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The Energy Journal
Volume 39, Number 1

What future(s) for liberalized electricity markets: efficient, equitable or innovative?

David M Newbery

DOI: 10.5547/01956574.39.1.dnew
View Abstract

Well-designed electricity liberalization has delivered effciency gains, but political risks of decarbonizing the sector have undermined investment incentives in en-ergy-only markets, while poorly designed regulated tariffs have increased the cost of accommodating renewables. The paper sets out principles from theory and public economics to guide market design, capacity remuneration, renewables support and regulatory tariff setting, with an illustration from a high capital cost low variable cost electricity system. Such characteristics are likely to become more prevalent with increasing renewables penetration, where poor regulation is already threatening current utility business models. The appendix develops and applies a method for determining the subsidy justifed by learning spillovers from solar PV.

Long-term endogenous economic growth and energy transitions

Victor Court, Pierre-André Jouvet, and Frédéric Lantz

DOI: 10.5547/01956574.39.1.vcou
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This article builds a bridge between the endogenous economic growth theory, the biophysical economics perspective, and the past and future transitions between renewable and nonrenewable energy forms that economies have had to and will have to accomplish. We provide an endogenous economic growth model subject to the physical limits of the real world, meaning that nonrenewable and renewable energy production costs have functional forms that respect physical constraints, and that technological level is precisely defned as the effciency of primary-to-useful exergy conversion. The model supports the evidence that historical productions of renewable and nonrenewable energy have greatly infuenced past economic growth. Indeed, from an initial almost-renewable-only supply regime we reproduce the increasing reliance on nonrenewable energy that has allowed the global economy to leave the state of economic stagnation that had characterized the largest part of its history. We then study the inevitable transition towards complete renewable energy that human will have to deal with in a not-too-far future since nonrenewable energy comes by defnition from a fnite stock. Through simulation we study in which circumstances this transition could have negative impacts on economic growth (peak followed by degrowth phase). We show that the implementation of a carbon price can partially smooth such unfortunate dynamics, depending on the ways of use of the income generated by the carbon pricing.

Decomposing aggregate CO2 emission changes with heterogeneity: An extended production-theoretical approach

H. Wang, B.W. Ang, and P. Zhou

DOI: 10.5547/01956574.39.1.hwan
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Quantifying the driving forces behind changes in aggregate CO2 emissions provides valuable information for supporting policy making in addressing climate change. We study this issue using the production-theoretical decomposition analysis (PDA) technique. Within a production theory framework, PDA examines CO2 emission changes from the perspective of productive efficiency. Although regional and sectoral heterogeneities in energy consumption and emission patterns prevail, they have not been taken into account in the PDA literature. By incorporating relevant decomposition methods, this study proposes an extended PDA approach to resolving the heterogeneity issue. The approach is applied to examine China's aggregate CO2 emission changes in its 11th five-year plan period (2005- 2010). By accounting for the heterogeneities, detailed results at the regional and sectoral levels are generated and further discussions presented.

On the effectiveness of feed-in tariffs in the development of solar photovoltaics

Elbert Dijkgraaf, Tom P. van Dorp, and Emiel Maasland

DOI: 10.5547/01956574.39.1.edij
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Growing concern about climate change and rising prices of fossil fuels has prompted governments to stimulate the development of renewables. The most common instrument is a feed-in tariff (FIT). This paper empirically tests whether or not FIT policies have been effective in encouraging the development of photovoltaic solar (PV), explicitly taking into account the structure and consistency of FITs. Panel data estimations are employed for 30 OECD member countries in the period 1990-2011. We fnd a positive effect of the presence of a FIT on the development of a country's added yearly capacity of PV per capita. This is in line with the results found in the existing literature. However, our study shows that the literature underestimates the potential impact of FITs, as the effect of a well-designed FIT is much larger than the average effect of the currently applied FITs. Not only the height of the tariff is important, but also the duration of the contract and the absence/presence of a cap have an impact. We also show that consistency greatly affects the effectiveness of FITs. Consistency is especially important when the tariff of a FIT is low. The total effect of a FIT can be seven times larger if it is well designed. Our results are robust for differences between countries with respect to the availability of other policy instruments, the use of nuclear or hydro power and the level of CO2 emissions.

Hedging Strategies: Electricity Investment Decisions under Policy Uncertainty

Jennifer Morris, Vivek Srikrishnan, Mort Webster, and John Reilly

DOI: 10.5547/01956574.39.1.jmor
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Given uncertainty in long-term carbon reduction goals, how much non-carbon generation should be developed in the near-term? This research investigates the optimal balance between the risk of overinvesting in non-carbon sources that are ultimately not needed and the risk of underinvesting in non-carbon sources and subsequently needing to reduce carbon emissions dramatically. We employ a novel framework that incorporates a computable general equilibrium (CGE) model of the U.S. into a two-stage stochastic approximate dynamic program (ADP) focused on decisions in the electric power sector. We solve the model using an ADP algorithm that is computationally tractable while exploring the decisions and sampling the uncertain carbon limits from continuous distributions. The results of the model demonstrate that an optimal hedge is in the direction of more non-carbon investment in the near-term, in the range of 20-30% of new generation. We also demonstrate that the optimal share of non-carbon generation is increasing in the variance of the uncertainty about the long-term carbon targets, and that with greater uncertainty in the future policy regime, a balanced portfolio of non-carbon, natural gas, and coal generation is desirable.

