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Energy Journal Issue

The Energy Journal
Volume 33, Number 4

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Crude Oil Market Power—A Shift in Recent Years?

Daniel Huppmann and Franziska Holz

DOI: http://dx.doi.org/10.5547/01956574.33.4.1
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We investigate the exertion of market power in the global crude oil market over the past years. Recognizing the difficulty of identifying market power in the crude oil market by empirical studies, we propose a numerical partial equilibrium model formulated as a mixed complementarity problem. Our approach allows for strategic behavior in a Nash-Cournot market, a Stackelberg leader-follower game, an OPEC oligopoly or cartel, as well as perfect competition. To take account of liquid spot markets, the model specifically includes arbitragers to capture the effect of global crude oil market integration. Our results indicate a market structure shift over the past years. Reported quantities and prices before the 2008 turmoil are close to those derived from a Stackelberg market simulation, with Saudi Arabia acting as Stackelberg leader vis-a`-visa non-cooperativeOPEC oligopoly and a competitive fringe. However, in 2008 and 2009, observed prices are closer to the competitive benchmark. We conclude that OPEC suppliers’ ability to exert market power was reduced in the 2008 turmoil and its aftermath. Keywords: Crude oil, OPEC, Stackelberg market, Market power, Pool market, Numerical simulation model, MCP, MPEC

Electricity Consumption and Economic Growth in Portugal: Evidence from a Multivariate Framework Analysis

Chor Foon Tang and Eu Chye Tan

DOI: http://dx.doi.org/10.5547/01956574.33.4.2
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The purpose of this study is to re-visit the relationship between electricity consumption and economic growth in Portugal over the sample period of 1974 to 2008 in a multivariate framework. The results of this study indicate that the variables are cointegrated and the causal relationship between electricity consumption and economic growth in Portugal is bi-directional. Uni-directional causalities running from energy price and real income to employment are also found. Contrary to earlier studies, our results indicate that Portugal is an energy-dependent economy and energy-conservation policies could be detrimental to its economic growth and development. Therefore, renewable energy sources such as bio-fuel, solar power, hydro power, wind power, and wave power should be aggressively explored to ensure sufficient supply of energy to support the growth of the Portuguese economy in an environment-friendly manner. Keywords: Electricity consumption, Employment, Income, Price, Portugal

Option Value and the Diffusion of Energy Efficient Products

Erin Baker

DOI: http://dx.doi.org/10.5547/01956574.33.4.3
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In a widely cited series of papers, Hassett and Metcalf argue that the slow diffusion of energy saving technology may be due to a high option value to waiting. While the authors clarify that this is relevant for yes/no decisions (such as whether to add insulation to a home), this argument has been widely cited even in investment decisions that involve a choice over multiple appliances or vehicles. In this note we consider how uncertainty and irreversibility would impact a consumer’s decision about when to buy which new product. We show that, a priori, applying an option value framework is as likely to lead to slow diffusion of inefficient products as to slow diffusion of efficient products. This casts some doubt on the idea that an option value framework is the primary driver of the slow diffusion of energy efficient technologies. Keywords: Energy Efficiency, Option value, Uncertainty

Thermostats for the Smart Grid: Models, Benchmarks, and Insights

Yong Liang, David I. Levine, and Zuo-Jun (Max) Shen

DOI: http://dx.doi.org/10.5547/01956574.33.4.4
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We model two existing thermostats and one novel thermostat to see how well they operate under dynamic pricing. The existing thermostats include a traditional thermostat with set temperature goals and a rigid thermostat that minimizes cost while always keeping temperature within a rigid predetermined range. We contrast both with a novel optimizing thermostat that finds the optimal trade-off between comfort and cost. We compare the thermostats’ performance both theoretically and via numerical simulations. The simulations show that, under plausible assumptions, the optimizing thermostat’s advantage is economically large. Importantly, the electricity demand of the rigid thermostat (but not the optimizing thermostat) ceases to respond to electricity prices on precisely the days when the electricity grid tends to be near capacity. These are the times when demand response is the most socially valuable to avoid massive price spikes. The social benefits of the optimizing thermostat may provide incentives for utilities and regulators to encourage its adoption. Keywords: Thermostat, Smart Grid, Dynamic Pricing, Optimization, Demand Response

Do Centrally Committed Electricity Markets Provide Useful Price Signals?

