Showing papers in "The Energy Journal in 2000"

Explaining Cointegration Analysis: Part II

Abstract: importance of stationarity for empirical modeling and inference; describe the effects of incorrectly assuming stationarity ; explain the basic concepts ofnonstationarity ; note some sources of non-stationarity ; formulate a class of nonstationary processes (autoregressions with unit roots) that seem empirically relevant for analyzing economic time series; and show when an analysis can be transformed by means of differencing and cointegrating combinations so stationarity becomes a reasonable assumption . We then describe how to test for unit roots and cointegration . Monte Carlo simulations and empirical examples illustrate the analysis .

Customers' Choice Among Retail Energy Suppliers: The Willingness-to-Pay for Service Attributes

Abstract: We examine small/medium commercial and industrial customers' choices among energy suppliers in conjoint-type experiments The distribution of customers' willingness to pay is estimated for more than 40 attributes of suppliers, including sign-up bonuses, amount and type of renewables, billing options, bundling with other services, reductions in voltage fluctuations, and charitable contributions These estimates provide guidance for suppliers in designing service options and to economists in anticipating the services that will be offered in competitive retail energy markets

Model-Based Comparisons of Pool and Bilateral Markets for Electricity

Abstract: A variety of market mechanisms have been proposed and implemented around the world in order to create competitive electricity pools and exchanges. However, it is an open question whether pool-based daily auctions or continuous bilateral trading deliver different prices under conditions of market power. In this paper we present a computationally intensive simulation model of the wholesale electricity market in England and Wales to isolate and systematically test the potential impact of alternative trading arrangements on electricity prices. After eight years of trading under a pool-based system, proposals were initiated in 1998 to change the market in England and Wales to bilateral trading. This paper uses an agent-based simulation to evaluate two important aspects of that proposal. The results show that daily bidding with Pay SMP settlement, as in the original Pool day-ahead market, produces the lowest prices while hourly bidding with Pay Bid settlement, as proposed for the bilateral model, produces the highest prices.

OPEC and World Crude Oil Markets from 1973 to 1994: Cartel, Oligopoly, or Competitive?

Abstract: This study investigates the existence of a dominant producer in the world crude oil market for the period 1973 to 1994. Contrary to the literature, the results show that neither OPEC nor the OPEC core can be characterized as a dominant producer. Using statistical tests, we also investigate whether OPEC, the OPEC core, or Saudi Arabia fit the competitive model or the Cournot model, The statistical results reject all models except the dominant firm model for Saudi Arabia. New user cost estimates are introduced and included in the models. Ail alternative explanation of high OPEC profits in the 1973-82 period is also developed as part of a statistical test of the effect of the US oil price regulation on world oil demand and supply. An estimate of the wealth transfer from price regulation is also calculated.

Regulation of an Electric Power Transmission Company

Abstract: Designing regulatory contracts for the operators of power transmission networks has become a critical policy issue in the United States. In this paper, a regulatory contract is proposed that induces network operators to optimally expand the grid, which is crucial for the emergence of efficient wholesale power markets, while also satisfying the other traditional regulatory objectives. The proposed mechanism is readily implementable, since it builds on a contract currently in place in England and Wales.

Supplementarity: An Invitation to Monopsony?

Abstract: Article 17 of the Kyoto Protocol allows Annex В parties to meet their greenhouse gas emissions commitments by emissions trading so long as such trading is "supplemental" to domestic abatement actions. Whether and how "supplemental" should be defined is one of the most contentious issues in the post-Kyoto climate negotiations. We demonstrate that implementing supplementarity by imposing concrete ceilings on permit imports in a market for tradable emissions rights gives rise to monopsonistic effects similar to those that characterize a buyers ' cartel. We assess the EU proposal on supplementarity in this context. Our results show that , under the most favorable assumptions , the proposal avoids the redistributive effects of an import limit , albeit at added cost . Under less favorable assumptions, namely , that the required demonstrations of verifiable abatement cannot be made , the EU proposal severely limits emissions trading and the associated reductions in the costs of achieving the Kyoto commitments.

