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Energy Journal Issue

The Energy Journal
Volume 39, Special Issue 1



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Foreword to the Special Issue: Introduction

David C. Broadstock, Javier Ordóñez and Maria Jesus-Herrerias




The Impact of Special Economic Zones on Electricity Intensity of Firms

Ronald B. Davies, T. Huw Edwards, and Arman Mazhikeyev

DOI: 10.5547/01956574.39.SI1.rdav

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Abstract:
In light of concerns over the environmental impact of Special Economic Zones located in developing countries, where environmental regulation is weak, we analyse the electricity intensity of firms in SEZs. We use firm level data from Africa and Asia, and we find that SEZ firms have higher electricity intensity as opposed to non-SEZ firms. If they also face higher fiscal, financial or environmental regulations, the electricity intensity of firms in SEZs increases by a greater rate as opposed to non-SEZ firms. As such, establishing SEZs may have significant environmental implications.




The Effect of Financial Development on Energy Intensity in China

Carlos Aller, Maria Jesus Herrerias, and Javier Ordóñez

DOI: 10.5547/01956574.39.SI1.call

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Abstract:
In this study, we analyse the relationship between financial development and energy intensity in 28 Chinese provinces over the period 1999 to 2014. Using a wide variety of financial development measures, as well as specific indicators capturing the level of state intervention in the financial system and the degree of market-driven financing in the economy, we examine whether limited access to finance acts as a barrier to reducing energy intensity. Our estimations control for variables such as state investment, stock market capitalization and the composition effect. Further, a GMM estimator is used to control for endogeneity in our models. Our results provide evidence that a poorly functioning financial system constrains the reduction of energy intensity across regions. However, the strength of these effects has been gradually declining over time, especially following the implementation of the Green Credit Policy. Limitations in domestic access to finance as well as the misallocation of funds and the efficient use of capital have policy implications, as they can reduce the incentives for investment in the energy sector. These findings are a source of considerable interest in light of the new policy based on green credit, and they highlight new opportunities as well as challenges to sustainable economic growth.




Is energy market integration a green light for FDI?

Maria T. Costa-Campi, Jordi Paniagua, and Elisa Trujillo

DOI: 10.5547/01956574.39.SI1.mcos

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Abstract:
This paper contributes to a better understanding of the effects of the European single market strategy by studying the effect of energy market integration (EMI) on foreign direct investment (FDI). Enforcing an EMI diminishes energy uncertainty and price volatility and signals stronger and credible institutions. FDI may, as a result, increase both within and outside the EMI area through two channels: first, via energy price converge and, second, via price dispersion reduction. We develop a formal model to explain how these mechanisms affect the capital invested abroad by heterogeneous firms. The Iberian Electricity Market (MIBEL) integration of 2007 is used to quantify the effect of EMI on FDI empirically. Gravity estimates on a global dataset including bilateral FDI data show that the integration of Portugal and Spain's electricity market increased both the amount of FDI's participants and the number of foreign projects. In line with our theoretical expectations, our estimates show that the increase of FDI is mainly due to the reduction in price dispersion. However, the institutional credibility signal sent by MIBEL had a greater influence than expected by the actual price reduction. Furthermore, we also observe a positive increase in FDI from neighboring countries (in this instance, France), albeit lower in magnitude.




Pricing and Margins in the Retail Automotive Fuel Market: Empirical Evidence from Spain

Alejandro Bello, Ignacio Contín-Pilart, and M Blanca Palacios

DOI: 10.5547/01956574.39.SI1.abel

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Abstract:
This paper analyses the evolution of gross retail margins for automotive fuels in Spain between January 2001 and February 2013. We firstly empirically test for breaks in the time series of gross margins. Our results indicate that there is only one break-point, in mid-2008, just when the demand for automotive fuels drops due to the economic crisis and the difference between the Spanish and the European retail margins increase notably. In addition, a regression analysis shows that the gross retail margins were higher during the recessive period of the Spanish economy (2008-2013) than before. Furthermore, we examine the causes of the break-point and of the subsequent evolution of margins. We find no evidence to support either the prohibition of using retail price maintenance (RPM) and recommended prices in the supply contracts or a supply cost change of automotive fuels as the cause of the evolution of retail margins. In addition, empirical evidence indicates that retail prices respond symmetrically to changes in wholesale prices. Instead, we show that the data are consistent with some firms exercising market power during the recessive period of the Spanish economy.




