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The Energy Journal
Volume 43, Number 2

North American Natural Gas Markets Under LNG Demand Growth and Infrastructure Restrictions

Baturay Çalci, Benjamin D. Leibowicz, and Jonathan F. Bard

DOI: 10.5547/01956574.43.2.bcal
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Strong liquefied natural gas (LNG) demand growth, especially in Asia, could increasingly motivate gas infrastructure development in North America. Nevertheless, opposition to new gas infrastructure is formidable in some of the U.S. states and Canadian provinces that are well positioned to supply LNG to the Asian market. In this paper, we investigate the combined effects of LNG demand growth and export infrastructure restrictions on North American natural gas markets through 2050. To do so, we build a mixed complementarity model with endogenous capacity investments. It is parameterized using publicly available data sources. Our results show that even if new export terminals cannot be constructed on the West Coast, LNG exports largely shift to other regions rather than suffer an overall decline. Increasing external demand for LNG puts upward pressure on regional prices in North America, and directs production and pipeline flows toward the regions that export LNG.

The Heterogeneous Impact of Coal Prices on the Location of Cleaner and Dirtier Steel Plants

Francois Cohen and Giulia Valacchi

DOI: 10.5547/01956574.43.2.fcoh
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Climate policy will predominantly affect industries that primarily rely on fossil fuels, such as steelmaking. Within these industries, exposure may be different by country according to the energy-intensity of national plants. We estimate the effect of coal prices on steel plant location worldwide and production preferences for BOF, a polluting technology, and EAF, a greener one. A 1% increase in national coal prices reduces BOF installed capacity by around 0.37%, while it has no statistically significant impact on EAF capacity. We simulate the implementation of a stringent European carbon market with no border adjustment and find a non-negligible shift in steel production outside Europe, with a concomitant impact on the technologies employed to produce steel. If applied worldwide, the same policy would primarily affect production in Asia, which relies on BOF and currently benefits from lower coal prices than those expected to emerge in the future.

Modelling the Global Price of Oil: Is there any Role for the Oil Futures-spot Spread?

Daniele Valenti

DOI: 10.5547/01956574.43.2.dval
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This paper illustrates the main benefits of accounting for the oil futures-spot spread in a Structural Vector Autoregressive model of the international market for crude oil. To this end, we replace the proxy for global above-ground crude oil inventories with the spread, which is derived by Brent crude futures prices with maturity 3-months. This model can be motivated on the basis of several economic considerations. First, the spread exploits the price discovery role in the crude oil futures markets. Second, the spread-based model alongside a proper set of identifying assumptions accounts for the presence of informational frictions and it allows for the feedback effect from futures to spot markets. Finally, the inventory proxy is affected by measurement error. The dynamic response functions show a positive relationship between the spread and the real price of oil, triggered by speculative shocks to financial markets. Moreover, this study provides a clear picture of the historical dynamic of the real price of oil and the spread during some of the exogenous events in the oil markets.

Do We Need to Implement Multi-Interval Real-Time Markets?

Darryl R. Biggar and Mohammad Reza Hesamzadeh

DOI: 10.5547/01956574.43.2.dbig
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Many market-based power systems have implemented a form of 'look-ahead dispatch' which simultaneously solves for the optimal dispatch and prices over several intervals into the future. A few papers have pointed out that the dispatch outcomes which emerge from look-ahead dispatch may not be time consistent. We emphasise that this time inconsistency is not inherent in look-ahead dispatch but is a consequence of the assumption of linear cost and utility functions, which is arguably a special case. Various augmentations to the dispatch process to resolve the time inconsistency problem have been proposed, but these augmentations suffer from the drawback that they do not allow the power system to efficiently adjust to new information. We query whether it is necessary to implement multi-interval real-time markets. We show how under certain assumptions, a sequence of one-shot dispatch processes will achieve the efficient outcome.

Electrification and Socio-Economic Empowerment of Women in India

Ashish Kumar Sedai, Rabindra Nepal, and Tooraj Jamasb

DOI: 10.5547/01956574.43.2.ased
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This study moves beyond the consensus of counting electrified households as a measure of progress in gender energy parity. Using the India Human Development Survey, we examine the effect of reliability of electrification on empowerment of women in terms of economic autonomy, agency, mobility and decision-making abilities, underscoring the labor market and respite effects of service reliability. We develop a comprehensive set of empowerment indices using principal component analysis and assess the causal effects of power outages on the indices with instrumental variable regressions while controlling for individual, household, district and caste characteristics. Results show that reliability of electricity has significant positive effects on all empowerment indices and improves women’s labor market outcomes, however, the effects differ at the margin of deficiency, location, living standards and education. The study recommends policy focus on electrification from a gendered lens for cost-effective solutions.