Developing Countries' Greenhouse Emmissions: Uncertainty and Implications for Participation in the Kyoto Protocol

Abstract: Developing countries can participate in the Kyoto Protocol to limit greenhouse gas emissions by adopting national emissions limits. Such limits could offer economic gains to developing countries, cost savings to industrialized countries, and environmental benefits. They could also address concerns of the U. S. Senate. On the other hand, uncertainty about greenhouse gas emissions in developing countries is so great that emissions limits may impose substantial costs if they turn out to be unexpectedly stringent. To manage risks arising from emissions limits, developing countries should index any emissions limits to variables that predict emissions in the absence of limits. This paper presents such an index-similar to one recently adopted by Argentina-and develops estimates showing that it could lower the risk of economic losses to developing countries from about 40 percent to about 35 percent.

Residential End-Use Electricity Demand: Results from a Designed Experiment

Abstract: Being able to disaggregate total energy demand into components attributable to specific end uses provides useful information and represents a primary input into any attempt to simulate the impact of policies aimed at encouraging households to use less energy or shift load. Conceptually the estimation problem can be solved by directly metering individual appliances. Not surprisingly, this has not been widely practised and by far the most common estimation procedure has been the indirect statistical approach known as conditional demand analysis. More recently, with access to limited direct metering, both approaches have been used in combination. This paper reports on a substantial modelling exercise that represents a unique example of combining data of this type. The distinctive aspects are the extent and richness of the metering data and the fact that optimal design techniques were used to decide on the pattern of metering. As such, the empirical results are able to provide a very detailed and accurate picture of how total residential load is disaggregated by end uses. Significantly, the consumption of high penetration end uses such as lighting, which cannot be estimated by conventional conditional demand analysis, has been successfully estimated. Also, by matching our estimates of end-use load curves with some recent prices paid by distributors to purchase electricity from an electricity market pool, we have been able to determine the costs to distributors associated with servicing individual end uses.

Lessons from Utility Conservation Programs

Abstract: This paper considers the design, incentives and effectiveness of U.S. demand side management (DSM) programs and tries to explain why this ambitious, almost unanimously embraced initiative failed. Problems on the demand side result from consumers' private information that implies that substantial principal-agent slippage must accompany any conservation incentive the utility offers to the consumer. Moreover, the regulatory incentives induce the American utility to select inefficient programs. Therefore, the utility has little to gain from deterring such strategic reactions and cheating by consumers. As a consequence, the reported conservation exists largely on paper but not in reality. This ex-post assessment is important for two reasons. First, European countries (Scandinavia, Germany, Austria and others) have been eager to repeat this American regulatory 'success'. Second, the problems addressed in this paper would apply to another round of conservation programs induced by the concern about global warming.

Where Did the Money Go? The Cost and Performance of the Largest Commercial Sector DSM Programs

Abstract: Spending on electricity energy-efficiency programs was responsible for most of the growth (and decline), and almost all of the energy savings from U. S. utility demand-side management (DSM) programs between 1990 and 1998. As a result of restructuring, utilities may never again assume such an important role in promoting electricity energy efficiency. However, as governments consider future domestic policies to promote energy efficiency in response to global environmental commitments, the potential of large-scale energy efficiency programs will likely be discussed. This article presents new information on a critical issue that will surely arise in these discussions: how much does it cost to save energy through programs that use monetary incentives and targeted information to influence individual customer decisions? We present findings from a detailed examination of the complete costs and measured energy savings from the largest commercial sector DSM programs operated by U.S. electric utilities in 1992. We extend the methodological considerations first identified by Joskow and Marron (1992) regarding differences among utility cost accounting conventions and savings evaluation methods. We quantify the impact of missing and incomplete data and, to the extent they can be assessed, demonstrate that our assumptions to address them are conservative in that they err on the side of overstating the apparent cost of saved energy. We find that the programs, as a whole, have saved energy at a cost of 3.2c/kWh. When compared to the cost of the energy they allowed the sponsoring utilities to avoid generating or purchasing (in the absence of these programs), we find that the programs, as a whole, are cost effective.

