 percent. If you look at where the revenues are going from Iran, Venezuela and so on, there's a long list of folks who are doing things that are contrary to our interests with the money that ultimately is coming out of the pockets of American consumers. Dealing with that is job one.

STANFORD: So how would you counsel American policy makers? What needs to happen to reduce our vulnerability over the long term?

Sagan: The vulnerabilities we have today should provide an incentive to make some critical investments and to change our thinking, but we're not really doing that. I was quite surprised at how much I agreed with one aspect of the second Bush inaugural address. [He said] let's start talking about our addiction to oil and all the problems associated with that, but I've been completely disappointed with the lack of follow-through. And part of the problem is this notion of energy independence. We need diversity in our research and development spending across the board, on a variety of technologies. We're going to produce energy security to a large degree by finding cooperative solutions that are efficient and secure for many countries working together. We need to see our national security as being very dependent on others and that's not entirely a bad thing.

Victor: There is one cluster of technology that's going to be exceptionally important - electric vehicles. The all-electric vehicle has been kind of a disaster. We tried to do that in California without much success at all. The new set of pluggable hybrid vehicles, which you plug in at night and charge up, are more promising. If such technologies make it feasible to reduce some of the transportation dependence on oil, then markets will be forced to become more "normal" and more responsive. Electric cars and other technologies can help to keep prices lower and ultimately help make the transition completely away from oil over a period of 30 or 50 years.

Weyant: We only think about energy as a nation when prices are high, and so there's a short attention span on the issue. That makes it really hard to sustain a policy that would be rational over the long term. If we're going to have a big R&D program, for example, you need to invest in technologies and sustain the investment over a long time horizon. If you couple this short attention span with our aversion to taxes, at least historically, you end up with policies that are almost designed from the outset to fail. The political tide is turning a little bit so a well-designed tax might be possible. Maybe you don't raise taxes now but you assure that the price of a [hybrid] car won't go below a certain level and that'll help create a little more confidence with the marketplace. If you just focus on research and development without getting the economic incentives right, you come up with all kinds of great gizmos that no one will actually make or use.

McFaul: We've been talking mostly about how to manipulate the market to change people's behavior and I think that's quite right. I can't tell you how many people I saw come out of a Palo Alto theater after seeing Al Gore's movie [An Inconvenient Truth] and jump into their gas-guzzling machines. I would like to tax those machines; use economic tools to change people's behavior in a way the movie didn't. This has to become a public policy issue. It's not right now. Think about the way the market for cigarettes worked in this country 50 years ago, and think of how it is structured now. We have not just taxes but regulation - they can't be advertised on television - and a national campaign trying to educate people about the health concerns. We need a similar effort on this issue.

Sagan: When you watch the Super Bowl you don't see advertisements for cigarettes, but you do for Hummers. There's no attempt at all to educate people about the relationship between these longer-term problems and what you do individually. And that takes decades.

Victor: One of the acid tests for whether the nation is pursuing a coherent energy policy is our policy on ethanol. Ethanol is important because it is a partial substitute for oil-based gasoline. In this country, almost all of the ethanol that is delivered to the marketplace is made from corn, which is economically inefficient. But we do that because the corn grows in the heartland, such as Iowa - an important state electorally. There have been lots of proposals to, for example, erase the tariff on imported ethanol. Brazil produces ethanol from sugar cane and it's much cheaper and more efficient. But the farm lobby always intervenes and these proposals languish, with the result that the U.S. ethanol industry never faces the rigors of world competition. So long as energy is bouncing around lower on the list of priorities, it will be difficult to have a coherent policy.

Weyant: It would be far better if people were willing to bite the bullet and say this is a problem and it's not going to be painless to solve it, but if we play our cards right it's not going to reduce our standard of living much. Convincing the public is really one thing that might be worth some more effort. It's a cacophony to them.

STANFORD: What is your greatest hope and your worst fear with regard to demand for oil?

Victor: My greatest hope is that inside the Chinese government and inside the Indian government people know that this independence view of the world energy market is completely wrongheaded. Maybe that will create an opportunity for the United States and India and China along with other major oil consumers to collectively manage this issue, and the consequences of doing that will spill over onto other areas of cooperation. My greatest fear, in addition to the things we've already discussed, is that the United States will use the oil issue to beat up on the Chinese and the Indians, and that our relationship with those countries, which is already fragile, will make it harder to work together on other things that also matter.

May: My greatest hope is that the United States, China, India and other major countries work together towards a more hopeful future, including improving the global environment, providing a counterbalance to mischief in the Middle East, and promoting a transition to modernization and away from extremism. My greatest fear is that the little termites who are nibbling at what is currently a somewhat sensible Chinese policy will have their way, either because the country's economy slows down - which it will inevitably - or for some other reason, and we'll wind up fighting each other or destroying each other's capabilities.

