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Energy Journal Issue

The Energy Journal
Volume 33, Number 1

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Interfuel Substitution and Energy Use in the U.K. Manufacturing Sector

Jevgenijs Steinbuks

DOI: 10.5547/ISSN0195-6574-EJ-Vol33-No1-1
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This paper investigates interfuel substitution, separately accounting for different types of energy use in the U.K. manufacturing sector. Econometric models of interfuel substitution are applied to aggregate energy use, as well as to a specific energy use process--thermal heating--where interfuel substitution is technologically feasible. Compared to the aggregate data, the estimated own-price elasticities for all fuels and the cross-price elasticities for fossil fuels are considerably higher for thermal heating processes. Nonetheless, electricity is found to be a poor substitute for other fuels based on both aggregate data and, separately, for the heating process. An increase in real fuel prices from the Climate Change Levy in 2001 resulted in higher substitution elasticities based on aggregate data, and lower substitution elasticities for the thermal heating process. The results of a counterfactual decomposition of change in the estimated elasticities indicate that technological change was the major determinant of the differences in observed elasticities before and after the energy price increase.

Keywords: Climate change levy, Elasticities, Energy use, Interfuel substitution, Manufacturing sector, United Kingdom

The Impact of State Level Building Codes on Residential Electricity Consumption

Anin Aroonruengsawat, Maximilian Auffhammer, and Alan H. Sanstad

DOI: 10.5547/ISSN0195-6574-EJ-Vol33-No1-2
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This paper studies the impacts of state level residential building codes on per capita residential electricity consumption. We construct a timeline of when individual states first implemented residential building codes. Using panel data for 48 US states from 1970-2006, we exploit the temporal and spatial variation of building code implementation and issuance of building permits to identify the effect of the regulation on residential electricity consumption. Controlling for the effect of prices, income, and weather, we show that states that adopted building codes followed by a significant amount of new construction have experienced detectable decreases in per capita residential electricity consumption--ranging from 0.3-5% in the year 2006. Estimates are larger in states where codes are more stringent and more strictly enforced.

Keywords: Residential Electricity Consumption, Building Codes, Regulation

Willingness to Pay for a Climate Backstop: Liquid Fuel Producers and Direct CO2 Air Capture

Gregory F. Nemet and Adam R. Brandt

DOI: 10.5547/ISSN0195-6574-EJ-Vol33-No1-3
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We conduct a sensitivity analysis to describe conditions under which liquid fuel producers would fund the development of a climate backstop. We estimate (1) the cost to develop competitively priced direct CO2 air capture technology, a possible climate backstop and (2) the effect of this technology on the value of liquid fuel reserves by country and fuel. Under most assumptions, development costs exceed individual benefits. A particularly robust result is that carbon prices generate large benefits for conventional oil producers--making a climate backstop unappealing for them. Unilateral investment does become more likely under: stringent carbon policy, social discount rates, improved technical outcomes, and high price elasticity of demand for liquid fuels. Early stage investment is inexpensive and could provide a hedge against such developments, particularly for fuels on the margin, such as tar sands and gas-to-liquids. Since only a few entities benefit, free riding is not an important disincentive to investment, although uncertainty about who benefits probably is.

Keywords: Air capture, Backstop technology, Climate policy, Learning by doing, R&D, Unconventional oil

Diversity in Unity: An Empirical Analysis of Electricity Deregulation in Indian States

Anupama Sen and Tooraj Jamasb

DOI: 10.5547/ISSN0195-6574-EJ-Vol33-No1-4
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As developing countries seek to improve their economic prospects, electricity reform has been widely viewed as a central part of this effort. While the focus of most research to date has been at economy or utility level, there has been much less research on regional outcomes. India presents a unique case, as its states share a common economic and political system, whilst having been given considerable flexibility in how they implement reform, thus allowing a comparative analysis of alternative approaches to reform. This study presents an econometric analysis of the determinants and impact of electricity reform in India, giving special regard to its political economy and regional diversity. It assesses how electricity reform in India has affected key economic variables that determine sectoral efficiency, prices and investment flows. We use panel data for 19 states, spanning 1991-2007, using dynamic panel data estimators. Results show that individual reform measures have affected key economic variables differently; thus the nature of reform in individual states would determine these economic outcomes. Findings suggest that due to political economy factors, outcomes have tended to be adverse in the initial stages of reform, as previously hidden distortions become apparent. The performance of reforms, however, may improve as the reform progresses beyond a `baseline' level.

