Showing papers in "The Energy Journal in 2014"

The effects of oil price shocks on stock market volatility:evidence from European data

Abstract: The paper investigates the effects of oil price shocks on stock market volatility in Europe by focusing on three measures of volatility, i.e. the conditional, the realized and the implied volatility. The findings suggest that supply-side shocks and oil specific demand shocks do not affect volatility, whereas, oil price changes due to aggregate demand shocks lead to a reduction in stock market volatility. More specifically, the aggregate demand oil price shocks have a significant explanatory power on both current-and forward-looking volatilities. The results are qualitatively similar for the aggregate stock market volatility and the industrial sectors' volatilities. Finally, a robustness exercise using short-and long-run volatility models supports the findings.

Competition in Germany's Minute Reserve Power Market: An Econometric Analysis

Abstract: The German reserve power market was subject to important regulatory changes in recent years. A new market design was created by synchronization and interconnection of the four control areas. In this paper, we analyze whether or not the reforms led to lower prices for minute reserve power (MRP). In contrast to existing papers, we use a unique panel dataset to account for unobserved heterogeneity between the four German regional markets. Moreover, we control for endogeneity by using weather data as instruments for electricity spot market prices. We find that the reforms were jointly successful in decreasing MRP prices leading to substantial cost savings for the transmission system operators.

A Microeconomic Framework for Evaluating Energy Efficiency Rebound And Some Implications

Abstract: Improving energy efficiency can lower the cost of using energy-intensive goods and may create wealth from the energy savings, both of which lead to increased energy use, a "rebound" effect. I present a theoretical framework that parses rebound into economic income and substitution effects. The framework leads to new insights about the magnitude of rebound when goods are not priced at marginal cost and when consumers are imperfect optimizers, as well as the role of technological progress in rebound. I then explore the implications of this framework with illustrative calculations for improved auto fuel economy and lighting efficiency. These suggest that rebound is unlikely to more than offset the savings from energy efficiency investments (known as "backfire"), but rebound likely reduces the net savings by roughly 10% to 40% from these energy efficiency improvements.

The perils of the learning model for modeling endogenous technological change

Abstract: Modeling of technological change has been a major empirical and analytical obstacle for many years. One approach to modeling technology is learning or experience curves, which originated in techniques used to estimate cost functions in manufacturing. These have recently been introduced in policy models of energy and climate-change economics to make the process of technological change endogenous—that is, allow technologies to vary with economic conditions. It is not widely appreciated that using learning in modeling raises major potential problems. The present note has three points. First, it shows that there is a fundamental statistical identification problem in trying to separate learning from exogenous technological change and that the estimated learning coefficient will generally be biased upwards. Second, we present two empirical tests that illustrate the potential bias in practice and show that learning parameters are not robust to alternative specifications. Finally, we show that an overestimate of the learning coefficient will provide incorrect estimates of the total marginal cost of output and will therefore bias optimization models to tilt toward technologies that are incorrectly specified as having high learning coefficients.

The Incidence of an Oil Glut: Who Benefits from Cheap Crude Oil in the Midwest?

Abstract: Beginning in early 2011, crude oil production in the U.S. Midwest and Canada surpassed the pipeline capacity to transport it to the Gulf Coast where it could access the world oil market. As a result, the U.S. “benchmark” crude oil price in Cushing, Oklahoma, declined substantially relative to internationally traded oil. In this paper, we study how this development affected prices for refined products, focusing on the markets for motor gasoline and diesel. We find that the relative decrease in Midwest crude oil prices did not pass through to wholesale gasoline and diesel prices. This result is consistent with evidence that the marginal gallon of fuel in the Midwest is still imported from coastal locations. Our findings imply that investments in new pipeline infrastructure between the Midwest and the Gulf Coast, such as the southern segment of the controversial Keystone XL pipeline, will not raise gasoline prices in the Midwest.

