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The Energy Journal
Volume 44, Number 6

Oil Market Stabilization: The Performance of OPEC and Its Allies

Hossa Almutairi, Axel Pierru, and James L. Smith

DOI: 10.5547/01956574.44.6.halm
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We examine the influence of OPEC+ on the level and volatility of oil prices. By extending Pierru et al.'s (2018, 2020) modeling framework, we are able to distinguish OPEC's particular role and impact from that of its Allies—those countries who joined with OPEC at the end of 2016 in the attempt to stabilize the market. In addition to corroborating earlier results regarding the impact of OPEC's management of spare capacity prior to 2017, we now present an analysis of how the concerted actions by the larger community of OPEC+ members have affected prices, including during the tumultuous period in which the COVID-19 pandemic took hold. We find that OPEC+'s efforts to stabilize the market reduced price volatility by up to one half, both before and during the pandemic. We attribute most of that reduction to OPEC's own actions whereas the impact of the Allies' efforts was mostly to support the price level. In that vein, OPEC+'s management of spare capacity barely impacted the average price over the pre-pandemic period, but, by countering the price collapse caused by the pandemic demand shock, lifted the average price by $35.70 from May 2020 through August 2021.

Rethinking the Role of Financial Transmission Rights in Wind-Rich Electricity Markets in the Central U.S.

James Hyungkwan Kim, Mark Bolinger, Andrew D. Mills, and Ryan Wiser

DOI: 10.5547/01956574.44.6.jkim
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Transmission congestion can cause a divergence between wholesale power prices at the individual pricing nodes where power is generated and the more-liquid trading hubs where that power is often delivered and sold. This nodal price difference is commonly referred to as the "locational basis" (or just "basis"). Because the basis varies over time, it can—if not hedged—unpredictably affect a wind plant's revenue and/or value, which increases investor risk and potentially slows deployment. We find wind plants typically face a larger and more-negative basis than do thermal generators, and hence are more-negatively impacted by congestion. Moreover, while most thermal generators can effectively hedge basis risk by purchasing conventional fixed-volume financial transmission rights (FTRs), these fixed-volume FTRs do not effectively hedge basis risk for variable wind generation. More-effective hedging mechanisms may be required to support those generators most-impacted by congestion, and to promote continued investment in variable generation resources in congested markets.

Oil Price Uncertainty and IPOs

Magnus Blomkvist, Nebojsa Dimic, and Milos Vulanovic

DOI: 10.5547/01956574.44.6.mblo
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We examine the impact of oil price uncertainty on IPO volume in the oil and gas sector. By using the implied volatility of oil options, a forward-looking uncertainty measure, we identify the effect of uncertainty on the going-public decision. Oil price uncertainty exhibits a strong negative relation to IPO volume. A one standard deviation decrease in the implied volatility results in a 29% increase in the number of quarterly IPOs. The effect is concentrated among the price-sensitive upstream producers. We further report that uncertainty positively impacts the IPO withdrawal decision and increases the value of postponing the offering.

The Effects of Fuel-Efficient Cookstoves on Fuel Use, Particulate Matter, and Cooking Practices: Results from a Randomized Trial in Rural Uganda

Theresa Beltramo, Garrick Blalock, Stephen Harrell, David I. Levine, and Andrew M. Simons

DOI: 10.5547/01956574.44.6.tbel
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Smoky cookfires contribute to global climate change and kill approximately four million people annually. While many studies have examined the effects of fuel-efficient cookstoves, this study does so while selling stoves at market prices. After introducing a fuel-efficient cookstove, fuelwood use and household air particulates declined by 12% and by smaller percentages after adjusting for observer-induced bias, or the Hawthorne effect. These reductions were less than laboratory predictions and fell well short of World Health Organization pollution targets. Even when introducing a second stove, most households continued to use their traditional stoves for most cooking. Future research should focus on improving the usability of fuel-efficient cookstoves and/or policies that assist consumers to shift to safer fuels like gas or electricity coupled with mechanisms to disable the existing smoky cookfire.

Assessing Improved Price Zones in Europe: Flow-Based Market Coupling in Central Western Europe in Focus

Tim Felling, Björn Felten, Paul Osinski, and Christoph Weber

DOI: 10.5547/01956574.44.6.tfel
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Theoretical papers have identified several sources of inefficiencies of flow-based market coupling (FBMC), the implicit congestion management method used to couple the Central Western European (CWE) electricity markets. These inefficiencies ultimately lead to welfare losses. In this paper, a large-scale model framework is introduced for FBMC assessments, focusing on modeling the capacity allocation and market clearing processes. The present paper completes this framework by presenting a newly developed redispatch model. Furthermore, we provide a case study assessing improved price zone configurations (PZCs) for the CWE electricity system, motivated by the debate on the currently-existing PZC. Our results show that improved PZCs—even while maintaining the number of price zones—can significantly reduce redispatch quantities and overall system costs. Moreover, making use of the insights of (Felten et al., 2021), we explain why increasing the number of price zones may not always increase welfare when using FBMC.

