Recent Issues

The Energy Journal
Volume 41, Number 6




Locational Investment Signals: How to Steer the Siting of New Generation Capacity in Power Systems?

Anselm Eicke, Tarun Khanna, and Lion Hirth

DOI: 10.5547/01956574.41.6.aeic
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Abstract:
New generators located far from consumption centers require transmission infrastructure and increase network losses. The primary objective of this paper is to study signals that affect the location of generation investment. Such signals result from the electricity market itself and from additional regulatory instruments. We cluster them into five groups: locational electricity markets, deep grid connection charges, grid usage charges, capacity mechanisms, and renewable energy support schemes. We review the use of instruments in twelve major power systems and discuss relevant properties, including a quantitative estimate of their strength. We find that most systems use multiple instruments in parallel, and none of the identified instruments prevails. The signals vary between locations by up to 20 EUR per MWh. Such a difference is significant when compared to the levelized costs of combined cycle plants of 64�72 EUR per MWh in Europe.




The (time-varying) Importance of Oil Prices to U.S. Stock Returns: A Tale of Two Beauty-Contests

David C. Broadstock and George Filis

DOI: 10.5547/01956574.41.6.dbro
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Abstract:
We evaluate the probability that oil prices affect excess stock returns for U.S. listed firms. The probabilities are obtained from a time-varying multi-factor asset pricing framework estimated using dynamic model averaging techniques, including oil price information among several other possible risk factors. Two widely used oil price measures are considered, one based on raw oil price changes and another based on disentangling the source of oil price changes due to supply-side or demand-side effects. As far as we know our dataset, which comprises 10,118 stock price series with up to 25,372,588 observations between 1995�2018, is the most comprehensive used for this purpose. We develop two �beauty-contests� in which we estimate the multi-factor models separately for individual stocks, for each of the two oil price measures. The results suggests that, when working with daily data (beauty contest 1), oil price changes are a significant (important) determinant for around 1�3% of the sample. When using oil price shocks�as opposed to oil price changes�(beauty contest 2) this percentage increases to 27�45%, suggesting that oil supply and demand shocks (as opposed to oil price changes) can better explain firm-level excess returns, at least for monthly frequency data where such a decomposition is available. We provide evidence that the increase in percentage is only partially attributable to data-frequency, and more likely attributed to the decomposition into supply/demand driven oil price changes. We reconcile differences between our findings and those reported in previous literature on the basis of the fully dynamic nature of our adopted methodology.




Growth Sources of Green Economy and Energy Consumption in China: New Evidence Accounting for Heterogeneous Regimes

Guanchun Liu, Yuanyuan Liu, and Chien-Chiang Lee

DOI: 10.5547/01956574.41.6.gliu
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Abstract:
This paper proposes an extended Solow decomposition framework with a finite mixture model, which is incorporated to account for heterogeneous regimes. The model decomposes green economy into two different components, namely, green total factor productivity and factor endowment. Then, we reestimate the growth sources of green economy and especially the importance of energy consumption in China�s provincial industries over 2000�2015. The empirical results suggest that there are three green growth regimes across Chinese provinces for overall economy and different industries. Specifically, some provinces switch regime over time, while the others maintain the same regime. Furthermore, when controlling for regime heterogeneity, the contribution of factor endowment decreases and that of green total factor productivity increases. With respect to energy consumption, traditional methods overestimate its importance in the primary and tertiary industries and underestimate that in the secondary industry. In addition, the reliance of China�s overall economy and the secondary and tertiary industries on energy consumption decreases as economy develops.




Fuel Demand across UK Industrial Subsectors

Paolo Agnolucci and Vincenzo De Lipsis

DOI: 10.5547/01956574.41.6.pagn
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Abstract:
Heterogeneity is a theme acquiring more and more prominence in the energy economic literature from both a modelling and policy-making perspective. We show that useful empirical evidence on this subject can be obtained by applying a parsimonious multivariate cointegration analysis that makes use of the increasingly available time series data on energy demand. We find that there is substantial heterogeneity in the demand for fuels from UK firms belonging to different subsectors, with price and level of production having different degrees of importance in the fuel choice, and with evidence of both substitutability and complementarity between fuels. Moreover, we show that fuel demand for the industrial sector as a whole is considerably more elastic than most estimates presented in the literature, finding which has direct relevance for policies aimed at influencing industrial fuel consumption through fuel switching.