Is There Really Granger Causality Between Energy Use and Output

Abstract: We carry out a meta-analysis of the very large literature on testing for Granger causality between energy use and economic output to determine if there is a genuine effect in this literature or whether the large number of apparently significant results is due to publication or misspecification bias. Our model extends the standard meta-regression model for detecting genuine effects in the presence of publication biases using the statistical power trace by controlling for the tendency to over-fit vector autoregression models in small samples. Granger causality tests in these over-fitted models have inflated type I errors. We cannot find a genuine causal effect in the literature as a whole. However, there is a robust genuine effect from output to energy use when energy prices are controlled for.

International Natural Gas market Integration

Abstract: We explore the relationships among the North American, European and Asian natural gas markets for evidence of convergence and integration for the January 1997 through May 2011 period. The analyses are conducted under a multivariate framework, so the dynamics among the prices can be captured without the necessity of identifying an anchor price series. We find evidence of convergence among the Japanese, Korean, Taiwanese and UK prices. The North American price displays behaviour that is distinct from this group of prices. We conclude that there is not a fully integrated international natural gas market. The integration between European (represented by NBP) and Asian geographic regions appears to be due primarily to underlying contractual mechanisms specifically linking natural gas prices to oil prices rather than the result of market supply and demand interactions. We also find that the relationship among the Asian markets has evolved with Japanese prices adjusting to changes in South Korean and Taiwanese prices.

Estimating the Impact of Time-of-Use Pricing on Irish Electricity Demand

Abstract: Electricity demand traditionally exhibits a substantial peak during a small number of hours each day. Policymakers are aware of the potential efficiency savings that may be generated from a shift in energy consumption away from peak times. Smart meters, in conjunction with time-of-use (TOU) pricing, can facilitate an improvement in energy efficiency by providing consumers with enhanced information about electricity consumption and costs, and thereby encourage a shift away from consumption during peak hours. In 2009-10, the Irish Commission for Energy Regulation (CER) co-ordinated a randomised controlled trial in the Irish residential electricity market. Smart meters, which replaced the existing mechanical meter readers, were introduced in approximately 5,000 households. Participants were divided into control and treatment groups, with treatment groups exposed to a variety of TOU tariffs and information stimuli (in-home display (IHD) units, monthly billing, etc.). Data was collected over approximately 18 months, with the first half year being used as a control period. This paper analyses the response of Irish households to the introduction of TOU tariffs and information stimuli. We examine how households responded to the different TOU tariffs, at different times of the day (peak, day and night) and in conjunction with different information stimuli. Finally, we examine the variation in our results across households of differing socio-economic status (as proxied by education levels). We find that TOU tariffs and information stimuli have a significant effect in reducing electricity consumption in Ireland, particularly during peak hours. However, while households reduce peak demand significantly after the introduction of TOU tariffs and associated information, there is little incremental response to increasing differentials between peak and off-peak prices.

Markets versus Regulation: The Efficiency and Distributional Impacts of U.S. Climate Policy Proposals

Abstract: Massachusetts Institute of Technology. Joint Program on the Science & Policy of Global Change

Market Design with Centralized Wind Power Management: Handling Low-predictability in Intraday Markets

Abstract: Arthur Henriot, author of the article, was awarded the French Association for Energy Economics the first prize for Best Student Article in Energy Economics.

Technology and U.S. Emissions Reductions Goals: Results of the EMF 24 Modeling Exercise

Abstract: This paper discusses Technology and U.S. Emissions Reductions Goals: Results of the EMF 24 Modeling Exercise

The Relationship between Crude Oil and Natural Gas Prices: The Role of the Exchange Rate

Abstract: To the extent that energy sources can be substituted in end-uses, one might expect the prices of different fuels to be linked. High prices for one fuel will create incentives to substitute toward other fuels that are relatively less expensive. Consistent with this basic economic prediction, many authors have documented a tendency for the natural logarithm of prices of different energy commodities to be cointegrated.