Price Elasticity of Supply and Productivity: An Analysis of Natural Gas Wells in Wyoming

Charles F. Mason and Gavin Roberts

DOI: 10.5547/01956574.39.SI1.cmasView Abstract

Abstract:
Using a large dataset of well-level natural gas production from Wyoming, we evaluate the respective roles played by market signals and geological characteristics in natural gas supply. While we find well-level production of natural gas is primarily determined by geological characteristics, producers respond to market signals through drilling rates and locations. Using a novel fixed effects approach based on petroleum-engineering characteristics, we confirm that production decline rates tend to be larger for wells with larger peak-production rates. We also find that the price elasticity of peak production is negative, plausibly because firms drill in less productive locations as prices increase. Finally, we show that drilling is price inelastic, although the price elasticity of drilling increased significantly when new technologies began to be adopted in Wyoming. Our results indicate that the popular view that shale wells have larger decline rates than conventional wells can be at least partially explained by the pattern of falling natural gas prices.




Analyzing the Potential Economic Value of Energy Storage

Monica Giulietti, Luigi Grossi, Elisa Trujillo Baute, and Michael Waterson

DOI: 10.5547/01956574.39.SI1.mgiu

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Abstract:
This paper examines the commercial opportunities for electrical energy storage, taking market prices as given and determining the extent to which a strategy of arbitrage across the day, buying at the lowest price times at night and selling at the highest price times during the early evening, and relying on price forecasts one day-ahead generates profits in the British context. The paper sets out the potential problems as the market moves to absorb increasing amounts of wind, then characterises the nature of prices, which reveals the importance of a strategy in which power is absorbed into store for a relatively few hours of the day and discharged over a relatively few hours. It argues that additional incentives may need to be put into place in order to render storage over relatively longer periods more attractive and to deliver broader social benefits which are unlikely to be generated and captured as a result of purely commercial considerations.




Climate Anomalies and Migration between Chinese Provinces: 1987–2015

M. R. Barassi, M. G. Ercolani, M. J. Herrerias, and Z. Jin

DOI: 10.5547/01956574.39.SI1.merc

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Abstract:
Internal migration between Chinese provinces has increased substantially since the mid-1980s. Though it is generally agreed that this has been driven by economic factors, climatic factors might also have had a part to play. The challenge is to evaluate the impact of climatic factors on migration in the simultaneous presence of changing socio-economic influences. We resolve this challenge by carrying out a statistical multivariate regression analysis on bilateral migration rates between Chinese provinces. The analysis simultaneously includes climate change in the form of climate anomalies (temperature, precipitation, sunshine) and various socio-economic factors including energy consumption. To this end we have constructed a unique three-dimensional panel dataset (time, sending province, receiving province) with bilateral migration rates between 30 provinces for the period 1987-2015. Due to the distributional properties of the data and underlying theory we use a Poisson Pseudo Maximum Likelihood (PPML) estimator but include OLS estimates for comparison. The results suggest that increases in temperature and precipitation are significant migration push factors while increased sunshine discourages push migration. Provincial differentials in per capita energy consumption and Gross Regional Product (GRP) are also significant drivers of migration.




