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Economics of Energy & Environmental Policy
Volume 1, Number 3

Rethinking Gas Markets--and Capacity

Larry E. Ruff

DOI: http://dx.doi.org/10.5547/2160-5890.1.3.1
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The "U.S. Model" of natural gas markets is based on long-term, point-to-point commercial capacity rights (MDQXY) that reflect the physical capacity of the pipeline and are traded frequently among system users (shippers) in markets independent of the transmission system operator (TSO). When physical capacity is complex and scarce and the gas market is dynamic there are many MDQXY that must be continually reallocated and reconfigured, making trading difficult/illiquid and market outcomes suboptimal. Entry and exit capacities defined separately for a few large zones make trading easy and liquid but operationally problematic. Shipper-only trading would result in such a large gap between market and optimal (or even just feasible) outcomes that the TSO must engage in active capacity and gas trading itself to offset unconstructive/dangerous shipper trades. These conclusions suggest that, at least in some/many complex situations, commercial capacity should be eliminated altogether and replaced with a TSO-operated on-the-day market that prices and allocates physical capacity directly, with financial hedging as an equivalent (or better) substitute for commercial capacity. A simplified version of such a market has been operating successfully in Victoria, Australia, since 1999.

Marginal Costs with Wings a Ball and Chain Pipelines and Institutional Foundations for the U.S. Gas Market

Jeff D. Makholm

DOI: http://dx.doi.org/10.5547/2160-5890.1.3.2
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The United States has highly competitive gas markets (spot and futures), showing prices in recent years that have definitively diverged from world oil prices. Those gas markets were not "built" in the manner of administered electricity markets. Rather, they were the result of a revolution in federal pipeline regulation designed purposely to free the gas market from administrative agencies. The keys to that revolution in pipeline regulation were the definitive split of pipeline transport markets from gas markets and the juxtaposition of traditional cost-based pipeline regulation alongside an unregulated "Coasian" market for the trade in well-defined intangible shipper contract rights to physical transport capacity. The new pipeline regulations permit infrastructure capital to flow freely into the pipeline sector by allowing investors to deal effectively with asset specificity without impairing competitive pipeline entry or impeding the trade in gas.

Designing the European Gas Market: More Liquid & Less Natural?

Miguel Vazquez, Michelle Hallack, and Jean-Michel Glachant

DOI: http://dx.doi.org/10.5547/2160-5890.1.3.3
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Designing a gas market is defining how the commodity, the transmission and ancillary services are traded. The European Union has built the commoditization of natural gas through the socialization of several costs of trade. This choice aims at obtaining more liquid markets through the creation of virtual hubs of trade. These virtual hubs ignore most of the network and of the physical gas flows by the creation of entry/exit market zones. Thus the definition of such market zones has tied EU markets inside virtual trading zones (national or sub-national). We show the consequences and the challenges of this European choice, especially at the cross-zone level (often at country cross-border). Once "entry/exit" trade arrangements are preferred, the use of market-based mechanisms for cross-zone decisions like network investments becomes less natural.

German Nuclear Policy Reconsidered: Implications for the Electricity Market

Michaela Fursch, Dietmar Lindenberger, Raimund Malischek, Stephan Nagl, Timo Panke, and Johannes Truby

DOI: http://dx.doi.org/10.5547/2160-5890.1.3.4
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In the aftermath of the nuclear catastrophe in Fukushima-Daiichi, German nuclear policy has been reconsidered. This paper demonstrates the economic effects of an accelerated nuclear phase-out in Germany on the European electricity market. An optimization model is used to analyze two scenarios with different lifetimes for nuclear plants in Germany (phase-out vs. prolongation). Based on political targets, both scenarios assume significant electricity demand reductions and a high share of renewable energy sources in Germany. We find that electricity costs and prices in the European system are higher in the phase-out scenario, especially in Germany, associated with welfare losses. Due to lifetime extensions of existing fossil-fired plants as well as moderate capacity additions, we conclude that the generation sector can generally cope with the phase-out under the given assumptions. Yet, we emphasize that this requires a substantial and costly transformation of the supply and the demand side.