Residual Demand Modeling and Application to Electricity Pricing

Abstract: Worldwide the installed capacity of renewable technologies for electricity production is rising tremendously. The German market is particularly progressive and its regulatory rules imply that production from renewables is decoupled from market prices and electricity demand. Conventional generation technologies are to cover the residual demand (defined as total demand minus production from renewables) but set the price at the exchange. Existing electricity price models do not account for the new risks introduced by the volatile production of renewables and their effects on the conventional demand curve. A model for residual demand is proposed, which is used as an extension of supply/demand electricity price models to account for renewable infeed in the market. Infeed from wind and solar (photovoltaics) is modeled explicitly and withdrawn from total demand. The methodology separates the impact of weather and capacity. Efficiency is transformed on the real line using the logit-transformation and modeled as a stochastic process. Installed capacity is assumed a deterministic function of time. In a case study the residual demand model is applied to the German day-ahead market using a supply/demand model with a deterministic supply-side representation. Price trajectories are simulated and the results are compared to market future and option prices. The trajectories show typical features seen in market prices in recent years and the model is able to closely reproduce the structure and magnitude of market prices. Using the simulated prices it is found that renewable infeed increases the volatility of forward prices in times of low demand, but can reduce volatility in peak hours. Prices for different scenarios of installed wind and solar capacity are compared and the meritorder effect of increased wind and solar capacity is calculated. It is found that wind has a stronger overall effect than solar, but both are even in peak hours.

Demand Impact of a Critical Peak Pricing Program: Opt-in and Opt-out Options, Green Attitudes and Other Customer Characteristics

Abstract: In this paper, we provide demand impact estimates of a critical peak pricing (CPP) program tested in the summer of 2011. We develop econometric models that examine demand responses of participants in "opt-in," "opt-out," and "tech only" CPP programs. Opt-out customers received bill protection while tech only cus­ tomers received in-home displays alerting them of critical peak times, but they were not placed on the CPP rate. Our results indicate that opt-in customers re­ duced critical peak period demand the most while opt-out customers' appear to attenuate their reduction because of bill protection. Additionally, we refine our findings using participant survey responses. In general, we find participants in test groups whose environmental or "green" attitude is high bad the strongest demand response.

Equity in Residential Electricity Pricing

Abstract: Real-time pricing of electricity is theoretically more economically efficient than flat rate pricing. However, a switch from flat-rates to real-time rates means that many consumers will lose the cross-subsidy they are receiving under the flat rate, and may see an increase in their bills even if they have elastic demand. We use hourly load data from 1260 Commonwealth Edison residential customers on a standard flat rate electricity tariff from 2007 and 2008. We calculate which customers would have been better off and which customers would not under real time pricing with both elastic and inelastic demand and look at the general characteristics of these customers. We find that if customers do not respond to prices under RTP, then only 35% of customers save money, while the remainder loses. The greatest potential for savings is from reduction in capacity costs.

Understanding the Determinants of Electricity Prices and the Impact of the German Nuclear Moratorium in 2011

Abstract: This paper shows how the effect of fuel prices varies with the level of electricity demand. It analyzes the relationship between daily prices of electricity, natural gas and carbon emission allowances with a vec- tor error correction model and a semiparametric varying smooth coef- ficient model. The results indicate that the electricity price adapts to fuel price changes in a long-term cointegration relationship. Different electricity generation technologies have distinct fuel price dependen- cies, which allows estimating the structure of the power plant portfo- lio by exploiting market prices. The semiparametric model indicates a technology switch from coal to gas at roughly 85% of maximum demand. It is used to analyze the market impact of the nuclear mora- torium by the German Government in March 2011. Futures prices show that the market efficiently accounts for the suspended capacity and expects that several nuclear plants will not be switched on after the moratorium.

Electricity Demand in Wholesale Italian Market

Abstract: In this paper we pursue two objectives: firstly we construct a theory based behavioral model of electricity demand in the Italian market; secondly we measure demand elasticity at hourly level, directly from consumer behavior. This is a novel approach providing the first attempt in the literature to estimate demand elasticity using individual demand bid data, in the Italian Power Exchange (IPEX). Econometric estimation allows us to identify robust results, showing that elasticity varies significantly with: time of the day; day of the week; season of the year; pattern of line congestion, as well as according to the level of equilibrium price. This has a policy implication: fostering more competition on the supply side could yield lower equilibrium prices and proportionately much higher quantities, for a lower offer curve, shifted to the right, would intersect a flatter portion of the demand curve. (This abstract was borrowed from another version of this item.)

