Elsevier

Energy Policy

Volume 74, November 2014, Pages 91-100
Energy Policy

Energy market integration and regional institutions in east Asia

https://doi.org/10.1016/j.enpol.2014.08.021Get rights and content

Highlights

  • The structures of institutions explain East Asian energy market integration.

  • Transaction costs are increased by statist trade institutions and bilateralism.

  • Order-creating institutions are sub-optimal for energy market integration.

  • Multi-level great power management offers limited leadership for integration.

  • The environmental stewardship institution supports cooperation on green energy.

Abstract

This article assesses the case made for energy market integration in East Asia by comparing the role of institutions in South East Asia and North East Asia. The types and functions of institutions and their overall structure are examined in light of global energy market trends. In South East Asia, the shift attempted by ASEAN towards more competitive markets is hampered by the remaining statist variants of the trade institution and bilateral energy diplomacy, which, as regards transaction cost functions, are sub-optimal. As for institutions with order-creating functions, the unresolved status of sovereignty within ASEAN hampers regulatory harmonisation; the great power management institution has since ASEAN׳s establishment reduced conflicts without providing decisive leadership conducive to integration. North East Asia׳s dependence on global energy markets overshadows the regional integration potential of the diverse liberalisation efforts and interconnection projects. Bilateral energy diplomacies, new trilateral institutions combined with ‘Track Two’ institutions and remaining great power competition co-exist. In both regions the institutional structure allows for step-wise, technical infrastructure integration. The environmental stewardship institution co-exists with statist energy security and development objectives while it supports cooperation on green energy. The overall structure of informal institutions constrains deeper energy market integration in several ways.

Introduction

In this article the integration of energy markets in East Asia is examined by assessing the different types and functions of regional institutions, including regional cooperation among national level institutions, and by taking account of global energy trends.

Studies conducted under the auspices of the East Asia Summit (EAS) have proposed that energy market integration should comprise liberalisation of energy trade, investment and domestic energy markets, development of regional energy infrastructure and institutions together with energy pricing reforms. These measures would strengthen the region׳s economies, reduce development gaps, optimise the use of energy resources and improve energy security as well as environmental and climate policy (Shi and Kimura, 2014, p. 10; Bhattacharyay, 2010, pp. 1–2). Correspondingly, failure to integrate regional energy markets could become an obstacle to economic growth in East Asia (Horii, 2011, pp. 451–57). Furthermore, in a survey of over 3000 Asian opinion leaders in 2010, improving energy interconnections and other infrastructure was ranked as the most potent and urgent area of regional integration (Capannelli, 2011, p. 8).

A compelling case therefore exists for energy market integration in East Asia. At the same time regional integration is inseparable from global trends owing to the region׳s heavy dependence on external supplies of fossil fuels. Only Australia, Indonesia, Myanmar, Malaysia and Vietnam have a positive ratio of domestic energy production to supply (Bhattacharya and Kojima, 2011). Some early signs suggest the regional cooperation facilitates the North East Asian states׳ energy dialogues with their Middle Eastern oil suppliers that have so far provided half of China׳s oil imports and some 80–90% of those of Japan and South Korea. New regional energy infrastructure also enhances competition by bringing Russian supplies onto the markets (Kanekiyo and Yoshikazu, 2013, pp. 77–84; cf. Motomura, 2014, Shadrina, 2014; Tabata and Liu, 2012, pp. 160–3).

East Asia is currently most dependent on external supplies of oil. In the IEA׳s New Policies scenario, oil demand in non-OECD Asia will increase by 2035 to 35.5 mb/d plus 2.8 mb/d in Japan. Production will only be 6 mb/d, plus 3.7 mb/d in Kazakhstan and 9.4 mb/d in Russia (IEA, 2013a, pp. 481, 505). These features indicate how East Asian regional integration is intertwined with the global trends discussed in this Special Issue: new interconnections; more competitive markets; new suppliers (including Russia); and the market entry of new sources of energy from the proliferation of LNG to unconventional fossil fuels and renewables (Aalto and Talus, 2014).

