Energy Journal Issue

The Energy Journal
Volume 43, Number 4
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How Valuable is the Reliability of Residential Electricity Supply in Low-Income Countries? Evidence from Nepal

Anna Alberini, Jevgenijs Steinbuks, and Govinda Timilsina

DOI: 10.5547/01956574.43.4.aalb

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Abstract:
We use contingent valuation to estimate the willingness to pay (WTP) for improved electricity service in Nepal following the end of the country's load-shedding crisis of 2007–2016. Using a nationally representative survey of grid-connected Nepali households, we calculate the WTP per outage-day avoided and the value of lost load (VoLL) for residential customers and analyze their key drivers, including income, education, and investments in own generation or electricity storage equipment. Households are willing to pay, on average, 123 NR ($1.11) per month for improved quality of power supply. In other words, they would be prepared to see a 65% increase in their monthly bill to avoid outages. Our preferred estimates of the VoLL range from 5 to 15 NR/kWh (¢4.7–¢14/kWh). These estimates are below the marginal cost of avoided load shedding, and are virtually the same as valuations at the beginning of the load-shedding crisis.




Distinguishing the Complex Effects of Foreign Direct Investment on Environmental Pollution: Evidence from China

Jianxun Chen, Hui Tan, and Yingran Ma

DOI: 10.5547/01956574.43.4.jche

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Abstract:
We attempt to investigate how and when foreign direct investment (FDI) impacts different types of environmental pollution in host countries. Using provincial data from China between 1995 and 2015, we find that FDI mitigates air pollution, yet it has insignificant effect on water and solid pollution. We further reveal that it is the combination of the technology, scale and structure effects that jointly determines the impact of FDI on environmental pollution. Among them, the technology effect takes the most dominant role, followed by the scale effect and structure effect. In addition, by considering the time effect on environmental policy change, we suggest that the pollution halo effect mainly occurs after air pollution policy revision. Our findings provide insight on the complex mechanisms and theoretical boundary of FDI on different types of environmental pollutants.




Risk-adjusted Social Discount Rates

Frédéric Cherbonnier and Christian Gollier

DOI: 10.5547/01956574.43.4.fche

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Abstract:
When evaluating public and private investment projects, those that contribute more to the collective risk should be more penalized through an upward adjustment of their discount rate. This paper shows how to estimate the risk-adjusted discount rate for different projects, with applications to the electricity sector. Using the standard framework of consumer theory, we express any investment project's beta in terms of the easier-to-measure price and income elasticities of the goods generated by the project. When considering an investment in production capacity, the beta has a flat term structure, and is positive (negative) for normal (inferior) goods. When considering core infrastructures carrying goods or services, such as energy transmission and distribution assets, the beta has a decreasing term structure with very high values at short horizons for infrastructures facing capacity constraints. We provide a real-case example of a cross-border electricity connection with negative beta for the exporting country.




Electricity Tariff Rebalancing in Emerging Countries: The Efficiency-equity Tradeoff and Its Impact on Photovoltaic Distributed Generation

Pedro I. Hancevic, Hector M. Nuñez, and Juan Rosellón

DOI: 10.5547/01956574.43.4.phan

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Abstract:
Existing tariff schemes often fail to achieve basic economic objectives. They set prices per unit that either exceed or fall short the social marginal cost and produce unfair distributional outcomes. In many cases, electricity rates also contribute to unsustainable fiscal deficits due to the (almost) generalized electricity subsidies. Moreover, inefficient residential tariffs do not favor the adoption of green technologies and the investment in energy efficiency improvements. We argue that the efficient deployment of green technologies, and more generally, the clean energy transition, will require electricity tariff reforms. In this paper, we use household level data and hourly industry data from Mexico to show how more efficient pricing mechanisms (such as a two-part tariff scheme in the context of efficient nodal pricing), combined with well-design environmental regulations (e.g., net-metering schemes) and correctly targeted transfer programs (e.g., means testing mechanisms) can improve economic, social, and environmental outcomes significantly, all at once.