The Impact of Imperfect Competition in Emission Permits Trading on Oligopolistic Electricity Markets

Abstract: The impact and efficacy of a cap-and-trade regulation on the electric power industry depend on interactions of demand elasticity, transmission network, market structure, and strategic behavior of generation firms. This paper develops an equilibrium model of an oligopoly electricity market in conjunction with a Cap-and-Trade emissions permits market to study such interactions. The concept of conjectural variations is proposed to account for imperfect competition in the permits market. We demonstrate the model using a WECC 225-bus system with a detailed representation of the California market. In particular, we examine the extent to which permit trading strategies affect the market outcome. We find that a firm with more efficient technologies can employ strategic withholding of permits, which allows for its increase in output share in the electricity market at the expense of other less efficient firms.

Is mandating smart meters smart

Abstract: The advent of "smart meters" will make possible Real Time Pricing of electricity: customers will face and react to wholesale spot prices, thus consumption of electric power will be aligned with its opportunity cost. This article determines the marginal value of a fraction of demand (or a consumer) switching to Real Time Pricing. First, it derives this marginal value for a simple yet realistic specification of demand. Second, using data from the French power market, it estimates that, for the vast majority of residential customers whose peak demand is lower than 6 kV A, the net surplus from switching to Real Time Pricing is lower than 1 euro/year for low demand elasticity, 4 euros/year for high demand elasticity. This finding casts a doubt on the economic value of rolling out smart meters to all residential customers, for both policy makers and power suppliers.

The Political Economy of Electricity Market Liberalization: A Cross-country Approach

Abstract: More than half of the countries in the world have introduced a reform process in their power sectors and billions of dollars have been spent on liberalizing electricity markets around the world. Ideological considerations, political composition of governments and educational/professional background of leaders have played and will play a crucial role throughout the reform process. Adapting a political economy perspective, this paper attempts to discover the impact of political economy variables on the liberalization process in electricity markets. Empirical models are developed and analyzed using panel data from 55 developed and developing countries covering the period 1975–2010. The research findings suggest that there is a significant negative relationship between electricity market liberalization and the size of industry sector, meaning that countries with larger industry sectors tend to liberalize less. Also, we detect a negative correlation between polity score and power sector liberalization, that is; it cannot be argued that liberalization policies are stronger in more democratic countries. On the other hand, our results imply that countries that receive foreign financial aid or assistance are more likely to liberalize their electricity markets. In OECD countries, single-party governments accelerate the reform process by reducing public ownership and vertical integration. Moreover, we detect a negative relationship between the years the chief executive has been in office and the reform progress in OECD countries. Furthermore, we identify a decrease in vertical integration in electricity industry during the terms of parties with “right” or “left” ideologies in OECD countries. Additionally, professional and educational background of head of executive branch (prime minister, president and so on) seem to have very significant impact on reform process in OECD countries, but this is not the case in non-OECD countries. Leaders with a professional background as entrepreneurs speed up electricity market liberalization process in OECD countries while those with a background as economists slow it down. As for educational background, the reforms seem to progress slower in OECD countries if the head of executive has an educational background in economics or natural science. As a final point, the study suggests that EU or OECD membership, the existence of electricity market reform idea, population density, electricity consumption, income level, educational level, imports of goods and services (as % of GDP) and country specific features have a strong correlation with liberalization process in electricity markets.

A Stylized Applied Energy-Economy Model for France

Abstract: We build, calibrate and simulate a stylized energy-economy model designed to evaluate the magnitude of carbon tax that would allow the French economy to reduce by a factor of four its CO2 emissions at a forty-year horizon. We estimate the substitution possibilities between fossil energy and other factors for households and firms. We build two versions of the model, the first with exogenous technical progress, and the second with an endogenization of the direction of technical progress. We show that if the energy-saving technical progress rate remains at its recent historical value, the magnitude of the carbon tax is quite unrealistic. When the direction of technical progress responds endogenously to economic incentives, CO2 emissions can be reduced by more than that allowed by the substitution possibilities, but not by a factor of four. To achieve this, an additional instrument is needed, namely a subsidy to fossil energy-saving research. The redirection of technical progress, which is a driver of energy transition, comes at a small cost in terms of the overall growth rate of the economy. [ABSTRACT FROM AUTHOR]

