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U.S. Energy Security Compacts: Enhancing American Leadership and Influence with Global Energy Investment

11.22.24 | 8 min read | Text by Katie Auth

This policy proposal was incubated at the Energy for Growth Hub and workshopped at FAS in May 2024. 

Increasingly, U.S. national security priorities depend heavily on bolstering the energy security of key allies, including developing and emerging economies. But U.S. capacity to deliver this investment is hamstrung by critical gaps in approach, capability, and tools. 

The new administration should work with Congress to give the Millennium Challenge Corporation (MCC) the mandate and capacity to lead the U.S. interagency in implementing ‘Energy Security Compacts’, bilateral packages of investment and support for allies whose energy security is closely tied to core U.S. priorities. This would require minor amendments to the Millennium Challenge Act of 2003 to add a fourth business line to MCC’s Compact operations and grant the agency authority to coordinate an interagency working group contributing complementary tools and resources. 

This proposal presents an opportunity to deliver on global energy security, an issue with broad appeal and major national security benefits. This initiative would strengthen economic partnerships with allies overseas, who consistently rank energy security as a top priority; enhance U.S. influence and credibility in advancing global infrastructure; and expand growing markets for U.S. energy technology. This proposal is built on the foundations and successes of MCC, a signature achievement of the G.W. Bush administration, and is informed by lessons learned from other initiatives launched by previous presidents of both parties. 

Challenge and Opportunity 

More than ever before, U.S. national security depends on bolstering the energy security of key allies. Core examples include: 

The U.S. needs a mechanism that enables quick, efficient, and effective investment and policy responses to the specific concerns facing key allies. Currently, U.S. capacity to deliver such support is hamstrung by key gaps in approach, capabilities, and tools. The most salient challenges include: 

A project-by-project approach limits systemic impact: U.S. overseas investment agencies including the Development Finance Corporation (DFC), the U.S. Trade and Development Agency (USTDA), and the Export-Import Bank (EXIM) are built to advance individual commercial energy transactions across many different countries. This approach has value–but is insufficient in cases where the goal is to secure a particular country’s entire energy system by building strong, competitive markets. That will require approaching the energy sector as a complex and interconnected system, rather than a set of stand-alone transactions. 

Diffusion of tools across the interagency hinders coordination. The U.S. has powerful tools to support energy security–including through direct investment, policy support, and technical and commercial assistance–but they are spread across at least nine different agencies. Optimizing deployment will require efficient coordination, incentives for collaboration; and less fragmented engagement with private partners.

U.S. tools to support global energy security

CommerceDFCDOEEXIMMCCStateTreasuryUSAIDUSTDA
Energy Sector Planning & AnalysisXXX
Policy Reform & Institutional StrengtheningXXXXXX
Public InfrastructureXX
Business Development for Private SectorXXXX
Early-Stage Project Support and/or FinanceXXXXX
Late-Stage Project Support and/or FinanceXXXX

Insufficient leverage to incentivize reforms weakens accountability. Ultimately, energy security depends heavily on decisions made by the partner country’s government. In many cases, governments need to make tough decisions and advance key reforms before the U.S. can help crowd in private capital. Many U.S. agencies provide technical assistance to strengthen policy and regulatory frameworks but lack concrete mechanisms to incentivize these reforms or make U.S. funding contingent on progress.

Limited tools supporting vital enabling public infrastructure blocks out private investment. The most challenging bottleneck to modernizing and strengthening a power sector is often not financing new power generation (which can easily attract private investment under the right conditions), but supporting critical enabling infrastructure including grid networks. In most emerging markets, these are public assets, wholly or partially state-owned. However, most U.S. energy finance tools are designed to support only private sector-led investments. This effectively limits their effectiveness to the generation sector, which already attracts far more capital than transmission or distribution. 

To succeed, an energy security investment mechanism should: 

Plan of Action

The new administration should work with Congress to give the Millennium Challenge Corporation the mandate to implement ‘Energy Security Compacts’ (ESCs) addressing the primary constraints to energy security in specific countries, and to coordinate the rest of the interagency in contributing relevant tools and resources. This proposal builds on and reflects key lessons learned from previous efforts by administrations of both parties. 

Each Energy Security Compact would include the following: 

This would require the following congressional actions: 

This proposal draws heavily on the successes and struggles of initiatives from previous administrations of both parties. The most important lessons include: 

Conclusion

The new administration should work with Congress to empower the Millennium Challenge Corporation to lead the U.S. interagency in crafting ‘Energy Security Compacts’. This effort would provide the U.S. with the capability to coordinate direct investment in the energy security of a partner country and contribute to U.S. national priorities including diversifying energy supply chains, investing in the economic stability and performance of rapidly growing markets, and supporting allies with energy systems under direct threat. 

This action-ready policy memo is part of Day One 2025 — our effort to bring forward bold policy ideas, grounded in science and evidence, that can tackle the country’s biggest challenges and bring us closer to the prosperous, equitable and safe future that we all hope for whoever takes office in 2025 and beyond.

Frequently Asked Questions
Has MCC demonstrated capacity to lead this initiative?

MCC’s model already includes multi-year Compacts targeting major constraints to economic growth. The agency already has the structure and skills to implement Energy Security Compacts in place, including a strong track record of successful investment across many energy sector compacts. MCC enjoys a strong bipartisan reputation and consistently ranks as the world’s most transparent bilateral development donor. Finally, MCC is unique among U.S. agencies in being able to put large-scale grant capital into public infrastructure, a crucial tool for energy sector support–particularly in emerging and developing economies. Co-leading the design and implementation of ESCs with the NSC will ensure that MCC’s technical skills and experience are balanced with NSC’s view on strategic and diplomatic goals.

Why should MCC’s eligibility criteria be amended?

This proposal supports existing proposed legislative changes to increase MCC’s impact by expanding the set of countries eligible for support. The Millennium Challenge Act of 2003 currently defines the candidate country pool in a way that MCC has determined prevents it from “considering numerous middle-income countries that face substantial threats to their economic development paths and ability to reduce poverty.” Expanding that country pool would increase the potential for impact. Secondly, the country selection process for ESCs should be amended to include strategic considerations and to enable participation by the NSC.

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