McFaul: My greatest sense of optimism comes from this discussion, and about what my colleagues in this discussion said about China, because from the surface it looks like there's a much more pernicious policy of China going its own way. I've learned today that in fact there are very reasonable voices within the Chinese government, and I hope that there will be in my own government. My greatest fear is that there will continue to be politicians who control oil revenues who do things that do not serve international security, and I'm speaking not only of Iran. My nightmarish scenario is that 10 years from now Iran, Iraq and, God forbid, Saudi Arabia are controlled by hostile governments that want to use the revenues that we pay them for their oil to harm us. I give that a low probability, but in terms of things that worry me about our security, it's the instability of those oil-exporting regimes.

Sagan: The hope is that this current crisis will provide the right set of incentives to encourage investment in a diverse set of energy R&D programs across the board, and will encourage cooperation between countries in energy research and development. That would help educate and change the culture of the United States away from a gas-guzzling, governor-in-the-Hummer culture. The fear is that this will become yet one more excuse to move to a more xenophobic policy that discourages cooperative international policies.

Weyant: Remember David Stockman, the erstwhile head of the Office of Management and Budget? I ran into him in Washington and he literally said to me, "Don't worry about oil security and disruptions or any of that stuff. We've got battleships to take care of this problem." That shocked me to no end, and my response was "Do you really want to be in that position, where that's your only option?" Your whole response is "We're best in the battleship field and you shouldn't mess with us?" This type of attitude is what worries me the most.

Sagan: We were earlier talking about the resource curse, and this strikes me as an example of the hegemon's curse. To not take the necessary steps on economic policies or energy policies because you think you've got a military backup solution. If our military strength causes us to be passive or uncooperative on the economic or energy front, it will have a boomerang effect that will really hurt us.

The anticipated title from Cambridge University Press has been released in hard-cover and is available for purchase. Edited by PESD director, David Victor, Rice professor Amy Jaffe, and PESD fellow Mark Hayes, the book sheds light on the political challenges which may accompany a shift to a natural gas-fed world.

Energy is on the front burner and will stay there, so this book has special value. Read it and learn about the topic of today and tomorrow and tomorrow.

- George P. Shultz, United States Secretary of State, 1982-1989

The coming phase of energy industry development is bringing with it the rapid globalisation of the gas business. Long term take-or-pay contracts, which align supply and demand and which formed the foundation of all successful projects in the past, are coming under pressure from liberalisation. But security of supply still depends on security of demand: this timely and authoritative study demonstrates that, if gas is to

fulfil its enormous promise as an energy source, new ways must be found to establish the confidence of both sides that secure supply will be matched by reliable demand

- Frank Chapman, CEO, BG Group plc

This is a very valuable addition to the global literature on energy issues and energy policy ... Natural Gas and Geopolitics goes deep into the global gas policy issues that affect critical US energy policy, not only looking backward but helping understand what may happen as the global natural gas market develops.

- Bill Richardson, Governor of New Mexico, United States Secretary of Energy, 1998 2001

South Africa will experience routine electricity blackouts in a few years unless new electricity policy and investment decisions are formulated and implemented this year.

This is the inexorable conclusion that emerges from scenario and modelling exercises undertaken separately by the National Electricity Regulator, Eskom and large energy-intensive industries.

Growing electricity demand will outstrip existing national supply capacity next year or the year thereafter, assuming a prudent reserve margin to allow for maintenance and unscheduled plant shutdowns.

Hydro-electricity imports, mainly Cahora Bassa in Mozambique, will provide respite for about another year. Thereafter, we need further generation capacity or significant energy savings and demand-side measures.

Eskom has started re-commissioning old moth-balled coal-fired power stations to meet this challenge. Camden, the first plant, will be relatively easy to re-commission and work has commenced. Grootvlei will be more difficult and Komati, the last plant that Eskom plans to re-commission, will be the most uncertain and expensive.

If successful, these old generating stations will give us a breather until around 2008. And then we need new generation capacity.

2008 might seem years away, but investment decisions, environmental impact assessments, plant construction and commissioning take many years. For a hydro-electric or pumped storage scheme, this could take ten years. A coal-fired power station could take six years or more, and gas turbines - two to four years.

If our economy grows faster, or we are not able to implement effective demand-side measures, new power generation capacity might be needed even earlier.

Government is aware of this situation. The President confirmed, in his state of the nation address in parliament in May, that a tender for new capacity will be awarded early in 2005.

The Department of Minerals and Energy has appointed technical advisors to prepare and manage this tender. However, their work schedule indicates that the contract with a new Independent Power Producer will only be concluded early in 2006, and this will only happen if the bid manages to comply with National Treasury's Public Private Partnership regulations. The DME will have to show that Eskom cannot build a new plant more cheaply - an interesting possibility given Eskom's competitive cost of capital and the potential for transfer-pricing with its current portfolio of extremely low-cost generating plant.

Given these tight time constraints, it is not unlikely that we shall have to resort to buying, on an emergency basis, a series of highly expensive, paraffin-burning open-cycle gas turbines.

There is a dangerous assumption that the current tender process for new generation capacity answers concerns about supply security. It does not.

