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Energy Journal Issue

The Energy Journal
Volume 38, Number 6

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Inter-temporal R&D and capital investment portfolios for the electricity industry’s low carbon future

Nidhi R. Santen, Mort D. Webster, David Popp, and Ignacio Pérez-Arriaga

DOI: https://doi.org/10.5547/01956574.38.6.nsan
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A pressing question facing policy makers today in developing a long-term strategy to manage carbon emissions from the electric power sector is how to appropriately balance investment in R&D for driving innovation in emerging low-and zero-carbon technologies with investment in commercially available technologies for meeting existing energy needs. Likewise, policy makers need to determine how to allocate limited funding across multiple technologies. Unfortunately, existing modeling tools to study these questions lack a realistic representation of electric power system operations, the innovation process, or both. In this paper, we present a new modeling framework for long-term R&D and electricity generation capacity planning that combines an economic representation of endogenous non-linear technical change with a detailed representation of the power system. The model captures the complementary nature of technologies in the power sector; physical integration constraints of the system; and the opportunity to build new knowledge capital as a non-linear function of R&D and accumulated knowledge, reflective of the diminishing marginal returns to research inherent in the energy innovation process. Through a series of numerical experiments and sensitivity analyses - with and without carbon policy - we show how using frameworks that do not incorporate these features can over-or under-estimate the value of different emerging technologies, and potentially misrepresent the cost-effectiveness of R&D opportunities.

Why Consumers Switch Energy Suppliers: The Role of Individual Attitudes

Xiaoping He and David Reiner

DOI: https://doi.org/10.5547/01956574.38.6.hxia
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Since 2008, fewer customers switched suppliers in British electricity and gas markets despite the potential for financial gains, suggesting that psychological factors may affect switching behaviors. Using a unique nation-wide British survey, we explore the influence of consumers' attitudes and perceptions on switching behaviors and assess the differences in switching propensity across different groups. Support for simplifying energy tariffs, professed less difficulty in understanding energy bills, expected difficulty in changing suppliers and lack of attention to the issue of energy prices are associated with lower switching activity. At a time of high saliency, political party voting intention was strongly related to switching. Unlike the bivariate analyses conducted by the regulator and the competition authority, our multivariate analysis show few demographic factors affect the likelihood of switching except for educational attainment and tariff payment patterns. Remedies aiming to encourage switching cannot be targeted correctly unless the supporting analysis is robust to alternative model specifications.

The Effect of Information on TOU Electricity Use: an Irish residential study

Shirley Pon

DOI: 10.5547/01956574.38.6.spon
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The disconnect between the time of use and the time of payment is sometimes blamed for the little awareness that many consumers appear to have about their usage of electricity. Real time information feedback combined with various pricing schemes has been found to reduce residential energy consumption more than information and pricing policies alone. I examine the effect of information provision with bi-monthly billing, monthly billing, and in-home displays in addition to a time-of-use pricing scheme on consumption over each month of the Irish Consumer Behavior Trial. I find that time-of-use pricing with real time usage information reduces electricity usage up to 8.7 percent during peak times at the start of the trial but the effect becomes indistinguishable from other treatment groups after the first three months. Increasing billing reports to the monthly level or a web application providing real time information may be more cost effective than in-home displays.

Fuel Prices and Station Heterogeneity on Retail Gasoline Markets

Justus Haucap, Ulrich Heimeshoff, and Manuel Siekmann

DOI: 10.5547/01956574.38.6.jhau
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We empirically investigate how and why price levels differ across gasoline stations, using the first full year from a novel panel data set including price quotes from virtually all gas stations in Germany. Our analysis specifically explores the role of station heterogeneity in explaining price differences across gasoline stations. Key determinants of price levels are found to be ex-refinery prices as key input costs, a station's location on roads or highway service areas, and brand recognition. A lower number of station-specific services implies lower fuel price levels, as does a more heterogeneous local competitive environment.