Market Makers and Liquidity Premium in Electricity Futures Markets

Juan Ignacio Peña and Rosa Rodríguez

DOI: 10.5547/01956574.43.2.jpen
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This paper studies the forward premium as a liquidity premium in electricity futures markets as determined by producers and retailers' demand for immediacy. Demand for immediacy by a buyer (seller) means the willingness to buy (sell) at the current market price rather than wait until a better price appears. An imbalance between the supply and demand of futures contracts creates a demand for immediacy. Market makers satisfy this demand by offsetting the imbalance at the current market price and require a liquidity premium until the imbalance disappears. The liquidity premium is negative (positive) when market makers sell (buy) futures contracts. The empirical application to the French, German, Spanish, and Nordic futures electricity markets in 2008–2017, finds several periods with a negative liquidity premium in the first three markets, suggesting that retailers wanted to offload a higher amount of price risk than the producers. The premium decreases when the number of market makers increases.

Abatement Technologies and their Social Costs in a Hybrid General Equilibrium Framework

Michael Miess, Stefan Schmelzer, Milan Šcasný, and Vedunka Kopecná

DOI: 10.5547/01956574.43.2.mmie
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We present a novel methodology to integrate heterogeneous micro-founded preferences into a dynamic computable general equilibrium model. This integrated model is linked to a bottom-up technology-rich electricity model and a stock-flow vehicle accounting model to quantify the social costs of electric vehicles as an endogenous, demand-driven abatement technology. Emission abatement is achieved through consumer choices that are recognised as a central driver of endogenous technological change. Endogenously determined emissions from vehicle use, electricity generation, and production provide an input to quantify external costs attributable to air quality and carbon emissions. We find that carbon and vehicle registration tax policies induce a significant shift away from conventional vehicles towards electric vehicles in Austria by 2030. The shift to electric vehicles results in small overall economic costs, a substantial decline in fuel demand that exceeds the increase in electricity demand to charge vehicle batteries, and overall positive net environmental benefits.

Competitive Energy Storage and the Duck Curve

Richard Schmalensee

DOI: 10.5547/01956574.43.2.rsch
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Power systems with high penetrations of solar generation need to replace solar output when it falls rapidly in the late afternoon—the duck curve problem. Storage is a carbon-free solution to this problem. This essay considers investment in generation and storage to minimize expected cost in a Boiteux-Turvey-style model of an electric power system with alternating daytime time periods, with solar generation, and nighttime periods, without it. In the most interesting cases, if energy market prices are uncapped, all expected cost minima are long-run competitive equilibria, and the long-run equilibrium value of storage capacity minimizes expected system cost conditional on generation capacities.

Carbon Intensity and the Cost of Equity Capital

Arjan Trinks, Gbenga Ibikunle, Machiel Mulder, and Bert Scholtens

DOI: 10.5547/01956574.43.2.atri
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The transition from high- to lower-carbon production systems increasingly creates regulatory and market risks for high-emitting firms. We test to what extent equity market investors demand a premium to compensate for such risks and thus might raise firms' cost of equity capital (CoE). Using data for 1,897 firms spanning 50 countries over the years 2008–2016, we find a distinct and robust positive impact of carbon intensity (carbon emissions per unit of output) on CoE: On average, a standard deviation higher (sector-adjusted) carbon intensity is associated with a CoE premium of 6 (9) basis points or 1.7% (2.6%). This effect is primarily explained by systematic risk factors: high-emitting assets are significantly more sensitive to economy-wide fluctuations than low-emitting ones. The CoE impact of carbon intensity is more pronounced in high-emitting sectors, EU countries, and firms subject to carbon pricing regulation. Our results suggest that carbon emission reduction might serve as a valuable risk mitigation strategy.

Cooperate or Compete? Insights from Simulating a Global Oil Market with No Residual Supplier

Bertrand Rioux, Abdullah Al Jarboua, Fatih Karanfil, Axel Pierru, Shahd Al Rashed, and Colin Ward

DOI: 10.5547/01956574.43.2.brio
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Structural changes in the oil market, such as the rise of tight oil, are impacting conventional market dynamics and incentives for producers to cooperate. What if OPEC stopped organizing residual production collectively? We develop an equilibrium model to simulate a competitive world oil market from 2020 to 2030. It includes detailed conventional and unconventional oil supplies and financial investment constraints. Our competitive market scenarios indicate that oil prices first decline and tend to recover to reference residual supplier scenario levels by 2030. In a competitive oil market, a reduction in the financial resources made available to the global upstream oil sector leads to increased revenues for low-cost producers such as Saudi Arabia. Compared to the competitive scenario, Saudi Arabia does not benefit from acting alone as a residual supplier, but, under some assumptions, it benefits from being part of a larger group that works collectively as a residual supplier.

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