Distortions of National Policies to Renewable Energy Cooperation Mechanisms

Jelle Meus, Hanne Pittomvils, Stef Proost, and Erik Delarue

DOI: 10.5547/01956574.43.4.jmeu

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Abstract:
The EU endeavors to stimulate the use of renewable energy cooperation mechanisms. These cooperation mechanisms can significantly reduce the policy cost for meeting renewable targets. Several authors, however, have raised concerns that such cooperation mechanisms can be subject to efficiency losses due to different national regulatory conditions, and due to an ill-advised selection of cross-border support instruments. A quantitative evaluation of these effects remains missing. To address this gap, we first introduce a unifying analytical framework to show how optimal cross-border renewable energy trade should be organized and how these mechanisms could be distorted. We then develop a partial equilibrium model, formulated as a large-scale mathematical program with equilibrium constraints, to assess the impact of (i) different national grid cost allocation regimes and (ii) different cross-border feed-in premium implementations. Our results indicate that EU-wide auctions for renewable electricity should (i) not be based on sliding feed-in premiums and should (ii) ideally be discriminatory if national regulatory conditions differ across Member States. We also consider country-level distributional effects and confirm that Member States can lose when engaging in renewable cooperation.




The Role of Uncertainty in Shaping Individual Preferences for Residential Energy Renovation Decisions

Salomé Bakaloglou and Fateh Belaïd

DOI: 10.5547/01956574.43.4.sbak

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This article examines a crucial question that has been raised in recent years in both policy and economic literature: the role of uncertainty as a barrier to energy retrofit decisions. We develop a discrete choice experiment to elicit preferences for energy renovation measures. This methodologically innovative experiment design includes two insurance schemes covering potential sources of uncertainty as attributes of the energy retrofit alternatives. We use a mixed logit model to investigate the nature of systematic heterogeneity in household preferences for attributes of energy retrofit solutions. The article shows that uncertainties related to future energy pricing and retrofit quality are negatively perceived during energy-renovation decision making. This impact varies according to household characteristics such as risk aversion and perceptions of the economic context. The results suggest that public policies should support and accompany the development of insurance schemes to increase energy renovation rates.




Assessing the Impact of Exceptional Drought on Emissions and Electricity Generation: The Case of Texas

Jamal Mamkhezri and Gregory L. Torell

DOI: 10.5547/01956574.43.4.jmam

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During the 2011 drought, Texas electricity prices rose as generators with water-intensive cooling technologies cut back production. We investigate the effect of exceptional drought on electricity supply and emissions using a fixed-effects model on intra-hourly ERCOT data from 2010 to 2017. We find that the effect of exceptional drought on electricity supply varies with the cooling technology type used by the generator. Generators with water-intensive cooling technologies respond to exceptional drought conditions by raising their average offer prices. However, generators that use dry cooling technologies do not raise offer prices but do increase the total quantity offer during exceptional drought periods. These changes in offer prices lead to lower emissions plants being dispatched during exceptional drought in ERCOT. Given that exceptional drought intensity and duration are forecasted to increase over the coming decades, our findings provide valuable insights for state policymakers seeking to regulate the electricity market in our study area.




How Far is Gas from becoming a Global Commodity?

Luís Aguiar-Conraria, Gilmar Conceição, and Maria Joana Soares

DOI: 10.5547/01956574.43.4.lagu

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While we can say that there is a global market for crude oil, we cannot say the same for natural gas. There is a strand of literature that argues that, in the last decades, gas markets have become less regional and more global. We use wavelets to test this hypothesis and conclude otherwise: although the European and Japanese gas markets are significantly synchronized, they are much less than the oil markets, which we take as the benchmark. We also show that the North American gas market fluctuations are independent of the other gas markets. Finally, we show that the existing synchronization between gas markets almost vanishes once one filters out the effect of oil price variations, suggesting that it is the global oil market that connects the regional gas markets.