Keywords: Electricity, India, Reform, Deregulation, Regional impacts

Long-run Cost Functions for Electricity Transmission

Juan Rosellón, Ingo Vogelsang, and Hannes Weigt

DOI: 10.5547/ISSN0195-6574-EJ-Vol33-No1-5
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Electricity transmission has become the pivotal industry segment for electricity restructuring. Yet, little is known about the shape of transmission cost functions. Reasons for this can be a lack of consensus about the definition of transmission output and the complexitity of the relationship between optimal grid expansion and output expansion. Knowledge of transmission cost functions could help firms (Transcos) and regulators plan transmission expansion and could help design regulatory incentive mechanisms. We explore transmission cost functions when the transmission output is defined as point-to-point transactions or financial transmission right (FTR) obligations and particularly explore expansion under loop-flows. We test the behavior of FTR-based cost functions for distinct network topologies and find evidence that cost functions defined as FTR outputs are piece-wise differentiable and that they contain sections with negative marginal costs. Simulations, however, illustrate that such unusual properties do not stand in the way of applying price-cap incentive mechanisms to real-world transmission expansion. Key words: Electricity transmission, Cost function, Incentive regulation, Merchant investment, Congestion management

The Hidden System Costs of Wind Generation in a Deregulated Electricity Market

Timothy D. Mount, Surin Maneevitjit, Alberto J. Lamadrid, Ray D. Zimmerman, and Robert J. Thomas

DOI: 10.5547/ISSN0195-6574-EJ-Vol33-No1-6
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Earlier research has shown that adding wind generation to a network can lower the total annual operating cost by displacing conventional generation. At the same time, the variability of wind generation and the need for higher levels of reserve generating capacity to maintain reliability standards impose additional costs on the system that should not be ignored. The important implication for regulators is that the capacity payments ["missing money"] for each MW of peak system load are now much higher. Hence, the economic benefits of reducing the peak system load using storage or controllable demand will be higher with high penetrations of wind generation. These potential benefits are illustrated in a case study using a test network and a security constrained Optimal Power Flow (OPF) with endogenous reserves (SuperOPF). The results show that the benefits are very sensitive to 1) how much of the inherent variability of wind generation is mitigated, and 2) how the missing money is determined (e.g. comparing regulation with deregulation).Keywords: Electricity markets, Wind generation, Optimum dispatch, Endogenous reserve capacity, Missing money, Total annual system costs.

The Welfare Impacts of Rural Electrification in Bangladesh

Shahidur R. Khandker, Douglas F. Barnes, and Hussain A. Samad

DOI: 10.5547/ISSN0195-6574-EJ-Vol33-No1-7
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Lack of access to electricity has been considered a major impediment to the growth and development of rural economies. Thus, the provision of electricity and other forms of modern energy has been a priority for many development organizations, including the World Bank. However, few impact studies of electrification have taken the endogeneity of the grid connection into account. Using a cross-sectional survey conducted in 2005 of 20,900 rural households in Bangladesh, this paper examines the welfare impacts of household access to grid electricity after controlling for endogeneity bias. The econometric analysis shows that grid electrification has significant positive impacts on household income, expenditure, and education. The household gain in total income due to electrification is as high as 21 percent, with a 1.5 percentage point reduction in poverty per year. The results also suggest that the income and expenditure effects of electricity connection are higher for better-off households. Keywords: Rural electrification, Electrification impacts, Distributional impacts, Bangladesh

Blowing in the Wind: Vanishing Payoffs of a Tolling Agreement for Natural-gas-fired Generation of Electricity in Texas

Chi-Keung Woo, Ira Horowitz, Brian Horii, Ren Orans, and Jay Zarnikau

DOI: 10.5547/ISSN0195-6574-EJ-Vol33-No1-8
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We use a large Texas database to quantify the effect of rising wind generation on the payoffs of a tolling agreement for natural-gas-fired generation of electricity. We find that while a 20% increase in wind generation may not have a statistically-significant effect, a 40% increase can reduce the agreement's average payoff by 8% to 13%. Since natural-gas-fired generation is necessary for integrating large amounts of intermittent wind energy into an electric grid, our finding contributes to the policy debate of capacity adequacy and system reliability in a restructured electricity market that will see large-scale wind-generation development.Keywords: Wind generation, Tolling agreement, Spark spread option, Investment incentive