Unveiling the Time-dependent Dynamics between Oil Prices and Exchange Rates: A Wavelet-based Panel Analysis

Hyunjoo Kim Karlsson, Kristofer Månsson, and Pär Sjölander

DOI: 10.5547/01956574.41.6.hkar
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Abstract:
The objective of this paper is to re-examine the relationship between real oil prices and real effective exchange rates (REER) for major oil-exporting countries with floating exchange rates. We apply the wavelet-based principles of Gallegati et al. (2016) using monthly data for the period 1996 to 2015. In contrast to many previous studies, our results support the theoretically expected positive nexus between the real oil prices and REER for our dataset. This (theoretically-expected) positive relationship is stronger at the larger time scales (that is, at the 4-8 and 8-16 month wavelet scales) compared to the smaller time scales (that is, at the 1-2 and 2-4 month wavelet scales). The findings of this study therefore add to the existing literature, since they disentangle the specific relationship between oil prices and exchange rates at different time scales, which has important policy implications.




Why the Effects of Oil Price Shocks on China’s Economy are Changing

Shouyang Wang, Xun Zhang, and Lin Zhao

DOI: 10.5547/01956574.41.6.swan
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Abstract:
Some studies on developed economies have revealed that the impacts of oil price shocks have decreased while conclusions about China remain occluded. We investigate the changing effects of oil price shocks on China�s macroeconomy and discuss the causes. A time-varying parameter vector autoregressive (VAR) model reveals that impacts of oil price shocks on China�s economy have shown a downward trend since 1997. The responses of the real output are much greater and last longer than those of inflation. Then a new Keynesian dynamic stochastic general equilibrium model is developed to synthetically explore the causes. The results indicate that decreasing oil intensity and monopoly power reduce the effects of oil price shocks, while increasing capital intensity in production amplifies them. Other factors-such as changing price stickiness, deregulation of refined oil prices, and shifts in monetary policy targets-have limited effects on the relationship between oil price shocks and China�s macroeconomy.




Energy R&D Investments and Emissions Abatement Policy

Di Yin and Youngho Chang

DOI: 10.5547/01956574.41.6.dyin
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Abstract:
The study examines the interactions of the energy R&D investments and the CO2 abatement policy using an endogenous energy R&D climate-economy model. Energy R&D investments affect the carbon emissions directly through efficiency improvements and indirectly by changing the comparative advantages of resources. This study considers the R&D investments in energy efficiency and low-carbon technology and explores how energy R&D investments accelerate the energy transition from fossil fuels to low-carbon technology. Three policies of carbon abatements are considered, namely, the optimal policy, the 2 �C policy, and the 1.5 �C policy. From the perspectives of benefits and costs, the optimal policy leads to the least abatement costs compared to the other two abatement policies. This study indicates that the more restrictive the abatement policy is, the more severe economic damage is caused in the short run, but more economic welfare is gained in the long run. Keywords: Energy R&D investments, Emissions abatement policy, Energy efficiency, Backstop technology, Energy substitution, Cost-benefit analysis, Climate change




Are Energy Executives Rewarded for Luck?

Lucas W. Davis and Catherine Hausman

DOI: 10.5547/01956574.41.6.ldav
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Abstract:
In this paper, we examine executive compensation data from 78 major U.S. oil and gas companies over a 24-year period. Perhaps in no other industry are the fortunes of so many executives so dependent on a single global commodity price. We find that a 10% increase in oil prices is associated with a 2% increase in executive compensation. This oil price effect holds for both CEOs and non-CEOs and separately for several different individual components of compensation, including bonuses. We find that the oil price effect is larger in companies with more insiders on the board, and asymmetric, with executive compensation rising with increasing oil prices more than it falls with decreasing oil prices. We then discuss potential mechanisms drawn from the broader existing literature on executive compensation.




