Recent Issues

The Energy Journal
Volume 43, Number 3




Fracking and Structural Shifts in Oil Supply

W.D. Walls and Xiaoli Zheng

DOI: 10.5547/01956574.43.3.wwal
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Abstract:
The adoption of hydraulic fracturing (fracking) and horizontal drilling technology substantively altered the structure of oil supply. Using disaggregate state-level data from the U.S, this paper provides empirical evidence that oil supplies are now asymmetric with respect to price changes as a result of the adoption of new production methods. The changed structure of U.S. oil supply—particularly the low supply elasticities for price declines and large supply elasticities for price increases—is consistent with the ineffectiveness of OPEC policies intended to drown fracking American producers in oil.




Price Formation in Auctions for Financial Transmission Rights

Jeff Opgrand, Paul V. Preckel, Douglas J. Gotham, and Andrew L. Liu

DOI: 10.5547/01956574.43.3.jopg
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Abstract:
Financial Transmission Rights (FTRs) are financial derivatives in wholesale electricity markets that are sold in auctions. The revenue collected from FTR auctions is passed through to electricity customers to reimburse them for transmission congestion payments they make in the spot energy market. On average, electricity customers' congestion payments greatly exceed auction reimbursements in electricity markets across the United States. We study the issue of auction revenue deficiency through the lens of Auction Revenue Rights (ARRs), which is the predominant mechanism used in U.S. electricity markets to distribute auction revenue to electricity customers. We demonstrate how the ARR process influences fundamental supply conditions in the FTR auction market and show how divergent auction equilibria emerge under different ARR decision-making regimes. Using market data from PJM, we find empirical evidence that variation in ARR management strategies helps explain differences between an FTR's auction price and its realized ex post value.




Export Growth - Fuel Price Nexus in Developing Countries: Real or False Concern?

Kangni Kpodar, Stefania Fabrizio, and Kodjovi Eklou

DOI: 10.5547/01956574.43.3.kkpo
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Abstract:
This paper investigates the impact of domestic fuel price increases on export growth in a sample of 77 developing countries over the period 2000-2014. Using a fixed-effect estimator and the local projection approach, we find that an increase in domestic gasoline or diesel price adversely affects real non-fuel export growth, with the impact phasing out within two years after the shock. The impact is mainly noticeable in countries with a high-energy dependency ratio and where access to electricity is limited. Further, large fuel price shocks do not seem to lead to disproportionately large changes in exports, suggesting that neither the gradualism nor the shock therapy approach in fuel subsidy reforms dominates. In countries where the export sector is vulnerable to fuel price shocks, appropriate mitigating measures should be designed to smooth the transition to higher fuel prices.




A Compound Real Option Approach for Determining the Optimal Investment Path for RPV-Storage Systems

Benjamin Hassi, Tomas Reyes, and Enzo Sauma

DOI: 10.5547/01956574.43.3.bhas
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Abstract:
The use of residential Photovoltaic-Storage systems may produce large benefits to owners and has expanded rapidly in recent years. Nonetheless, large uncertainties regarding the profitability of these systems make it necessary to incorporate flexibilities in their economic evaluations. This paper offers a new method to evaluate the compound flexibility of both the option of delaying investments and the option of further expanding the capacity of solar photovoltaic modules and batteries during the investment horizon. Flexibility is modeled as a compound real option, whose value is computed using a novel method that we call Compound Least Squares Monte Carlo (CLSM). The model is applied to the investment decisions associated to a residential Photovoltaic-Storage system. Results suggest that investors should use the proposed CLSM method in the economic valuation of multi-stage projects, since considering only a single flexibility could promote sub-optimal decisions. Moreover, in our case study, we show that it is optimal to break the investment down into two steps or more in 36% of future scenarios, on average.




Increasing or Diversifying Risk? Tail Correlations, Transmission Flows and Prices across Wind Power Areas

Johannes Mauritzen and Genaro Sucarrat

DOI: 10.5547/01956574.43.3.jmau
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Abstract:
As wind power costs have declined, capacity has grown quickly, often times in adjacent areas. Price and volatility risk from wind power's intermittency can be mitigated through geographic diversification and transmission. But wind power generation has a fat-tailed and right-skewed distribution. In this article we investigate how geographic diversification of wind power and the effect of wind power on market prices varies across the distribution of production. In a case study from Denmark and Sweden, we show that during tail-end production periods, correlations between areas increase substantially as does congestion in the transmission network. This leads to highly non-linear price effects. The marginal effect of wind power on the local prices is shown to be substantially higher at the 10th decile of wind power production. This has implications for valuation models of wind power projects and for operations of electricity markets with high penetrations of wind power.




The Long Norwegian Boom: Dutch Disease After All?

