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Utility Diversification

Alfred E. Kahn

Year: 1983
Volume: Volume 4
Number: Number 1
DOI: 10.5547/ISSN0195-6574-EJ-Vol4-No1-9
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Abstract:
Diversification by public utility companies is a topic in which I have had a longstanding interest. The second volume of my Economics of Regulation, for example, contains a 73-page chapter largely devoted to this subject. I have taken the occasion to reread that discussion, and have observed with interest-and some amusement-how similar the issues were as I saw them then to the issues with which the National Association of Regulatory Utility Commissioners is grappling today. The entire chapter consists of the advantages and possible benefits of utility company diversification, on the one side, and the possible drawbacks and dangers, on the other. The first of these could well have been written by the utility companies today; the other, by those regulators and members of the public at large who are resolutely opposed to any such dilutions of the public utility concept. My own not very striking conclusion was that "The balance of social advantage will obviously vary from one industry to another [p. 268].... There is no single optimum pattern or combination for all situations [p. 324]...."



Nuclear Power: A Hedge against Uncertain Gas and Carbon Prices?

Fabien A. Roques , William J. Nuttall, David M. Newbery, Richard de Neufville, Stephen Connors

Year: 2006
Volume: Volume 27
Number: Number 4
DOI: 10.5547/ISSN0195-6574-EJ-Vol27-No4-1
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Abstract:
High fossil fuel prices have rekindled interest in nuclear power. This paper identifies specific characteristics making nuclear power unattractive to merchant generators in liberalized electricity markets, and argues that non-fossil fuel technologies have an overlooked option value given fuel and carbon price uncertainty. Stochastic optimization estimates the company option value of keeping open the choice between nuclear and gas technologies. The merchant option value decreases sharply as the correlation between electricity, gas, and carbon prices rises, casting doubt on whether merchant investors have adequate incentives to choose socially efficient diversification in liberalized electricity markets.



Competition in Electricity Markets with Renewable Energy Sources

Daron Acemoglu, Ali Kakhbod, and Asuman Ozdaglar

Year: 2017
Volume: Volume 38
Number: KAPSARC Special Issue
DOI: 10.5547/01956574.38.SI1.dace
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Abstract:
This paper studies the effects of the diversification of energy portfolios on the merit order effect in an oligopolistic energy market. The merit order effect describes the negative impact of renewable energy, typically supplied at the low marginal cost, to the electricity market. We show when thermal generators have a diverse energy portfolio, meaning that they also control some or all of the renewable supplies, they offset the price declines due to the merit order effect because they strategically reduce their conventional energy supplies when renewable supply is high. In particular, when all renewable supply generates profits for only thermal power generators this offset is complete - meaning that the merit order effect is totally neutralized. As a consequence, diversified energy portfolios may be welfare reducing. These results are robust to the presence of forward contracts and incomplete information (with or without correlated types). We further use our full model with incomplete information to study the volatility of energy prices in the presence of intermittent and uncertain renewable supplies.



A Strategic Perspective on Competition between Pipeline Gas and LNG

Robert A. Ritz

Year: 2019
Volume: Volume 40
Number: Number 5
DOI: 10.5547/01956574.40.5.rrit
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Abstract:
Global gas markets feature two types of suppliers: piped gas and LNG exporters. Pipelines have a high degree of "asset specificity" : once built, they are physically bound to a particular route. LNG is transported by tanker, with a choice of export markets. Put simply: LNG is mobile, pipelines are not. This paper uses game-theoretic modelling to show how its commitment to serving a single market confers a strategic advantage on piped gas. By "overinvesting" in its own market, a pipeline exporter can induce LNG rivals to shift sales to their other markets. The model helps understand competition between Russian piped gas and Qatari LNG. It shows how Russia's dependence on Europe can be good news for gas buyers, why these nonetheless strongly benefit from diversifying into LNG imports, and how the Herfindahl index of imports can mismeasure "supply security" . The paper also discusses Russia's evolving gas export strategy, including gas deals with China.



A Risk-Hedging View to Refinery Capacity Investment in OPEC Countries

Hamed Ghoddusi and Franz Wirl

Year: 2021
Volume: Volume 42
Number: Number 1
DOI: 10.5547/01956574.42.1.hgho
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Abstract:
Should oil-rich members of OPEC invest in the oil refinery industry? This is a crucial energy policy question for such economies. We extend theoretical models for a vertical integration strategy within an oil-producing economy, based on a risk-hedging view. The first model highlights the trade-off between return and risk-reduction features of upstream/downstream sectors. The dynamic model demonstrates the volatility of the total budgetary revenue of each sector. Our theory-guided empirical analysis shows that though the average markup in the refining sector is significantly smaller than the profits in the upstream, downstream investment can provide some hedging value. In particular, the more stable and mean-reverting refining margins provide a partial revenue cushion when crude oil prices are low. We discuss the risk-hedging feature of the refinery industry when the crude oil market faces supply versus demand shocks.



Selling Wind

Ali Kakhbod, Asuman Ozdaglar, and Ian Schneider

Year: 2021
Volume: Volume 42
Number: Number 1
DOI: 10.5547/01956574.42.1.akak
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Abstract:
We investigate the strategic behavior of wind producers in the presence of uncertain wind resource availability, where wind availability is correlated across firms. We study how the level of correlation between different firms' wind resources impacts strategy and market outcomes. The main insight of our analysis is that increasing heterogeneity in resource availability improves social welfare, as a function of its effects both on improving diversification and on reducing withholding by firms. We show that this insight is robust for common assumptions regarding electricity demand. The model is also used to analyze the effect of wind resource heterogeneity on firm profits and opportunities for collusion. Finally, we analyze the impacts of improving public information and weather forecasting; enhanced public forecasting increases welfare, but it is not always in the best interests of strategic producers.



Structural Transformation Options of the Saudi Economy Under Constraint of Depressed World Oil Prices

Salaheddine Soummane, Frédéric Ghersi, and Franck Lecocq

Year: 2022
Volume: Volume 43
Number: Number 3
DOI: 10.5547/01956574.43.3.ssou
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Abstract:
We implement the hybrid (energy-economy) recursive-dynamic multisector IMACLIM model with important adaptations to Saudi macroeconomics. We design two scenarios reflecting both the Saudi Vision 2030 economic development program and Nationally Determined Contribution (NDC) to greenhouse gas mitigation: Continuity of previous plans to expand energy-intensive activities under maintained energy-pricing policies, versus Transformation by economic diversification away from hydrocarbon-related activities and fiscal and energy-pricing reforms. We show that, compared to Continuity, Transformation improves activity, employment and public budget outlooks, while considerably abating the energy intensity of GDP and total CO2 emissions. Our results thus point at the relevance of economic diversification as both a hedging strategy against international climate change mitigation depressing oil markets and a national climate mitigation strategy for Saudi Arabia. However, the successful advancement of the reforms necessary for diversification remains conditional to setting a suitable institutional framework for a competitive economy.





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