Oil Price Shocks in Major Emerging Economies

Nahiyan Faisal Azad and Apostolos Serletis

DOI: 10.5547/01956574.43.4.naza

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Abstract:
As the world economic power shifts from the advanced G7 countries—Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States—to the seven largest emerging market countries (EM7)—Brazil, China, India, Indonesia, Mexico, Russia, and Turkey—the vulnerability of these emerging market countries to exogenous shocks is becoming of growing importance. This paper presents a comprehensive examination of the effects of oil price shocks on real economic activity in the EM7 economies in the context of two classes of empirical models. In general, we find that oil price uncertainty has statistically significant effects on the real output of the EM7 economies and that the relationship between oil prices and economic activity is in general symmetric. We also find that oil price uncertainty has in general a negative effect on world crude oil production.




Adaptation Funding and Greenhouse Gas Emissions: Halo Effect or Complacency?

Salpie Djoundourian, Walid Marrouch, and Nagham Sayour

DOI: 10.5547/01956574.43.4.sdjo

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This paper contributes to the debate surrounding the impact of adaptation to climate change on the incentives to abate greenhouse gases emissions. Using data from the World Development Indicators and various adaptation funds under the UNFCCC framework, this paper provides an empirical analysis of the relation between adaptation and emissions. We specifically test whether adaptation measures to climate change affect emissions of greenhouse gases in a world where adaptation funds are available. Using a staggered difference-in-differences approach and an event study analysis, we find that receiving adaptation funding significantly and negatively affects several CO2 emissions measures, providing preliminary evidence of the presence of a halo effect of adaptation funding. We do not find evidence of a significant change in the emissions of methane, nitrous dioxide and other greenhouse gases.




The Integration of Variable Generation and Storage into Electricity Capacity Markets

Stan Zachary, Amy Wilson, and Chris Dent

DOI: 10.5547/01956574.43.4.szac

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We show how to value both variable generation and energy storage to enable them to be integrated fairly and optimally into electricity capacity markets. We develop theory based on balancing expected energy unserved against costs of capacity procurement, and in which the optimal procurement is that necessary to meet an appropriate reliability standard. For conventional generation the theory reduces to that already in common use. Further the valuation of both variable generation and storage coincides with the traditional risk-based approach based on equivalent firm capacity. The determination of the equivalent firm capacity of storage requires particular care; this is due both to the flexibility with which storage added to an existing system may be scheduled, and also because, when any resource is added to an existing system, storage already within that system may be flexibly rescheduled. We illustrate the theory with an example based on the GB system.




Extending Macroeconomic Impacts Forecasting for NEMS

Christa D. Court, Randall W. Jackson, Amanda J. Harker Steele, Gavin Pickenpaugh, Péter Járosi, Justin Adder, and Charles Zelek

DOI: 10.5547/01956574.43.4.ccou

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Abstract:
To comprehensively model the macroeconomic impacts that result from changes in long-term energy-economy forecasts, the United States (U.S.) Department of Energy's National Energy Technology Laboratory (NETL) partnered with West Virginia University (WVU)'s Regional Research Institute to develop the NETL/WVU econometric input-output (ECIO) model. The NETL/WVU ECIO model is an impacts forecasting model that functions as an extension of the U.S. energy-economic models available from the U.S. Energy Information Administration's National Energy Modeling System (NEMS) and the U.S. Environmental Protection Agency's Market Allocation (MARKAL) model. The ECIO model integrates a macroeconomic econometric forecasting model and an input-output accounting framework along derived forecast scenarios detailing a baseline of the U.S. energy-economy and an alternative forecast on how power generation resources can meet future levels of energy demand to generate estimates of the impacts to gross domestic product, employment, and labor income. This manuscript provides an overview of the model design, assumptions, and standard outputs.




Book Reviews

Unsettled?: What Climate Science Tells Us, What it Doesn't, and Why it Matters, by Steven Koonin - Book Review by: Gary Yohe

Shale Gas, The Environment and Energy Security: A New Framework for Energy Regulation, by Ruven Fleming - Book Review by: Mark S. Langevin





 

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