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Energy Journal Issue

The Energy Journal
Volume 35, Number 2

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Equity in Residential Electricity Pricing

Shira Horowitz and Lester Lave

DOI: 10.5547/01956574.35.2.1
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Real-time pricing of electricity is theoretically more economically efficient than flat rate pricing. However, a switch from flat-rates to real-time rates means that many consumers will lose the cross-subsidy they are receiving under the flat rate, and may see an increase in their bills even if they have elastic demand. We use hourly load data from 1260 Commonwealth Edison residential customers on a standard flat rate electricity tariff from 2007 and 2008. We calculate which customers would have been better off and which customers would not under real time pricing with both elastic and inelastic demand and look at the general characteristics of these customers. We find that if customers do not respond to prices under RTP, then only 35% of customers save money, while the remainder loses. The greatest potential for savings is from reduction in capacity costs. Keywords: Residential electricity pricing, Dynamic pricing, Real-time pricing

The Relationship between Crude Oil and Natural Gas Prices: The Role of the Exchange Rate

Peter R. Hartley and Kenneth B. Medlock III

DOI: 10.5547/01956574.35.2.2
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Several previous studies have found evidence that oil and natural gas prices in the United States are cointegrated. There is also evidence, however, that the relationship is unstable. One explanation is that technological changes alter the substitutability between natural gas and oil products. We reaffirm this finding, but also find evidence that the exchange rate influences the relative price of oil to natural gas in the United States. As in previous studies, we again find that short run departures from long run equilibrium are influenced by weather, product inventories, other seasonal factors and supply shocks such as severe tropical storms in the Gulf of Mexico. Keywords: Oil/natural gas relative price, Cointegration, Exchange rate, Nontraded and traded goods

Residual Demand Modeling and Application to Electricity Pricing

Andreas Wagner

DOI: 10.5547/01956574.35.2.3
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A model for residual demand is proposed, which extends structural electricity price models to account for renewable infeed in the market. Infeed from wind and solar is modeled explicitly and withdrawn from total demand. The methodology separates the impact of weather and capacity. Efficiency is modeled as a stochastic process. Installed capacity is a deterministic function of time. The residual demand model is applied to the German day-ahead market. Price trajectories show typical features seen in market prices in recent years. The model is able to closely reproduce the structure and magnitude of market prices. Using simulations it is found that renewable infeed increases the volatility of forward prices in times of low demand, but can reduce volatility in peak hours. The merit-order effect of increased wind and solar capacity is calculated. It is found that under current capacity levels in the German market wind has a stronger overall effect than solar, but both are even in peak hours. Keywords: Residual demand modeling, Electricity pricing, Renewable infeed, Wind infeed, Solar infeed, Electricity demand, German power market, Merit-order effect, Structural model

Who Benefits Most from Rural Electrification? Evidence in India

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

DOI: 10.5547/01956574.35.2.4
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This paper applies an econometric analysis to estimate the average and distribution benefits of rural electrification using rich household survey data from India. The results support that rural electrification helps reduce time allocated to fuel wood collection by household members and increases time allocated to studying by boys and girls. Rural electrification also increases labor supply of men and women, schooling of boys and girls, household per capita income and expenditure. Electrification also helps reduce poverty. But the larger share of benefits accrues to wealthier rural households, with poorer ones having a more limited use of electricity. The analysis also shows that restricted supply of electricity, due to frequent power outages, negatively affects both household electricity connection and its consumption, thereby reducing the expected benefits of rural electrification. Keywords: Rural electrification, Electrification impacts, Distributional impacts, India

The Impact of Oil Price Volatility on Welfare in the Kingdom of Saudi Arabia: Implications for Public Investment Decision-making

Axel Pierru and Walid Matar

DOI: 10.5547/01956574.35.2.5
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Since real oil price is positively correlated with real consumption and domestic income in Saudi Arabia, a risk premium needs to be considered when assessing the net present value of oil-related public investment projects. For projects generating additional oil exports, this risk premium quantifies the cost of increased dependence on oil revenues. For projects transforming oil into products whose prices are less correlated with the Saudi economy, it quantifies the benefit from reducing the aggregate risk. The value of this risk premium depends on expectations about future consumption and oil price. By considering alternative assumptions, we show that over a one-year horizon this risk premium could range between 1.3% and 5% of the expected oil-related cash flow, with higher premia for longer planning horizons. We discuss the implications of these calculations for energy-related public projects in Saudi Arabia and, more generally, for public decision-making in resource-rich countries. Keywords: Risk premium, Oil, Public investment, NPV, Domestic income, Saudi Arabia

Estimating the Impact of Time-of-Use Pricing on Irish Electricity Demand

Valeria Di Cosmo, Sean Lyons, and Anne Nolan

DOI: 10.5547/01956574.35.2.6
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Smart meters, in conjunction with time-of-use (TOU) pricing, can facilitate an improvement in energy efficiency by providing consumers with enhanced information about electricity consumption and costs, and thereby encourage a shift away from consumption during peak hours. In 2009-10, the Irish Commission for Energy Regulation co-ordinated a randomised controlled trial in the Irish residential electricity market. Smart meters were introduced in approximately 5,000 households, divided into control and treatment groups, with treatment groups exposed to a variety of TOU tariffs and information stimuli. This paper analyses the response of Irish households at different times of the day to the introduction of TOU tariffs and information stimuli. We find that these measures have a significant effect in reducing electricity consumption in Ireland, particularly during peak hours. However, while households reduce peak demand significantly after the introduction of TOU tariffs and associated information, there is little incremental response to increasing differentials between peak and off-peak prices. Keywords: Household electricity demand, Electricity pricing, Smart metering

Competition in Germany's Minute Reserve Power Market: An Econometric Analysis

Justus Haucap, Ulrich Heimeshoff, and Dragan Jovanovic

DOI: 10.5547/01956574.35.2.7
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The German reserve power market has been subject to important regulatory changes in recent years. A new market design has been introduced by synchronizing and interconnecting the four regional German control areas. We analyze whether the reforms have led to lower prices for minute reserve power (MRP). In contrast to existing papers, we use a unique panel dataset to account for unobserved heterogeneity between the four German regional markets. Moreover, we control for endogeneity by using weather data as instruments for electricity spot market prices. We find that the reforms were jointly successful in decreasing MRP prices leading to substantial cost savings for the transmission system operators. Keywords: Electricity Market, Frequency Control, Minute Reserve Power, Balancing Power, Market Design, Productive Efficiency

Scrapping a Wind Turbine: Policy Changes, Scrapping Incentives and Why Wind Turbines in Good Locations Get Scrapped First

Johannes Mauritzen

DOI: 10.5547/01956574.35.2.8
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The most common reason for scrapping a wind turbine in Denmark is to make room for a newer turbine. The decision to scrap a wind turbine is then highly dependent on an opportunity cost that comes from the interaction of scarce land resources, technological change and changes in subsidy policy. Using a Cox regression model I show that turbines that are located in areas with better wind resources are at a higher risk of being scrapped. Policies put in place in order to encourage the scrapping of older, poorly placed turbines actually have a larger effect on well-placed turbines. Keywords: Wind power scrapping, Nordic electricity market, Cox regression model