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Economics of Energy & Environmental Policy
Volume 8, Number 2

Symposium on ‘Facing the Energy Transition’

Facing the Energy Transition: An Introduction

Maria Teresa Costa-Campi, Andreas Löschel, and Elisa Trujillo-Baute

DOI: 10.5547/2160-5890.8.2.etru
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To reconcile sustainable economic growth and climate change mitigation, it is necessary to re-think the current energy model. The commitments of the Paris ClimateAgreement and the Sustainable Development Goals will not be achieved unlessenergy systems around the world are fundamentally transformed. The energy architecture of the future requires an appropriate framework to cope with differentstrategies of how this transformation might be approached. The special issue aimsto shed light on the role of markets and networks for the energy transition andanalyses the appropriate economic, regulatory and policy framework to enablehighly integrated, flexible, clean, and efficient energy systems. It is related to the VIInternational Academic Symposium �Facing the Energy Transition: Markets andNetworks� organized in February 2018 by the Chair of Energy Sustainability atthe University of Barcelona

Energy Systems Integration: Economics of a New Paradigm

Tooraj Jamasb and Manuel Llorca

DOI: 10.5547/2160-5890.8.2.tjam
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Energy Systems Integration (ESI) is an emerging paradigm emanating from a whole system perspective of the energy sector. It is based on a holistic view by which the main energy carriers are integrated to achieve horizontal synergies and efficiencies at all levels. The energy system may in turn integrate with other infrastructure sectors such as water, transport, and telecommunications to meet the demand for a broad range of energy and essential services. It also implies that energy security, sustainability, and equity objectives can be balanced more effectively. There is already progress in the technical aspects of ESI. However, such systems require not only physical solutions but they also need economic, regulatory, and policy frameworks to ensure efficient performance over time. Thus, it is important to better understand the economic features of integrated energy systems. To our knowledge this aspect is barely addressed in the literature on ESI. We discuss selected aspects that relate to industrial organization, regulation, business economics, and technology. Finally, we offer some considerations and policy recommendations.

The Role of Efficient Pricing in Enabling a Low-Carbon Electricity Sector

Frank A. Wolak

DOI: 10.5547/2160-5890.8.2.fwol
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Producers and consumers will make the investments and innovations necessary to transition to a low carbon electricity supply industry only if they are compensated for their efforts. In the absence of explicit government support for these activities, this outcome will occur only if wholesale and retail prices provide this compensation. Efficient wholesale and retail pricing provides compensation for the cost-effective deployment of these innovations. Multi-settlement locational marginal pricing markets set efficient short-term wholesale electricity prices. Marginal cost-based pricing of transmission and distribution networks is increasingly important in regions with solar resources. More efficient wholesale and retail pricing implies significantly greater price volatility, particularly as the share of intermittent renewable generation increases, which requires implementing a number of competition and regulatory safeguards to protect consumers, while still providing the price signals necessary for a least cost transition to a low-carbon electricity supply industry.

Energy Market Integration and Electricity Trade

Joan Batalla, Jordi Paniagua, and Elisa Trujillo-Baute

DOI: 10.5547/2160-5890.8.2.jbat
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This paper explores energy trade in the electricity market by undertaking a comprehensive empirical analysis of the effect of Europe's progressive Energy Market Integration (EMI). Its aim is to quantify the effect of EMI on electricity trade in Europe in order to derive corresponding evidenced- based policy implications. The empirical strategy employs standard goods trade gravity models, adapted to energy trade in the electricity market and estimated using standard gravity techniques. We use energy trade flows between European countries to quantify the effect of the successive EMI enlargements on energy flows. The paper highlights relevant fact-based policy implications for integrating electricity markets. Our results suggest that EMI creates electricity trade among members, but also diverts trade between non-members. Two main mechanisms appear to account for the EMI effect: namely, market enlargement and the integration of electricity markets.

Drivers of Energy R&D in Manufacturing Industries

Maria Teresa Costa-Campi and Jose Garcia-Quevedo

DOI: 10.5547/2160-5890.8.2.mcos
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Energy R&D can have major social and economic impacts and is a critical factor in addressing the challenges presented by climate change mitigation policies. As well as the energy utilities themselves, firms in other sectors also invest in energy R&D; however, while various studies have examined the determinants of R&D in the former, there are no analyses of energy R&D drivers in other industries. This paper seeks to fill this gap by examining the determinants of investment in energy R&D in non-energy industries. We focus on manufacturing industries where we can differentiate between energy and non-energy R&D related expenditure. The empirical analysis is carried out for 21 sectors in Spain for the period 2008-2013. To overcome data shortcomings, we built a database from several surveys. The data show the importance of taking into account the efforts devoted to energy R&D by the manufacturing sectors in order to have more complete information about the total investment made in energy R&D. The results of the estimations indicate the importance of the energy R&D developed by firms that supply the energy utilities.

Do Almost Mature Renewable Energy Technologies Still Need Dedicated Support Towards 2030?

Anne Held, Mario Ragwitz, Pablo del Río, Gustav Resch, Corinna Klessmann, Arndt Hassel, Milan Elkerbout, and James Rawlins

DOI: 10.5547/2160-5890.8.2.ahel
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The discussion on whether and how to continue support for almost mature renewable electricity (RES-E) technologies, such as onshore wind and PV, has recently intensified. In this paper we analyze arguments in the literature in favor and against the phase-out of renewables support in the context of increasingly competitive RES-E technologies. We conclude that there are good reasons to continue dedicated RES-E policies beyond 2020 for those technologies. Dedicated RES-E support can provide a predictable, secure investment framework that lowers the risk premiums required by investors and therefore reduces the capital costs of RES-E. In addition, there are still significant cost reduction potentials for these technologies. The increased use of renewables has multiple socio-economic benefits in addition to climate change mitigation. These arguments are still valid when looking at the current market situation characterized by oversupply and low prices on both the CO2 market and some power markets in Europe. Since renewables are not the main reason for the current oversupply, it would not be effective to take actions towards restoring market equilibrium in the form of radical or overall phase-out of RES-E support.