Asian Spot Prices for LNG and other Energy Commodities

Abdullahi Alim, Peter R. Hartley, and Yihui Lan

DOI: 10.5547/01956574.39.1.aali
View Abstract

We investigate the relationship between the Japan-Korea Marker (JKM) price of LNG, which has become more important as spot trading of LNG has increased, and spot prices of Brent oil, fuel oil and thermal coal in Asia. We find that the JKM price appears to reflect inter-fuel competition in Asia. In this respect, it could be better than oil or other spot natural gas prices as a reference price for indexing long-term LNG contracts in Asia. The JKM may also be suitable for underpinning the development of an LNG pricing hub in Asia with associated derivatives markets.

What caused the drop in European electricity prices? A factor decomposition analysis

Lion Hirth

DOI: 10.5547/01956574.39.1.lhir
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European wholesale electricity prices have dropped by nearly two thirds since their all-time high around 2008. Different factors have been blamed, or praised, for having caused the price slump: the expansion of renewable energy; the near-collapse of the European emissions trading scheme; over-optimistic power plant investments; a decline in final electricity consumption; and cheap coal and natural gas. This ex-post study of European electricity markets from 2008 to 2015 uses a fundamental power market model to quantify their individual contributions on day-ahead prices. The two countries we study in detail, Germany and Sweden, differ significantly: fuel and CO2 prices were important price drivers in Germany, but in Sweden it was electricity demand. This difference is explained by the nature of the hydro-dominate Nordic electricity system. In both countries, however, the single largest factor depressing prices was the expansion of renewable energy. At the same time, Germany's nuclear phase-out had an upward effect on prices. If one defines the Energiewende as the combination of these two policies, its net effect on power prices was negligible.

Vehicle Lifetime Trends and Scrappage Behavior in the U.S. Used Car Market

Antonio Bento, Kevin Roth, and Yiou Zuo

DOI: 10.5547/01956574.39.1.aben
View Abstract

Using national data on vehicles in operation, we examine long-run changes in scrappage patterns in passenger cars and light trucks in the United States between 1969 and 2014. We find that the average lifetime for passenger cars has increased from 12.2 to 15.6 years between 1970s and the 2000s. Our central estimate of the elasticity of scrappage with respect to vehicle prices is -0.4, which is substantially different than values adopted in simulation models. These estimates imply that many policies aimed at reducing gasoline consumption, including Corporate Average Fuel Economy standards and gasoline taxes may produce changes in the used vehicle market that are different than prior studies suggest. We also note that consumer scrappage behavior seems to respond more strongly to changes in vehicle price than changes in gasoline price than standard theory would predict.

Size, Subsidies and Technical Efficiency in Renewable Energy Production: The Case of Austrian Biogas Plants

Andreas Eder and Bernhard Mahlberg

DOI: 10.5547/01956574.39.1.aede
View Abstract

This study estimates the efficiency of biogas plants and identifies determinants of inefficiencies. Data Envelopment Analysis is applied on a sample of 86 Austrian biogas plants for the year 2014, covering about one third of the installed electric capacity of Austrian biogas plants. We decompose technical efficiency into scale efficiency and pure technical efficiency (managerial efficiency). In a second-stage regression analysis the effects of subsidies and other variables on managerial efficiency are investigated. The main results are: i) 34% of biogas plants in our sample are technically efficient, 40% are scale efficient and 50% are managerial efficient; ii) small biogas plants (≤100 kW) are scale inefficient exhibiting increasing returns to scale; iii) production subsidies show a significant, negative relationship to managerial efficiency. The results are consistent with the hypothesis that production subsidies provide a disincentive to managerial effort of plant operators.

Towards an Integrated Spot LNG Market: An Interim Assessment

Xiaoyi Mu and Haichun Ye

DOI: 10.5547/01956574.39.1.xmu
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This paper examines whether, and to what extent, the spot LNG markets in different regions (East Asia, Iberia, Northwest Europe, and South America) are integrated and how market integration evolves over time. We first lay out a framework of market integration in the context of global LNG market where the main supplier (e.g. Qatar) may have market power. Estimating a time-varying coefficients model, we find that a varying degree of market integration exists between all four LNG indices particularly after the Fukushima incident in 2011. We complement the time-varying coefficient analysis with a test of price convergence among the LNG indices using the Phillips-Sul (2007) methodology. The results reveal that, there is strong evidence that the spot LNG prices are converging after the Fukushima accident and they are also converging with the price of NBP in the UK. The empirical result is consistent with the change of market power of the main supplier.

Ontario's Auction Market for Financial Transmission Rights: An Analysis of its Efficiency

Derek E. H. Olmstead

DOI: 10.5547/01956574.39.1.dolm
View Abstract

Financial transmission rights (FTR) are financial products that entitle their holder to receive a payment based on the degree of congestion in a transmission system. In many liberalized electricity markets, FTR are sold at auction by the local electricity system operator. This paper addresses several questions about the performance of FTR auctions in Ontario's restructured electricity market, including whether auction market clearing prices approximate realized payouts and whether there is any evidence that the competitiveness of auctions, as measured by the number of bidders, affects the forward market unbiasedness or informational efficiency of the auctions. The paper finds that the auction process is inefficient in the sense that market clearing prices are substantially and systematically lower than realized payouts, resulting in substantial transfers away from consumers. However, there is some evidence that the auction market is more efficient when there are three or more bidders.

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