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Energy Journal Issue

The Energy Journal
Volume 39, Number 2

Prepress Content: The following article is a preprint of a scientific paper that has completed the peer-review process and been accepted for publication within The Energy Journal.

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Modelling Electricity Swaps with Stochastic Forward Premium Models

Iván Blanco, Juan Ignacio Peña, and Rosa Rodriguez

DOI: 10.5547/01956574.39.2.ibla
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We present a new model for pricing electricity swaps. Two general factors affect contracts but unique risk elements affect each contract. General factors are average swap prices and deterministic trend-seasonal components, and unique elements are forward premiums. Innovations follow MNIG distributions. We estimate the model with data from the European Energy Exchange. The model outperforms four competitors, both in in-sample valuation and in out-of-sample forecasting, and in fitting the term structure of volatilities by market segments. Competitor models are (i) diffusion spot prices, (ii) jump-diffusion spot prices with time dependent volatility, (iii) HJM-based and (iv) Levy multifactor model with NIG distributions. Value-at-Risk measures based on normality strongly underestimate tail risk but our model gives estimates that are more exact.

Does Daylight Saving Save Electricity? A Meta-Analysis

Tomas Havranek, Dominik Herman, and Zuzana Irsova

DOI: 10.5547/01956574.39.2.thav
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The original rationale for adopting daylight saving time (DST) was energy savings. Modern research studies, however, question the magnitude and even direction of the effect of DST on electricity consumption. Representing the first meta-analysis in this literature, we collect 162 estimates from 44 studies and find that the mean reported estimate indicates slight electricity savings: 0.34% during the days when DST applies. The literature is not affected by publication bias, but the results vary systematically depending on the exact data and methodology applied. Using Bayesian model averaging we identify the most important factors driving the heterogeneity of the reported effects: data frequency, estimation technique (simulation vs. regression), and, importantly, the latitude of the country considered. Electricity savings are larger for countries farther away from the equator, while subtropical regions consume more electricity because of DST.

The Impact of Securing Alternative Energy Sources on Russian-European Natural Gas Pricing

Nathalie Hinchey

DOI: 10.5547/01956574.39.2.nhin
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This paper examines the effects of procuring alternative sources of natural gas on Russian pricing in Europe. With the increasing presence of LNG import capability in European ports, this topic is growing in importance, especially for European policy makers. Theoretical results, stemming from an asymmetric Nash Bargaining model, suggest that Russian prices decrease as dependency on Russian gas decreases. The empirical results, obtained from the estimation of a correlated random effects model, corroborate this stipulation by finding a positive relationship between Russian pricing and average dependency on Russian supplied gas. These findings explain the recent phenomenon experienced in the Baltic Region where the presence of an LNG import terminal in Lithuania has secured access to non-Russian suppliers of gas and decreased prices from Gazprom.

The Price Elasticity of Electricity Demand in the United States: A Three-Dimensional Analysis

Paul J. Burke and Ashani Abayasekara

DOI: 10.5547/01956574.39.2.pbur
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In this paper we employ a dataset of three dimensions - state, sector, and year - to estimate the short- and long-run price elasticities of state-level electricity demand in the United States. Our sample covers the period 2003-2015. We contribute to the literature by employing instrumental variable estimation approaches, using the between estimator, and pursuing panel specifications that enable us to control for multiple dimensions of fixed effects. We conclude that state-level electricity demand is very price inelastic in the short run, with a same-year elasticity of -0.1. The long-run elasticity is near -1, larger than often believed. Among the sectors, it is industry that has the largest long-run price elasticity of demand. This appears to in part be due to electricity-intensive industrial activities clustering in low-price states.

OPEC’s Impact on Oil Price Volatility: The Role of Spare Capacity

Axel Pierru, James L. Smith, and Tamim Zamrik

DOI: 10.5547/01956574.39.2.apie
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OPEC claims to hold and use spare production capacity to stabilize the crude oil market. We study the impact of that buffer on the volatility of oil prices. After estimating the stochastic process that generates shocks to demand and supply, and assessing OPEC's limited ability to accurately measure and offset those shocks, we find that OPEC's use of spare capacity has reduced price volatility, perhaps by as much as half. We also apply the principle of revealed preference to infer the implicit loss function that rationalizes OPEC's investment in spare capacity and compare it to other estimates of the cost of crude oil supply shortfalls. That comparison suggests that OPEC's buffer capacity was in line with global macroeconomic needs.

The Other Renewable: Hydropower Upgrades and Renewable Portfolio Standards

Stein-Erik Fleten, Johannes Mauritzen, and Carl J. Ullrich

No Abstract

Vintage Capital, Technology Adoption and Electricity Demand-Side Management

Wenbiao Cai, Hugh Grant, and Manish Pandey

No Abstract