Auctions for Renewables: Does the Choice of the Remuneration Scheme Matter?

Ali Darudi

DOI: 10.5547/01956574.44.6.adar
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Auctions are increasingly used to support renewable energy sources (RES). The choice of the remuneration scheme is one of the major design challenges policymakers face. This paper analyzes the effects of remuneration schemes on RES auctions’ success in markets with imperfect competition. I develop a game-theoretical auction/operation framework to model the feedback effects between the spot market’s strategic behavior and the auction stage’s bidding behavior. The analysis indicates that policymakers concerned about true-cost bidding, allocative efficiency, spot price, total payments to RES, and non-realization risk may prefer feed-in-tariff (FIT) remuneration. However, feed-in-premium (FIP) remunerations may outperform FIT ones from a social welfare perspective, particularly in markets with dirty technologies at the margin. A machine-learning-based simulation strategy is also presented, indicating that, for an auction for 14 GW of onshore wind in France, FIP auction with a winning incumbent leads to 1.40% higher prices than FIT ones.

Competition and Competitors: Evidence from the Retail Fuel Market

Xulia González and María J. Moral

DOI: 10.5547/01956574.44.6.xgon
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Policy makers and antitrust authorities are concerned about the lack of competition in the fuel retail market and its impact on consumer prices. The aim of this article is to empirically evaluate the role of the intensity of competition and competitors' brand affiliation on retail fuel prices. To this end, we use a panel data set with detailed daily on nearly 8,500 gas stations and 2 million price observations; we estimate a reduced-form fuel price equation that accounts for supply (input costs and local competition) and demand shifters (income, traffic intensity, and location) as well as for brand and time fixed effects. We use an instrumental variable estimation strategy, to account for the endogeneity of the intensity of competition. Our results show that premium brands and low-cost brands affect the prices of rival firms in an opposite way. On the one hand, premium brands soften competition in the local markets where they operate and thereby allow their rivals to set higher prices. Besides, price setting by premium-brand stations react differently depending on whether the nearest rival sells the same brand (a friendly competitor) or some other brand. By contrast, low-cost brands contribute to reducing prices through their own prices (direct effect), thereby encouraging competitors to lower their prices (indirect effect). Our results suggest that regulation limiting the entry of premium operators whilst promoting the entry of low cost gas stations will enhance competition at the retail level.

A Survey of Capacity Mechanisms: Lessons for the Swedish Electricity Market

Par Holmberg and Thomas Tangeras

DOI: 10.5547/01956574.44.6.phol
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Many electricity markets use capacity mechanisms to support producers. Capacity payments can mitigate imperfections associated with "missing money" in the spot market and solve transitory capacity shortages caused by investment cycles, regulatory changes, or technology shifts. We discuss capacity mechanisms used in electricity markets around the world. We argue that correctly designed strategic reserves are likely to be more efficient than market-wide capacity mechanisms in jurisdictions that rely on substantial amounts of variable renewable energy and hydro power for electricity supply, such as Sweden.

Firming Technologies to Reach 100% Renewable Energy Production in Australia’s National Electricity Market (NEM)

Joel Gilmore, Tim Nelson, and Tahlia Nolan

DOI: 10.5547/01956574.44.6.jgil
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Australia has committed to reducing its greenhouse gas emissions in a manner consistent with limiting anthropogenic climate change to no more than 2 degrees Celsius. One of the ways in which this commitment is being realised is through a shift towards variable renewable energy (VRE) within Australia’s National Electricity Market (NEM). Substituting existing dispatchable thermal plant with VRE requires consideration of long-term energy resource adequacy given the unpredictability of solar and wind resources. While pumped hydro and battery storage are key technologies for addressing short-term mismatches between resource availability and demand, they may be unable to cost effectively address ‘energy droughts’. In this article, we present a time sequential solver model of the NEM and an optimal firming technology plant mix to allow the system to be supplied by 100% VRE. Our conclusion is that some form of fuel-based technology (most likely hydrogen) will probably be required. This has important implications for Australian energy policy.

