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Energy Journal Issue

The Energy Journal
Volume 35, Number 3

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Demand Impact of a Critical Peak Pricing Program: Opt-in and Opt-out Options, Green Attitudes and Other Customer Characteristics

Steve A. Fenrick, Lullit Getachew, Chris Ivanov, and Jeff Smith

DOI: http://dx.doi.org/10.5547/01956574.35.3.1
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In this paper, we provide demand impact estimates of a critical peak pricing (CPP) program tested in the summer of 2011. We develop econometric models that examine demand responses of participants in "opt-in," "opt-out," and "tech only" CPP programs. Opt-out customers received bill protection while tech only customers received in-home displays alerting them of critical peak times, but they were not placed on the CPP rate. Our results indicate that opt-in customers reduced critical peak period demand the most while opt-out customers' appear to attenuate their reduction because of bill protection. Additionally, we refine our findings using participant survey responses. In general, we find participants in test groups whose environmental or "green" attitude is high had the strongest demand response. Keywords: Critical peak pricing, Dynamic rates, Demand response, Average load impact, Opt-in, Opt-out, Pilot design, Stratified random sampling

Electricity Demand in Wholesale Italian Market

Simona Bigerna and Carlo Andrea Bollino

DOI: http://dx.doi.org/10.5547/01956574.35.3.2
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In this paper we pursue two objectives: firstly we construct a theory based behavioral model of electricity demand in the Italian market; secondly we measure demand elasticity at hourly level, directly from consumer behavior. This is a novel approach providing the first attempt in the literature to estimate demand elasticity using individual demand bid data in the Italian Power Exchange (IPEX). Econometric estimation allows us to identify robust results, showing that elasticity varies significantly with: time of the day; day of the week; season of the year; pattern of line congestion; as well as according to the level of equilibrium price. This has meaningful policy implications: fostering more competition on the supply side could yield lower equilibrium prices and proportionately much higher quantities, for a lower offer curve shifted to the right would intersect a flatter portion of the demand curve. Keywords: Electricity market, Demand Elasticity, Heterogeneous consumers, Italy, System marginal Price

Daily Price Cycles and Constant Margins: Recent Events in Canadian Gasoline Retailing

Benjamin Atkinson, Andrew Eckert, and Douglas S. West

DOI: http://dx.doi.org/10.5547/01956574.35.3.3
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Retail gasoline pricing in Canada has typically followed certain distinct patterns, ranging from long durations of price rigidity relative to wholesale prices to daily price cycles. This paper examines recent changes to pricing patterns in Canadian cities resulting in new equilibrium behavior, and discusses possible reasons for these changes. Using high frequency retail price data obtained from GasBuddy.com, it is demonstrated that volatility changes exhibited in Toronto appear to correspond to an increased frequency of the price cycle, and replacement of the cycle with fixed retail margins. While multiple factors may have contributed to the first pricing change, the second change corresponds closely to a refinery fire in southern Ontario; this temporary event (in conjunction with a rail strike and refinery maintenance) could have triggered a permanent change in equilibrium behavior. This paper also illustrates problems for academic researchers and policymakers when using low frequency price data to analyze pricing in a market characterized by a price cycle. Keywords: Price cycle, Gasoline retailing, Constant margins, Supply shocks

Vehicle Manufacturer Technology Adoption and Pricing Strategies under Fuel Economy/Emissions Standards and Feebates

Changzheng Liu and David L. Greene

DOI: http://dx.doi.org/10.5547/01956574.35.3.4
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New post-2010 Corporate Average Fuel Economy (CAFE) standards and carbon dioxide (CO2) emissions standards have significantly increased the stringency of requirements for new light-duty vehicle fuel efficiency. This study investigates the role of technology adoption and pricing strategies in meeting the new standards, and the impact of possible feebate policies. The analysis simulates manufacturer decision making over the period (2011-2020) using a dynamic optimization model of the new vehicle market that maximizes social surplus while meeting the standards. Consumer surplus is determined from consumer demand, which is represented by a nested multinomial logit model, and the model is conservative in its assumptions on available technology. Results indicate that technology adoption will likely play a much larger role than pricing strategies in meeting the new standards (consistent with the intent of the policy). Feebates, when implemented along with the standards, can bring additional fuel economy improvement and emissions reduction, but the impact of feebates diminishes with the increasing stringency of the standards. Results also show that the impact of the policy on consumers could be relatively limited. In the long run the policy requires increasing up-front technology costs to consumers that outweigh the perceived benefit of fuel savings, and there is some loss in total new vehicle sales. However, the net effect is limited, and the full value of fuel savings to society is substantial. Results also show a small decrease in average vehicle footprint size, indicating that efficiency improvements are primarily distributed across all vehicle sizes, consistent with the intent of the policy. Keywords: CAFE, Emissions standards, Manufacturer pricing, Technology adoption