The Impact of Policy on the Efficiency of Solar Energy Plants in Spain: A Production-Frontier Analysis

Cristina Peñasco, Desiderio Romero-Jordán, and Pablo del Río

DOI: 10.5547/2160-5890.8.2.cpen
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The analysis of the impact of remuneration schemes for renewable electricity, and solar photovoltaics (PV) in particular, on the effectiveness of renewable energy deployment and the total costs of support has received a considerable attention in the past. In contrast, the literature on the effects of deployment support on productive efficiency and, more specifically, on the incentives to locate the plants in the sites with the best renewable energy resources is tiny. This article covers this gap in the literature. Its aim is to identify the impact of successive feed-in tariff (FIT) reforms on the location of solar PV plants in Spain between 2009 and 2013 using a unique dataset of PV plants and a panel stochastic production-frontier model. The analysis shows that more generous FITs, i.e. those providing a higher net support (support levels minus generation costs) have not encouraged the location of those plants in the best sites. Our results suggest that the design elements in instruments to support the deployment of renewable energy projects should carefully be chosen in order to encourage the selection of the best sites.

Determinants of Energy Efficiency and Renewable Energy in European SMEs

Agusti Segarra-Blasco and Elisenda Jove-Llopis

DOI: 10.5547/2160-5890.8.2.aseg
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This paper empirically investigates the factors driving the adoption of energy efficiency (EE) and renewable energy (RE) measures in a sample of 8,213 Small and Medium-Sized Enterprises (SMEs) in European countries. Our results suggest that sustainable energies actions (EE and RE) are highly persistent both at the firm level and across countries and that there are relevant complementarities between EE and RE practices, as well as other resource efficient practices. In addition, strategies for EE seem to rely more on cost saving and regulations, while those for RE are more linked to public support and environmental awareness. The paper ends with some recommendations for policymakers suggesting that Europe needs to design an energy policy for the SMEs firms that jointly pursues both EE and the diffusion of RE according to the technological gap of each member country.

Greener and Fairer: A Progressive Environmental Tax Reform for Spain

Christoph Böhringer, Xaquin Garcia-Muros, and Mikel González-Eguino

DOI: 10.5547/2160-5890.8.2.cboh
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Environmental externalities call for the use of environmental taxes to get prices right and thereby reduce environmental pressures. To date, however, the Spanish government makes only limited use of environmental taxes. One major reason for the policy reluctance are concerns on the regressive impacts of environmental taxes. We argue that policy can hedge against these concerns by means of revenue recycling. More specifically, we assess the impacts of a green tax reform where additional revenues are redistributed lump-sum to Spanish households on an equal-per-capita basis. Based on quantitative evidence from coupled microsimulation and computable equilibrium analyses we find that such a green tax reform leads to a substantial reduction in harmful emissions while having a progressive impact.


The Green Paradox, A Hotelling Cul de Sac

Robert D. Cairns and James L. Smith

DOI: 10.5547/2160-5890.8.2.rcai
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The green paradox is an effect by which an increasing tax per unit on oil production, aimed at tracking damages from CO2 emissions, induces an increase in world production and a decrease in price in the near term. The increase is a rational response in a Hotelling exhaustible-resource model. We simulate the decisions of a price-taking producer in response to a tax of various shapes. In contrast to a Hotelling model, our extraction technology involves irreversible, lumpy investments in exploration and development. In addition, we assume output from a developed reserve is subject to natural decline at a rate that is determined by the sunk development investment and the geology of the reserve. Decisions are far more complicated, and results far subtler, than in the Hotelling framework. Given a price path, we show that almost any form of tax causes a reduction in the level of development and initial production, thereby contradicting the hypothesis of the green paradox.

An Economic Perspective on Mexico's Nascent Deregulation of Retail Petroleum Markets

Lucas W. Davis, Shaun Mcrae, and Enrique Seira Bejarano

DOI: 10.5547/2160-5890.8.2.ldav
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Retail petroleum markets in Mexico are on the cusp of a historic deregulation. For decades, all 11,000 gasoline stations nationwide have carried the brand of the state-owned petroleum company Pemex and sold Pemex gasoline at federally regulated retail prices. This industry structure is changing, however, as part of Mexico's broader energy reforms aimed at increasing private investment. Since April 2016, independent companies can import, transport, store, distribute, and sell gasoline and diesel. In this paper, we provide an economic perspective on Mexico's nascent deregulation. Although in many ways the reforms are unprecedented, we argue that past experiences in other markets give important clues about what to expect, as well as about potential pitfalls. Turning Mexico's retail petroleum sector into a competitive market will not be easy, but the deregulation has the potential to increase efficiency and, eventually, to reduce prices.Keywords: Market Deregulation, Gasoline Stations, Price Competition, Product Differentiation, Vertical Integration

Book Reviews

Book Reviews

Integration of Large-Scale Renewable Energy into Bulk Power Systems: From Planning to Operation, edited by Pengwei Du, Ross Baldick and Aidan Tuohy - Book Review by: Ronnie Belmans

Can We Price Carbon?, by Barry G. Rabe - Book Review by: Xavier Labandeira

Imperfect Markets and Imperfect Regulation. An Introduction to the Microeconomics and Political Economy of Power Markets, by Thomas-Olivier Léautier - Book Review by: David Newbery

Consumers, Prosumers, Prosumagers. How Service Innovations Will Disrupt the Utility Business Model, edited by Sioshansi Fereidoon - Book Review by: Jesse Scott

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