Ramteen Sioshansi and Ashlin Tignor

DOI: http://dx.doi.org/10.5547/01956574.33.4.5
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Centrally committed markets rely on an independent system operator to determine the commitment and dispatch of generators. This is done by solving a unit commitment model, which is an NP-hard mixed integer program that is rarely (if ever) solved to complete optimality. We demonstrate, using a case study based on the ISO New England system, that near-optimal solutions that are very close to one another in terms of overall system cost can yield very different generator surpluses and prices. We further demonstrate that peaking generators are more prone to surplus differences between near-optimal solutions and that transmission buses that are most prone to binding transmission constraints experience the greatest price fluctuations. Based on these findings, we discuss the potential benefits of a decentralized market design in providing more robust price signals. Keywords: Unit commitment, Market design, Pricing http://dx.doi.org/10.5547/01956574.33.4.5

A Rough Analysis: Valuing Gas Storage

Monica Giulietti, Luigi Grossi, and Michael Waterson

DOI: http://dx.doi.org/10.5547/01956574.33.4.6
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This paper studies the impact of a fire in 2006 which removed the possibility of access to the Rough gas storage facilities covering over 80% of total UK storage, at a time when major withdrawals from storage would have likely taken place. Implicitly, it shows the value of such gas storage facilities, in a country with relatively little storage, where we might therefore see a considerable impact. We find that the major effect on activity was through an increased sensitivity of supply to prices and an increased variance in this sensitivity, not through non-price rationing. Keywords: Gas storage, Rough fire, UK gas market, Event study analysis http://dx.doi.org/10.5547/01956574.33.4.6

Oil and the U.S. Macroeconomy: A Reinvestigation Using Rolling Impulse Responses

Marc Gronwald

DOI: http://dx.doi.org/10.5547/01956574.33.4.7
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This paper investigates the role of extreme oil price increases in empirical studies of the macroeconomics of oil prices. The innovative approach of rolling impulse responses is applied and data on both the aggregate and the industry-level is considered. The results show that the first oil crisis drives long-run results and superimposes both subsample and industry-specifics. Furthermore, there is evidence that the non-occurrence of large oil shocks after the mid1980s is an important explanation for the Great Moderation. Keywords: Oil Prices, Vector Autoregressions, Rolling Impulse Responses, Great Moderation

Vertical Economies and the Costs of Separating Electricity Supply--A Review of Theoretical and Empirical Literature

Roland Meyer

DOI: http://dx.doi.org/10.5547/01956574.33.4.8
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Motivated by the European movement towards a separation of electricity networks from the competitive functions generation and supply this paper reviews theoretical and empirical literature on vertical synergies in electricity supply. In the analysis a clear distinction is made between four different unbundling options leading to different forms and magnitudes of synergy losses. Apart from coordination economies a main source of scope economies seems to result from a market risk effect if generation and retail are separated. Accordingly, the European policy of network unbundling (either transmission or distribution) results in synergy losses between 2 and 8 percent due to coordination losses, while an unbundling option that includes a separation between retail and generation, as observed in some U.S. states, may lead to a permanent cost increase of 20 percent or more due to a significant risk increase. Keywords: Ownership unbundling, Vertical integration, Economies of scope

Providing Free Autopoweroff Plugs: Measuring the Effect on Households' Electricity Consumption through a Field Experiment

Carsten Lynge Jensen, Lars Garn Hansen, Troels Fjordbak, and Erik Gudbjerg

DOI: http://dx.doi.org/10.5547/01956574.33.4.9
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Experimental evidence of the effect of providing households with cheap energy saving technology is sparse. We present results from a field experiment in which autopoweroff plugs were provided free of charge to randomly selected households. We use propensity score matching to find treatment effects on metered electricity consumption for different types of households. We find effects for single men and couples without children, while we find no effect for single women and households with children. We suggest that this could be because of differences in saving potential (e.g. some households do not have appliances where using a plug is relevant), differences in the skills relevant for installing the technology and differences in the willingness to spend time and effort on installation. We conclude that targeting interventions at more responsive households, and tailoring interventions to target groups, can increase the efficiency of programs. Keywords: Autopoweroff plugs, Treatment effect, Energy consumption, Types of households