The Political Economy of Electricity Market Liberalization: A Cross-country Approach

Erkan Erdogdu

DOI: http://dx.doi.org/10.5547/01956574.35.3.5
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More than half of the countries in the world have introduced a reform process in their power sectors since 1980s. Adapting a political economy perspective, this paper attempts to discover the impact of political economic variables on the liberalization process in electricity markets. Empirical models are developed using panel data from 55 developed and developing countries covering the period 1975-2010. The research findings clearly show that political variables have a significant impact on the reform progress. Consistent with public choice theory and economic theory of regulation, our results suggest that a portion of the differences in the reform experiences of reforming countries in the past three decades can be explained by differences in the relative strength of interest groups. We find that industry sector has a significant impact on the pace of power market liberalization process; and as its size gets larger, so does its influence. Our results also imply that countries receiving foreign financial support are more likely to liberalize their electricity markets, which underlines the point that reforms may not be always voluntary. In addition, our findings suggest that government ideology is one of the determinants of the progress in electricity market reform process. Finally, the paper also questions whether politicians' education and profession matter for the electricity market reforms. Overall, the results show they do. Keywords: Econometric modeling, Institutions and the macroeconomy, International political economy

Do Day-Ahead Electricity Prices Reflect Economic Fundamentals? Evidence from the California ISO

Kevin F. Forbes and Ernest M. Zampelli

DOI: http://dx.doi.org/10.5547/01956574.35.3.6
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This paper hypothesizes that if day-ahead markets for electricity are efficient, then the day-ahead prices will reflect the processed information and expectations of all market participants regarding the next day's electricity load and thus the prices may be useful in actually predicting the next day's load. We test this hypothesis using data for the PG&E aggregation area in the California ISO. The results provide evidence of a positive and significant relationship between the hourly day-ahead electricity price (relative to the natural gas price) and the subsequent actual hourly load. The reported relationship is sufficiently robust to produce a forecast based on the day-ahead hourly price relative to the price of natural gas, some binary variables, and a number of estimated ARMA disturbances that is considerably more accurate than the ISO's day-ahead forecast. Keywords: Electricity markets, Electricity prices, Market efficiency, Load forecasting, Smart grid, California ISO

The Impact of Imperfect Competition in Emission Permits Trading on Oligopolistic Electricity Markets

Tanachai Limpaitoon, Yihsu Chen, and Shmuel S. Oren

DOI: http://dx.doi.org/10.5547/01956574.35.3.7
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The impact and efficacy of a cap-and-trade regulation on the electric power industry depend on interactions of demand elasticity, transmission network, market structure, and strategic behavior of generation firms. This paper develops an equilibrium model of an oligopoly electricity market in conjunction with a Cap-and-Trade emissions permits market to study such interactions. The concept of conjectural variations is proposed to account for imperfect competition in the permits market. We demonstrate the model using a WECC 225-bus system with a detailed representation of the California market. In particular, we examine the extent to which permit trading strategies affect the market outcome. We find that a firm with more efficient technologies can employ strategic withholding of permits, which allows for its increase in output share in the electricity market at the expense of other less efficient firms. Keywords: Power market modeling, Cap-and-trade program, Market power, Conjectural variation

Natural Gas and U.S. Economic Activity

Vipin Arora and Jozef Lieskovsky

DOI: http://dx.doi.org/10.5547/01956574.35.3.8
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Previous empirical work has shown that real natural gas prices have a negligible impact on total U.S. industrial production and most of its sub-indices. We reassess these conclusions using a multivariate framework and a time-frame that includes recent developments in the U.S. natural gas market. Our results show that natural gas does affect U.S. economic activity, primarily through changes in its production. The shale gas revolution has changed this relationship - a one percentage point increase in natural gas supply raises total U.S. industrial production by more after 2008 than before. Keywords: Natural gas, VAR, Shale, Endogenous, Industrial production