Natural Gas and U.S. Economic Activity

Abstract: Previous empirical work has shown that real natural gas prices have a small to negligible impact on total U.S. industrial production and most of its sub-indices. We first show that these results still hold with a sample that runs through mid-2012 and uses a different natural gas price. Concerns about the joint determination of the real natural gas price and U.S. economic activity lead us to reassess these results using a multivariate framework. Our model shows that natural gas does affect U.S. economic activity, but primarily through changes in natural gas production. We also show that natural gas supply, inventory demand, and responses to events in the oil market have been the most important contributors to the real natural gas price since 2000. In terms of approximate point estimates, our results indicate that increases in natural gas supply can raise total U.S. industrial production by 0.1 to 0.5 percent under plausible scenarios.

Unilateral Climate Policy: Can OPEC Resolve the Leakage Problem?

Abstract: In the abscence of a global agreement to reduce greenhouse gas emissions, individual countries have introduced national climate policies. Unilateral action involves the risk of relocating emissions to regions without climate regulations, i.e., emission leakage. A major channel for leakage are price changes in the international oil market. Previous studies on leakage have assumed competitive behaviour in this market. Here, we consider alternative assumptions about OPEC’s behaviour in order to assess how these affect leakage and costs of unilateral climate policies. Our results based on simulations with a large-scale computable general equilibrium model of the global economy suggest that assumptions on OPEC’s behaviour are crucial to the impact assessment of unilateral climate policy measures. We find that leakage through the oil market may become negative when OPEC is perceived as a dominant producer, thereby reducing overall leakage drastically compared to a setting where the oil market is perceived competitive.

Vehicle Manufacturer Technology Adoption and Pricing Strategies under Fuel Economy/Emissions Standards and Feebates

Abstract: New post-2010 Corporate Average Fuel Economy (CAFE) standards and carbon dioxide (CO 2 ) emissions standards have significantly increased the stringency of requirements for new light-duty vehicle fuel efficiency. This study investigates the role of technology adoption and pricing strategies in meeting the new standards, and the impact of possible feebate policies. The analysis simulates manufacturer decision making over the period (2011-2020) using a dynamic optimization model of the new vehicle market that maximizes social surplus while meeting the standards. Consumer surplus is determined from consumer demand, which is represented by a nested multinomial logit model, and the model is conservative in its assumptions on available technology. Results indicate that technology adoption will likely play a much larger role than pricing strategies in meeting the new standards (consistent with the intent of the policy). Feebates, when implemented along with the standards, can bring additional fuel economy improvement and emissions reduction, but the impact of feebates diminishes with the increasing stringency of the standards. Results also show that the impact of the policy on consumers could be relatively limited. In the long run the policy requires increasing up-front technology costs to consumers that outweigh the perceived benefit of fuel savings, and there is some loss in total new vehicle sales. However, the net effect is limited, and the full value of fuel savings to society is substantial. Results also show a small decrease in average vehicle footprint size, indicating that efficiency improvements are primarily distributed across all vehicle sizes, consistent with the intent of the policy.

Dynamic Adjustment of Crude Oil Price Spreads

Abstract: This paper examines the dynamic adjustment of crude oil price differentials formed by a wide range of popularly traded crude oils which include non-benchmark crudes of different quality. Recent studies have pointed out the fact that the adjustment of oil price spreads is asymmetric in nature. This paper makes a contribution in many ways. Employing econometric procedures that are more powerful than recently applied methods, and on a much wider selection of crude oil pairs than previous studies we establish that the results obtained for price differentials between benchmark crudes are not representative of the behaviour of non-benchmark pairs. Further, our results show that the adjustment of price differentials cannot be fully explained by the quality differentials which are commonly approximated by the difference in API gravity. Finally, we find that short run and long run dynamics do not show a pattern that could be linked to quality differentials.