Technology Adoption in Emission Trading Programs with Market Power

Francisco J. André and Carmen Arguedas

DOI: 10.5547/01956574.39.SI1.fand

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Abstract:
In this paper we study the relationship between market power in emission permit markets and endogenous technology adoption. We find that the initial distribution of permits, in particular, the amount of permits initially given to the dominant firm, is crucial in determining over- or under-investment in relation to the benchmark model without market power. Specifically, if the dominant firm is initially endowed with more permits than the corresponding cost effective allocation, this results in under-investment by the dominant firm and over-investment by the competitive fringe, regardless of the specific amount of permits given to the latter firms. The results are reversed if the dominant firm is initially endowed with relatively few permits. Also, the presence of market power results in a divergence of both abatement and technology adoption levels with respect to the benchmark scenario of perfect competition, as long as technology adoption becomes more effective in reducing abatement costs.




How Persistent are Shocks to Energy Prices?

Atanu Ghoshray

DOI: 10.5547/01956574.39.SI1.agho

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Abstract:
Whether shocks to energy prices are permanent or transitory remains a contentious issue. This may result from mis-specification of the econometric tests, due for example to the uncertainty over the presence of a trend, or the possible presence of structural breaks and non-stationary volatility in the data. This paper makes a contribution by addressing the underlying characteristics of energy price data that influence such econometric tests. First, we detect whether the data are characterised by non-stationary volatility and possible trend breaks. The next step involves employing novel unit root tests that unify the underlying characteristics, such as trend break and/or nonstationary volatility, of the data. We conclude shocks to energy prices are not transitory. We further decompose a benchmark oil price and its demand and supply components into their permanent and transitory components and compute the cross correlations to find that they conform to standard theories of commodity storage models.




An Empirical Analysis of the Relationships between Crude Oil, Gold and Stock Markets

Semei Coronado, Rebeca Jiménez-Rodrguez, and Omar Rojas

DOI: 10.5547/01956574.39.SI1.scor

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Abstract:
Oil and gold are used as investment assets and so they are closely related to the evolution of stock market indices, given that any influence on decisions about investment portfolios can affect stock market returns. Consequently, it is important for investors to analyze the direction of influence between crude oil, gold and stock markets when designing and implementing their investment strategies. Thus, this paper studies the direction of the causality among the three markets for the US case. In doing so, we apply linear and non-linear Granger causality tests for daily data from the Great Moderation onwards. Evidence is provided as to the importance of considering the possibility of nonlinear relationships between the three markets, a feature which cannot be revealed using conventional linear causality tests which would therefore lead to an information loss about the true link. The results for the full sample indicate that the causality goes in all directions, which implies that changes in the stock market returns may be monitored by observing changes in the returns of the two commodity markets considered (and vice versa). This may help to design substitution investment strategies. The results also indicate that the direction of influence between markets does not exhibit material differences between various subsamples, with the exception of the causality relationship between the two commodity markets. This may in part help explain the contradictory results and mixed conclusions found in previous related literature.




Combination Forecasting of Energy Demand in the UK

Marco Barassi and Yuqian Zhao

DOI: 10.5547/01956574.39.SI1.mbar

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Abstract:
In more deregulated markets such as the UK, demand forecasting is vital for the electric industry as it is used to set electricity generation and purchasing, establishing electricity prices, load switching and demand response. In this paper we produce improved short-term forecasts of the demand for energy produced from five different sources in the UK averaging from a set of 6 univariate and multivariate models. The forecasts are averaged using six different weighting functions including Simple Model Averaging (SMA), Granger-Ramanathan Model Averaging (GRMA), Bayesian Model Averaging (BMA), Smoothing Akaike (SAIC), Mallows Weights (MMA) and Jackknife (JMA). Our results show that model averaging gives always a lower Mean Square Forecast Error (MSFE) than the best/optimal models within each class however selected. For example, for Coal, Wind and Hydro generated Electricity forecasts generated with model averaging, we report a MSFE about 12% lower than that obtained using the best selected individual models. Among these, the best individual forecasting models are the Non-Linear Artificial Neural Networks and the Vector Autoregression and that models selected by the Jackknife have often superior performance. However, MMA averaged forecasts almost always beat the predictions obtained from any of the individual models however selected, and those generated by other model averaging techniques.