Knut Anton Mork

DOI: 10.5547/01956574.43.3.kmor
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Abstract:
Norway's famed success against the Dutch disease did not extend to the petroleum investment boom of 2000–19. This paper takes a fresh look at the post-2000 data and shifts the focus from quantities and productivity to product prices and wages. Sweden, which is used as the control, had similar developments for real GDP and productivity, but mainland Norway outpaced Sweden in terms of product prices and wages, far in excess of the corresponding divergence of consumer prices. This real appreciation is explained as a result of new demand pressure from oil companies with a strong home bias. It also implies that about half of the resource rent, all of which was to be appropriated by the government, leaked to the private sector. Thus, rent management has not been nearly as effective as claimed. And the real appreciation is likely to cause major adjustment problems once the resource boom ends.




Climate Change and the Vulnerability of Germany's Power Sector to Heat and Drought

Alexander Golub, Kristina Govorukha, Philip Mayer, and Dirk Rübbelke

DOI: 10.5547/01956574.43.3.agol
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Abstract:
The effects of extreme weather events and the resilience of the energy sector have become the subject of regulatory initiatives and ongoing research. We demonstrate the vulnerability of the German power sector to climate change and provide a qualitative and quantitative analysis of emerging risks from two types of extreme weather events: droughts and high temperatures. Our analysis is based on datasets covering temperature and drought data for the last 40 years. We present evidence of a higher frequency of power plant outages as a consequence of droughts and high temperatures. To characterize the vulnerability of the power sector we develop a capacity-adjusted drought index. The results are used to assess the monetary loss of power plant outages due to heatwaves and droughts and losses to consumers due to higher wholesale electricity prices and price volatility. An increasing frequency of such extreme weather events will aggravate the observed problem.




Structural Transformation Options of the Saudi Economy Under Constraint of Depressed World Oil Prices

Salaheddine Soummane, Frédéric Ghersi, and Franck Lecocq

DOI: 10.5547/01956574.43.3.ssou
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Abstract:
We implement the hybrid (energy-economy) recursive-dynamic multisector IMACLIM model with important adaptations to Saudi macroeconomics. We design two scenarios reflecting both the Saudi Vision 2030 economic development program and Nationally Determined Contribution (NDC) to greenhouse gas mitigation: Continuity of previous plans to expand energy-intensive activities under maintained energy-pricing policies, versus Transformation by economic diversification away from hydrocarbon-related activities and fiscal and energy-pricing reforms. We show that, compared to Continuity, Transformation improves activity, employment and public budget outlooks, while considerably abating the energy intensity of GDP and total CO2 emissions. Our results thus point at the relevance of economic diversification as both a hedging strategy against international climate change mitigation depressing oil markets and a national climate mitigation strategy for Saudi Arabia. However, the successful advancement of the reforms necessary for diversification remains conditional to setting a suitable institutional framework for a competitive economy.




Are Energy Endowed Countries Responsible for Conditional Convergence?

Matthew E. Oliver and Gregory B. Upton Jr.

DOI: 10.5547/01956574.43.3.moli
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Abstract:
We test for economic convergence in GDP per capita and consumption per capita within two distinct sets of countries: those with significant (and plausibly exogenous) fossil fuel (FF) endowments and those without such endowments. Among countries with FF endowments, we find evidence of both absolute and conditional convergence across both macroeconomic dimensions, as indicated by standard β- and σ-convergence tests. By contrast, we do not find robust evidence of convergence among countries without FF endowments. This pattern—convergence among FF-endowed and non-convergence among non-endowed countries—is robust to changes in the sample period, controlling for potential resource curse effects, and is largely consistent across growth components. We discuss the implications for economic development and comment on its implications for global decarbonization policies.




An Empirical Analysis of the Bid-ask Spread in the Continuous Intraday Trading of the German Power Market

Clara Balardy

DOI: 10.5547/01956574.43.3.cbal
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Abstract:
Liquidity is decisive for a well-functioning market. As most of the literature on the subject is based on financial markets, the extrapolation of its insights to the power market is fragile. This paper shows the specificities of liquidity of the German power market. Using the bid-ask spread as a proxy, thanks to the detailed order book for the hourly contracts, I first describe the evolution of the liquidity over the trading session. The bid-ask spread has a "L-shaped" pattern over it. Second, I identify the four main drivers of the bid-ask spread: the volatility, the adjustments' need (forecast errors), the activity and the concentration of the market. I find that an increase of the volatility or the market concentration increases the bid-ask spread while an increase of the adjustments' need or the market activity decreases it.




How May National Culture Shape Public Policy? The Case of Energy Policy in China

Philip Andrews-Speed

DOI: 10.5547/01956574.43.3.pand
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Abstract:
This paper explores how aspects of national culture may shape the design and implementation of public policy, using the example of energy policy in China. It focuses on cognitive style and on political and legal culture. China's energy policies display a combination of pragmatism, incrementalism, internal contradiction and ambiguity. This is consistent with evidence from experimental psychology and history that the development of Chinese and East Asian cognitive styles have taken a path distinct from those of Western civilizations with their Greek philosophical heritage. These variations of cognitive style between cultures are reflected in brain function and genes. Policy implementation also bears features from imperial times in the political culture of China's Communist Party and the contemporary legal system. These arguments reinforce existing calls for caution when seeking to transfer energy or other public policy approaches between countries with different cultures.




Book Reviews

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