Systemic Risk in the Global Energy Sector: Structure, Determinants and Portfolio Management Implications

Syed Jawad Hussain Shahzad, Román Ferrer, Elie Bouri

DOI: 10.5547/01956574.44.6.ssha
View Abstract

We examine the dynamics of tail dependence across returns of 105 global energy firms from 26 countries covering the regions of America, Asia Pacific and Europe. A partial correlation-based approach is used to quantify the dependence structure and level of systemic risk under relatively stable and extremely bearish and bullish market conditions. The dependence network of energy stock returns is constructed based on the novel triangulated maximally filtered graph (TMFG). The results reveal a high degree of tail dependence and role played by geographical proximity. The strongest links are found under extreme bearish market conditions. American and European energy firms are more interconnected and contribute more to systemic risk than Asian-Pacific companies. The dependence intensifies during periods of market turmoil, especially during the COVID-19 pandemic. A higher instability in the dependence structure is observed during extremely bearish market circumstances. A simple portfolio trading strategy based on the dependence ranking of energy firms outperforms a naïve equally-weighted buy-and-hold portfolio strategy.

Energy Performance Certificates and the Capitalization of Utility Costs in Rents: The Potential Role of Asymmetric Information and Uncertainty

Aras Khazal and Ole Jakob Sonstebo

DOI: 10.5547/01956574.45.1.akha
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This paper is the first to investigate the relationship between the energy efficiency of dwellings, measured by the energy performance certificate (EPC), and utility cost inclusion in rental prices. First, we investigate potential drivers behind the decision to include utility costs in rents. We find that labeled dwellings are more likely to include utility costs and that this likelihood is higher among energy-efficient dwellings than among inefficient dwellings. Next, we surprisingly find that utility costs seem to be under-capitalized in energy-inefficient dwellings. These results are confirmed with the counterfactual decomposition approach. Overall, the findings indicate that the EPC labeling policy may be important for both landlord and tenant decision-making and may enhance market efficiency.

Effect of Combining Carbon Policies and Price Controls in Cross-Border Trade of Energy on Renewable Generation Investments

Juan Carlos Muñoz, Sebastian Oliva H., and Enzo Sauma

DOI: 10.5547/01956574.45.1.jmun
View Abstract

In this paper, we investigate the combined effect of carbon policies and price controls in cross-border trade of electricity on power generation investments. It has been shown that price controls in cross-border trade of electricity may negatively affect renewable energy investments. However, the assessment of the impact of the simultaneous adoption of carbon policies and energy price controls has still not been addressed. Assessing this interaction is important to find out whether carbon policies can offset the negative impact of price controls on renewable energy investments or not. Results show that carbon policies can partially offset the negative impact of price controls, and that cap-and-trade programs are more effective to prevent this negative impact than carbon taxes. On the other hand, high levels of carbon taxes combined with price control regulation may increase renewable capacity investments, but without completely offsetting the negative effect of the price controls.

High-Speed Rail and Energy Productivity: Evidence from China

Yantuan Yu and Shuai Shao

DOI: 10.5547/01956574.45.1.yayu
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Using the difference-in-differences method combined with the propensity score matching, this study identifies the causal relationship between high-speed rail (HSR) and energy productivity in China. Furthermore, we investigate the mechanism through which HSR affects energy productivity, as well as the heterogeneity of the impact across quantiles and distances. The results show that HSR connection contributes to the improvement of energy productivity. This finding is consolidated after a potential endogeneity problem is addressed using the instrumental variable method and a variety of potential confounders are controlled through a series of robustness checks. On average, the marginal impact of HSR on energy productivity is approximately 9%. Moreover, HSR connection cannot be completely substituted by traditional railway and aviation in improving energy productivity. The heterogeneity analysis suggests that the positive energy productivity effect of HSR gradually decreases with an increasing distance to the nearest HSR station. In addition, HSR network accessibility has a significant positive effect on energy productivity, while technological innovation mediates the relationship between HSR development and energy productivity. We propose that to achieve the long-term improvement of energy productivity, policymakers should comprehensively consider both transit-oriented development and ecology-oriented development modes.

Carbon Emissions in the U.S.: Factor Decomposition and Cross-State Inequality Dynamics

Panos K. Pouliasis, Nikos C. Papapostolou, Michael N. Tamvakis, and Ioannis C. Moutzouris

DOI: 10.5547/01956574.44.6.ppou
View Abstract

This paper examines the determinants of inequality in the distribution of CO2 emissions across U.S. regions. We implement a factorial decomposition of CO2 per capita based on extended Kaya factors, that is, carbon intensity of fossil fuel consumption, energy mix, energy intensity of GDP, economic growth in terms of labor productivity and employment rate. Results reveal that U.S. states display marked differences in most factors. We identify energy intensity as the main source of emissions inequality. Based on the within and between group inequality components we also explore the effect of geographical, geological, climatic and human development partitions of U.S. states' groups. Findings indicate that the within-group inequality had been the main contributor to the whole inequality. Finally, some economic policy implications are also discussed; explaining the unequal distribution of emissions is vital to establish differentiated targets and work towards successful mitigation proposals.

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