Cost-effectiveness and Economic Incidence of a Clean Energy Standard

Bryan K. Mignone, Thomas Alfstad, Aaron Bergman, Kenneth Dubin, Richard Duke, Paul Friley, Andrew Martinez, Matthew Mowers, Karen Palmer, Anthony Paul, Sharon Showalter, Daniel Steinberg, Matt Woerman, and Frances Wood

DOI: http://dx.doi.org/10.5547/2160-5890.1.3.5
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A Clean Energy Standard (CES) is a flexible, market-based policy instrument that could be adopted to reduce greenhouse gas emissions from the U.S. electricity system over time. This paper uses several well-known energy system and electricity models to analyze a CES that reflects broad principles outlined in President Obama's January 2011 State of the Union Address and in the Administration's subsequent Blueprint for a Secure Energy Future. 1 In particular, it examines three different design options for a CES that would each lead to approximately 80% clean electricity by 2035. These different design options provide broadly similar economic incentives for clean energy deployment and yield similar overall welfare impacts, but they exhibit different distributional outcomes. The most inclusive CES crediting approach favors producers over consumers in competitive electricity markets as well as regions with larger initial endowments of clean energy. On the other hand, the most restrictive crediting approach favors consumers over producers and reduces preferences for regions with larger initial endowments of clean energy. While specific technology outcomes vary across the four models used in this study, key insights about cost-effectiveness and economic incidence are largely robust to the underlying modeling platform. These insights may be important considerations in future CES policy design efforts.

Impacts of Biofuels Policies in the EU

Monica Padella, Adele Finco, and Wallace E. Tyner

DOI: http://dx.doi.org/10.5547/2160-5890.1.3.6
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Biofuels have the potential of playing an important role in the renewable energy sources panorama, ensuring the achievement of multiple goals such as security of supply, reduction of greenhouse gas (GHG) emissions, creation of green jobs, and development of business opportunities in the agricultural and rural sectors. Subsidies to the sector were justified on this basis, but analysis is required to determine real impacts. However, other potential impacts could offset any benefits biofuels may bring, and careful assessment and analysis of biofuels' impacts are necessary. These possible consequences involve food prices and food security, economic distortions of subsidies, and environmental impacts. Among the methodologies used to evaluate biofuels impacts, general equilibrium models (CGE) can be considered as the most comprehensive tool available to analyze governmental intervention at the aggregate level. The use of these tools is primarily to generate projections of future performance of the market (in terms of production, consumption, prices, international trade) on the basis of alternative scenarios. The present paper applies a general equilibrium model, an extended version of the GTAP (Global Trade Analysis Project) model developed by Hertel, Tyner and Birur in 2010, in which an alternative closure has been adopted in order to analyze the combined impacts of the US and EU biofuels programs considering in particular the socio-economic effects on prices, employment and welfare in the European Union in 2015.

Development and Application of Greenhouse Gas Performance Benchmarks in the European Union Emissions Trading Scheme

Stefan Pauer

DOI: http://dx.doi.org/10.5547/2160-5890.1.3.7
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In the European Union Emissions Trading Scheme's third trading period (2013-2020), the free allocation of emission allowances will be based on greenhouse gas performance benchmarks. This policy note describes how the revised rules were developed, how they will be applied in practice, and what they imply for operators of installations subject to the system. It highlights the rationale for changing the rules prevailing under the system's first two trading periods, explains the principles applied in devising the new allocation methodology, and illustrates the impacts on operators' business decisions. The author concludes that in a policy setting where free allocation is the chosen means to safeguard the competitiveness of industries subject to emissions trading, basing free allocation on greenhouse gas performance benchmarks supports the "polluter pays" principle by allowing appropriate price signals from differences in emission intensity, forms an equitable way of distributing emission allowances free of charge, and strengthens incentives to reduce greenhouse gas emissions.

Linking Emission Trading Schemes: A Short Note

Georg Grull and Luca Taschini

DOI: http://dx.doi.org/10.5547/2160-5890.1.3.8
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In principle, linking emission trading schemes would favour the depletion of low-cost abatement opportunities that are geographically spread over the globe. However, this would only be possible if the price of the emission permits in the different schemes converge to one price. Using a simple model-free structure, the paper first assesses how a unilateral link between two schemes or a bilateral link between schemes with restrictions on the amount of imported permits preempt a correct price convergence. Second, it shows under which conditions bilateral links between schemes with price containment mechanisms allows permit price convergence.

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