The role of institutions in actually facilitating the targeted positive outcomes in East Asian energy market integration remains under-investigated. The constraints imposed by the relative weakness of regional intergovernmental institutions on energy market integration, however, are frequently noted (e.g. Shi and Kimura, 2014, p. 19). In this situation, the operations of international companies, primarily of Japanese origin, have so far provided the impetus in the form of foreign direct investment and cross-border production and distribution networks. These, in turn, have been facilitated by decreasing transportation costs (Fujita, Kuroiwa and Kumagai, 2011, p. 2; Kim and Gokan, 2011, Capannelli, 2011, Dieter, 2012, p. 117; cf. Bhattacharyay, 2010). This predominant economic integration pattern returns us to the role of states and their mutual coordination as providers of transport, energy supply and other infrastructure to facilitate the regional operations of companies.

The lack of more detailed attention to how state institutions are actually involved in regional energy market integration is problematic given the centrality of state institutions in the economies of East Asia. The states׳ centrality is a natural consequence of the state capitalist, neo-mercantilist, developmental and markets socialist variations of how the institution of trade is often organised in East Asia (see e.g. Beeson, 2009, Bremmer, 2008, Dent, 2012a, García, 2011, Stubbs, 2012, Aalto, 2014, Shadrina, 2014). Moreover, insufficient attention has been paid to the order creating functions of states and other institutions vis-à-vis the provision of a firm enough structure for energy market integration. State sovereignty is a major order-creating institution in international relations and in particular in East Asia (Narine, 2012, p. 156). In fact, the existing studies of regional economic and energy market integration, and studies on how sovereignty shapes regional integration in East Asia, have explored very different questions (see Beeson and Stubbs, 2012, p. 5).

In order to fill some of these gaps in the existing research, in this article market and sovereignty issues, or transaction cost reduction and order creation problems are scrutinised systematically as parts of the same methodological framework alongside ecological/climatic problems. The research question is: to what extent do institutions support energy market integration in the sub-regions of South East Asia (SEA) and North East Asia (NEA)?

In the next section the comparative methodological framework and material utilised is introduced. In the third section the results are discussed in the context of the global trends. The final section concludes the article and discusses some policy implications.

Section snippets

Heuristic case study comparison

In this article the similarities and differences among regional level institutions in the SEA and NEA regions are compared vis-à-vis energy market integration (for the method, see Porta, 2008, pp. 204–208). These two East Asian case studies are heuristic or instructive with regard to the wider prospects of integration in representing the only Asian sub-regions with notable intraregional trade (see Capannelli, 2011, p. 5).

The two case studies will build on the comparison of the institutional

SEA: trade

The ASEAN Economic Community aims at a ‘single market and production base, a highly competitive economic region, a region of equitable economic development, and a region fully integrated into the global economy by 2015 (ASEAN, 2008, pp. 6, 22). In the Plan of Action for Energy Cooperation 2010–15, ‘open and flexible markets׳ are linked with energy security and sustainability objectives, infrastructure projects and institutions (ASEAN, 2010, pp. 9–12). While ASEAN Member States attempt a shift

Conclusions and policy implications

In this article the main similarities and differences in energy market integration between the SEA and NEA regions were explained by referring to the types, functions and overall structure of institutions, and to the impact of global energy market trends.

Regarding the research question on the extent to which institutions can support energy market integration, we can conclude that in both sub-regions energy companies spearhead energy market integration by means of the infrastructure projects

Acknowledgements

This article was supported by the Academy of Finland project ‘Energy Policy in European Integration’ (Aalto, 2011–15, no. 1396863) and the Academy of Finland Centre of Excellence ‘Choices of Russian Modernization׳ (Kivinen, 2012–17). Great responsibility for compiling the material and tables in this article was assumed by Iida Jaakkola. For commentary I wish to thank Iida Jaakkola, Kim Talus and the anonymous reviewers.

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