Remuneration of Flexibility using Operating Reserve Demand Curves: A Case Study of Belgium

Anthony Papavasiliou and Yves Smeers

DOI: 10.5547/01956574.38.6.apap
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Flexibility is becoming an increasingly important attribute of conventional generators due to the challenges imposed by the unpredictable, highly variable and non-controllable nature of renewable supply. Paradoxically, flexible units are currently being mothballed or retired in Europe due to financial losses. We investigate an energy-only market design, referred to as operating reserve demand curves, that rewards flexibility by adjusting the real-time energy price to a level that reflects the value of capacity under conditions of scarcity. We test the performance of the mechanism by developing a model of the Belgian electricity market, which is validated against the historical outcomes of the market over a study period of 21 months. We verify that (i) based on the observed market outcomes of our study period, none of the existing combined cycle gas turbines of the Belgian market can cover their investment costs, and (ii) the introduction of price adders that reflect the true value of scarce flexible capacity restores economic viability for most combined cycle gas turbines in the Belgian market.

The Impact of the Fracking Boom on Arab Oil Producers

Lutz Kilian

DOI: 10.5547/01956574.38.6.lkil
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This article makes four contributions. First, it investigates the extent to which the U.S. fracking boom has caused Arab oil exports to decline since late 2008. Second, the article quantifies for the first time by how much the U.S. fracking boom has lowered the global price of oil. Using a novel econometric methodology, it is shown that in mid-2014, for example, the Brent price of crude oil was lower by $10 than it would have been in the absence of the fracking boom. Third, the article provides evidence that the decline in Saudi net foreign assets between mid2014 and August 2015 would have been reduced by 27% in the absence of the fracking boom. Finally, the article discusses the policy choices faced by Saudi Arabia and other Arab oil producers.

Fossil Fuel Price Shocks and CO2 Emissions: The Case of Spain

Jorge Blazquez, Jose Maria Martin-Moreno, Rafaela Perez, and Jesus Ruiz

DOI: 10.5547/01956574.38.6.jmar
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This paper focuses on the impact of oil, natural gas and coal price shocks on the Spanish business cycle from 1969 to 2013. It uses Bayesian procedures to estimate a Dynamic Stochastic General Equilibrium (DSGE) model for a small open economy. The paper shows that natural gas and coal shocks are relevant sources of macroeconomic disruption in addition to oil price shocks. The three fossil fuel prices have an impact on the economic activity and explain the evolution of the energy mix. However, we find that oil price shocks have a significantly larger impact on economic volatility. Finally, we assess the impact of hydrocarbon price shocks on carbon emissions given that different price shocks result in a different fossil fuel mix and, thus, in different CO2 emissions.

Cost, Contractors and Scale: An Empirical Analysis of the California Solar Market

Johannes Mauritzen

DOI: 10.5547/01956574.38.6.jmau
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This paper presents an empirical analysis of the rapidly growing California rooftop solar photovoltaic market using detailed data of over 100,000 solar installations between 2007 and 2014. The rapid fall in the cost of solar panels stand central in the expansion of this market. I use a semi-parametric regression model to aid identification of cost factors by decomposing time-varying and cross-sectional components. I find that the use of Chinese manufactured panels are associated with costs that are 6% lower. Economies of scale at the local level (number of yearly installations in a zip code) and at the installation level (size of the installation) are also associated with lower costs. Higher subsidies, and higher contractor market-share are associated with higher costs. I use an exploratory analysis of the dominant contractor, SolarCity, to discuss non-cost factors in the expansion of the solar photovoltaic market.

Geospatial, Temporal and Economic Analysis of Alternative Fuel Infrastructure: The case of freight and U.S. natural gas markets

Yueyue Fan, Allen Lee, Nathan Parker, Daniel Scheitrum, Rosa Dominguez-Faus, Amy Myers Jaffe, and Kenneth Medlock III

DOI: 10.5547/01956574.38.6.yfan
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The transition to low-carbon fuel in the United States has spatial, temporal and economic aspects. Much of the economic literature on this topic has focused on aspects of the cost effectiveness of competing fuels. We expand this literature by simultaneously considering spatial, temporal and economic aspects in an optimization framework that integrates geographic information system (GIS) tools, network analysis, technology choice pathways and a vehicle demand choice model. We focus on natural gas fuel as a low-carbon alternative to oil-based diesel fuel in the heavy-duty sector primarily because of the recent cost benefits relative to diesel fuel and the high vehicle turnover rate in heavy-duty trucks. We find that the level of profitability of natural gas fueling infrastructure depends more on volume of traffic flows rather than proximity to natural gas supply.