The Target Revenue Model and the World Oil Market: Empirical Evidence from 1971 to 1994

Abstract: This study draws on other studies that concluded OPEC is not a cartel and Saudi Arabia acts as a dominant producer in the world oil market. The intention here is to see whether the Target Revenue (TR) model provides an explanation for the behavior of some OPEC members that do not coordinate production with Saudi Arabia. We investigate whether production cuts or increases by OPEC and non-OPEC members are based on their investment or budgetary needs. By retesting the TR model , we show that investment and budgetary needs do not affect the production of oil in free-market economies (OPEC and non-OPEC ), but they do affect production decisions of the more centrally-planned , isolated and oil-dependent economies. Existing studies in the literature have conceptual and statistical limitations that justify retesting the model. This study is the first to investigate the TR model in a separate study and to compare the results of static and dynamic models. It is also the first to

Cost Structures for Fossil Fuel-Fired Electric Power Generation

Abstract: This paper estimates short- and long-run marginal production costs and returns to scale in electric power generation in the United States We find substantial short-run diseconomies of scale at high output levels A relatively large number of small and mid-sized firms have optimal capital stocks below actual levels In contrast, several large firms have optimal capital stock targets, substantially above current levels These disparities in actual and optimal capital' suggest a possible consolidation in the industry

Coal or nuclear in new power stations : the political economy of an undesirable but necessary choice

Abstract: Where gas and hydro are not available and power capacity needs to be expanded, the choice will be between coal and nuclear, for there are few viable alternative options. This paper analyzes the fac ...

"No Cost" Efforts to Reduce Carbon Emissions in the U.S.: An Economic Perspective

Abstract: The 1999 Special Issue of The Energy Journal presents several articles that conclude the costs of the Kyoto Protocol would be very high for the U.S. if all the adjustments were domestic. However , a few studies conclude that the Kyoto target is achievable at a negligible cost and perhaps with a net benefit. This paper explains why a majority of studies conclude that the cost of reducing emissions is high while some studies conclude that the Kyoto target could be achieved at a low cost , if not for free. Most studies employ mainstream economic analysis to estimate the costs of achieving the Kyoto Protocol. In contrast , the "no cost " analyses use a unique methodology applied only to energy conservation and referred to here as the energy conservation paradigm. One conclusion is that the energy conservation paradigm is inconsistent with mainstream economics. The "no cost" conclusion used to support approval of the Kyoto Protocol is not supported by the basic principles of economics. The Climate Change Technology Initiative recommends tax credits to reduce carbon emissions. With the proposed tax credit of $1,100 per residential head pump , each tonne of carbon reduced from the more efficient heat pump would cost $510. With different input

Household Response to Incentive Payments for Load Shifting: A Japanese Time-of-Day Electricity Pricing Experiment

Abstract: We measure the effect of incentive payments on residential time-of-day (TOD) electricity demand in summer, using data from a residential TOD electricity pricing experiment in the Kyushu region of southern Japan. During the experiment, participating households could receive incentive payments if they reduce their peak usage share. Results based on an econometric model indicate that households have shifted their electricity usage from peak to off-peak periods in response to the incentive payment, but the effect of the incentive payment on load shifting was modest.

Technology diffusion in energy-economy models: The case of Danish vintage models

Abstract: Technological progress is an important issue in long-term energy demand projections and in environmental analyses. Different assumptions on technological progress and diffusion of new technologies are among the reasons for diverging results obtained using bottom-up and top-down models for analysing the costs of greenhouse gas mitigation. This paper examines the effect on aggregate energy efficiency of using technological vintage models to describe technology diffusion. The focus is on short- to medium-term issues. Three different models of Danish energy supply and demand are used to illustrate the consequences of the vintage modelling approach. The fluctuating utilisation rates for power capacity in Denmark are found to have a significant impact on average fuel efficiencies. Diffusion of electric appliances is linked to economic activity and saturation levels for each appliance. In the sector of residential heat demand, fuel price increases are found to accelerate diffusion by increasing replacement rates for heating equipment.

A Note on Saudi Arabian Price Discrimination

Abstract: Furthermore , these Western sales take place at fob ( Saudi Arabia ) prices that are lower than for exports to customers in the Far East. This note explains these Saudi price and trade flow anomalies in terms of a model of constrained price discrimination in which the quality adjusted price differential between Asian and European prices cannot exceed the differential in tanker rates to the two markets. The conditions under which price discrimination is likely to continue are also explored. The focus is on the West European and Far East oil markets but the argument applies to the U.S. market as well. Implications of Saudi marketing practices for new oil producers such as those in Central Asia are also discussed.