Behavioral Anomalies and Energy-related Individual Choices: The Role of Status-quo Bias

Julia Blasch and Claudio Daminato

DOI: 10.5547/01956574.41.6.jbla
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Abstract:
The literature on the energy-efficiency gap discusses the status-quo bias as a behavioral anomaly that potentially increases a household�s energy consumption. We empirically investigate the extent to which the status-quo bias is linked to residential electricity consumption through two channels: non-replacement of old appliances and overuse of appliances. Using data from a large household survey conducted in three European countries, we find that our measure of status-quo bias is a significant predictor of both the age of home appliances and the level of a household�s consumption of energy services. This is also reflected in the total electricity consumption, which is found to be around 6% higher when the household head is status-quo biased. We thus provide empirical evidence that the status-quo bias may represent a substantial barrier to increasing residential energy efficiency. Our findings prompt policy makers to design instruments that take this barrier into account.




Impact of Permit Allocation on Cap-and-trade System Performance under Market Power

Mei Wang and Peng Zhou

DOI: 10.5547/01956574.41.6.mwan
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Abstract:
The presence of market power usually has negative impacts on the cost-effectiveness of the carbon market. As market power-induced efficiency loss depends on permit allocation, the choice of permit allocation methods is likely to affect the cost-effectiveness of the carbon market. This paper examines theoretically how the choice of emission permit allocation method affects the cost-effectiveness of an emissions trading system when market power exists. We find that, under grandfathering and benchmarking, the carbon market would be more efficient if the permits initially allocated to the dominant firm were closer to its CO2 emissions. Under auctioning, the dominant firm tends to lower the CO2 price, which may result in efficiency loss. By combining the modelling results of efficiency loss due to market power and the fairness in terms of CO2 cost pass-through, we finally provide some policy recommendations on how to choose a CO2 emission permit allocation method for different industries.




Transient and Persistent Energy Efficiency in the Wastewater Sector based on Economic Foundations

Stefano Longo, Mona Chitnis, Miguel Mauricio-Iglesias, Almudena Hospido

DOI: 10.5547/01956574.41.6.slon
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Given the increasing importance of the wastewater sector in terms of energy usage, the understanding of the level of energy efficiency of wastewater treatment plants (WWTPs) is useful to both the industry itself as well as policy makers. Here, based on economic foundations, we apply a Stochastic Frontier Analysis (SFA) approach for energy demand modelling to estimate energy efficiency in the wastewater sector. Using specific SFA models and panel data from 183 Swiss WWTPs over the period 2001 to 2015, the paper illustrates that distinguishing between persistent and transient inefficiency is essential to deduce appropriate energy efficiency diagnosis in WWTPs. In this respect, persistent energy inefficiency is found to be more severe than transient energy inefficiency. Furthermore, it is shown that the age of the equipment influences the demand for energy and the energy savings due to technological innovation are quantified. Finally, economies of output density and scale are estimated demonstrating that for plants operating below optimal scale significant energy savings can be achieved if plants would be operated at higher size. Moreover, our analysis reveals also that for plants larger than 100,000 Population Equivalent, at least from an energy efficiency point of view, it would be no more beneficial to increase their scale.




International Oil Market Risk Anticipations and the Cushing Bottleneck: Option-implied Evidence

Marie-Hélène Gagnon and Gabriel J. Power

DOI: 10.5547/01956574.41.6.mgag
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Abstract:
This paper studies crude oil market integration and spillovers between Brent and WTI oil indexes over the 2006�2019 period. In addition to prices, we estimate time series of model-free option-implied moments to capture forward-looking market views and anticipations of different risk categories. We describe the WTI-Brent equilibrium relationship in prices and in risk expectations measured by implied volatility, skewness, and kurtosis. Using a fractional cointegration model, we find long memory in the price cointegrating vector and in implied moments, implying that persistence of shocks is an important feature of crude oil markets. The evidence supports a differential in implied volatility but not in prices, and suggests equilibrium fragmentation during the Cushing bottleneck period. Analysis of implied moments reveals that Brent and WTI risk anticipations generally share a common equilibrium. Unlike volatility, asymmetric and tail risks are more locally driven, especially during market disruptions such as the Cushing bottleneck, so there is potential for diversifying extreme risks using both indexes.




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