The challenge is not only to manage the current tender process within tight time-constraints. We need to make decisions this year about procuring much more capacity than the approximately 1000 MW anticipated in the current tender.

A likely planning scenario indicates that this year, 2004, we need to make investment decisions on a new pumped-storage scheme, a new pulverised coal-fired plant and a green-field coal fluidized-bed combustor or a combined-cycle gas turbine. In short, we need to start placing orders for a range of new power plant. In ensuing years we shall need to continue to order new plant.

These challenges raise the question of whether a part-time committee of government officials, assisted by consultants, is the most appropriate and sustainable mechanism to continue to procure new power? It also provokes debate about what market structure is appropriate to encourage the most efficient and cost-effective investment decisions?

Following the 1998 While Paper on Energy Policy, and a number of subsequent studies, Cabinet decided, in May 2001, to restructure the power sector by unbundling Eskom's electricity transmission division into an independent company and selling-off 30% of Eskom's generation plants. New capacity would be provided by private investors and an electricity trading market would be established comprising a power exchange and a parallel market for bilateral power contracts and financial hedges. None of this happened.

What is emerging is a quite different market model. In her budget speech, the Minister of Minerals and Energy stated that "the state has to put security of supply above all and above competition especially". The Minister of Public Enterprises has indicated that Eskom will not be privatised and that a strong state-owned utility is important for social and economic development.

Eskom is thus likely to continue to dominate the market. It may even be permitted to build new generation plant. Private sector investment will be permitted only on the margins in the form of Independent Power Producers. They will sign long-term power purchase agreements with Eskom (or with an independent transmission company or system operator, if these are eventually separated form Eskom).

Government will now need to clarify whether the emerging market model for the electricity sector is its preferred model or is merely a temporary measure to secure emergency supplied. This is not a trivial question - for it strikes at the heart of the cost and efficiency issues in the power sector, and will have long-term consequences for electricity prices in this country.

Few remember the controversial electricity price-hikes by Eskom in the late 1970s and 1980s when it made investment mistakes that resulted in huge unused power generation capacity. History demonstrates the potential weaknesses of the old industry model where state-owned monopoly utilities simply pass the costs of poor investment decisions to consumers.

The current tender process is also full of risk. A small number of officials and technical advisors will decide how much new power is needed, using which fuel sources, when and where. While a degree of (once-off) competition might be possible through the tender bids, long-term power purchase agreements could tie-up non-competitive electricity prices for decades.

Plans for a new market structure, where investors have to compete to sell their power in a power exchange or a contract market, have been sacrificed in the face of security of supply concerns.

Periods of supply uncertainty and shortages are never a good time to design and implement new competitive market structures. The long period of large capacity surpluses that provided a window of opportunity for major reform has disappeared. Now we have to patch the current system and prepare for the future.

The default IPP/ single-buyer model that is emerging now requires the establishment of a robust and sustainable institutional structure (probably best attached to the power system operator) that will be responsible for long term planning, security of supply and procurement of generation capacity.

We can avoid future black-outs. But we need to act now.

The BP Foundation has awarded a three-year, $1.95 million grant to Stanford University for a broad research program on modern energy markets. The foundation is funded by BP, formerly British Petroleum, one of the world's largest energy companies. The gift will support the Program on Energy and Sustainable Development at the Stanford Institute for International Studies (SIIS). With the gift, BP joins the Electric Power Research Institute in Palo Alto, CA, as one of the program's core sponsors.

"This new partnership with BP will allow the program to accelerate research in several areas, including the design and operation of market-based policies to address the threats of global warming," said program director %people2%. "In addition to BP Foundation support, we look forward to learning more from BP's own experience as an energy company, which touches on every aspect of our program's research."

The agreement reflects a commitment by BP and Stanford to complement technical research with similar work on the legal, political and institutional dimensions of how societies derive value from energy, he added.

"Stanford University is undertaking ground-breaking research with the potential to have a profound impact on the organization of modern energy markets and the conduct of environmental policy," said Greg Coleman, BP's group vice president for environment, health, safety and security. "We hope that this is just the first step in a relationship which will become broader and deeper."

The agreement with Stanford is the latest in a series of BP partnerships with universities in the United Kingdom, the United States and China representing a total commitment of more than $100 million, according to BP officials. The Stanford agreement is expected to complement work under way at Princeton University, the Chinese Academy of Sciences and Tsinghua University, company officials added.

Founded in 2001, the SIIS Program on Energy and Sustainable Development focuses on the political, legal and institutional aspects of modern energy services, in collaboration with faculty from the Stanford School of Law and several university departments, including political science and economics. About half of the program's resources are devoted to research partnerships in key developing countries, including Brazil, China, India, Mexico and South Africa. Program researchers have examined the emergence of a global business in natural gas, reforms of electric power markets and the supply of modern energy services to low-income rural households in developing countries.

The program is housed in the Center for Environmental Science and Policy - one of five major research centers at SIIS, the university's primary forum for interdisciplinary research on international issues and challenges.