Technology and the Exploratory Success Rate in the U.S. Offshore

Abstract: Over the last 20 years, the offshore exploratory success rate has more than doubled for a group of large producers which includes Exxon, Shell, Mobil, and Texaco, according to the U.S. Energy Information Administration (EIA). It is tempting to conclude that this increase can be attributed to the many advances in seismic and drilling technologies that have occurred over the same period. However, such a conclusion may be premature given that much of the increase in the success rate occurred in the late 1970s and early 1980s, well before the major advancements in seismic technology. The conclusion may also be premature in that it ignores the relationship between price and the success rate. Increases in the price may positively (negatively) affect the success rate. Given this, and the decline in price over the past decade, one would expect the success rate to have declined (increased) in the absence of technological change. This paper develops an econometric model that attempts to disentangle and quantify the effects of the major factors hypothesized to affect the offshore exploratory success rate. The analysis relies on company level data from the EIA's Financial Reporting System over the period 1978 through 1995.

Energy Economists and Economic Liberalism

Abstract: Energy markets in many countries have been extensively liberalised in recent years as part of the revival of market economics. However, though ,everyone may believe in markets now', there are differences of opinion about what constitutes a competitive market. The perfect competition paradigm persists and leads to demands for state regulation to counteract 'imperfections' anti failures'. Energy economists should look more sceptically than they generally do at these calls for regulation, most of which have little to do with the 'public interest': in the long run the accretion of regulation may lead back to extensive state control.

The Risk of Early Retirement of U.S. Nuclear Power Plants under Electricity Deregulation and CO2 Emission Reductions

Abstract: During the next decade, most states in the USA will deregulate electricity generation. Nuclear power plants that were ordered and built in a regulated environment will continue to be regulated as nuclear facilities. However, under state deregulation the price they receive for their electricity will be set largely in non-regulated markets. This paper examines the competitiveness of the nuclear power industry with a probabilistic model to identify which nuclear power units face the highest risk of early retirement under deregulation. Projected outputs under both average-cost and marginal-cost pricing are compared with expected generation under continued rate-of-return regulation. Nuclear units at risk of early retirement are in regions with the lowest forecast prices or are old plants. But, if CO2 regulation targets an emission reduction to 9 % below projected 2010 levels (projected to be 24% above 1990 levels), there are only a few units at risk of early retirement after 2015.

The Potential Market for Photovoltaics and Other Distributed Resources in Rural Electric Cooperatives

Abstract: In the United States, rural electric cooperatives have an aging distribution system (1 million miles of distribution wires were originally installed over 40 years ago) and a load density that is about one-tenth of the load density at other utilities. The result is that there may soon be a large market opportunity for photovoltaics (PV) and other distributed resources. This paper calculates the cost of replacing portions of the distribution system as it wears out with hybridPV systems, compares it to the cost of replacing the system with equivalent distribution system equipment, and selects the alternative with the lowest cost. Results suggest that there is a potential market of 500 MW to 950 MW of PV at a price of $3,000/kW (a 50 percent reduction over PV prices in 2000) and a corresponding fossil-based generation market size of 280 MW to 555 MW at a price of $1,000/kW The hybrid-PV systems could replace 7 percent to 16 percent of the miles of distribution system and could save co-ops $1.0 billion to $2.5 billion (present value).

A Note on Vertical Integration and Stock Ratings of Oil Companies in the U.S.

Abstract: This note examines some evidence for a link between profitability of oil companies and operational vertical integration into pipelines and crude oil. An empirical specification is estimated using ordered probit. Levels of integration into pipeline and crude that maximize stock ratings are derived using recent oil company data. Integration into pipelines has a weak positive effect on the stock ratings of oil companies, and integration into crude oil has a stronger positive effect.

Extracting Common Oil: Cooperation or Competition?

Abstract: This paper considers how likely it is that a given number of agents who share a homogeneous oil reservoir will exploit the reservoir for their common benefit. A game-theoretical model is used , examining whether one agent would profit from deviating from the cooperative strategy , given that the remaining agents would follow a subgame-perfect retaliation strategy. The paper also examines the sensitivity of the cooperative solution to the number of agents, the time it takes to discover a deviation , the value of production relative to investment , and the discount rate. It is found that the cooperative solution is very sensitive to the number of agents; with more than three agents the cooperative solution becomes very unlikely.