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Petroleum Taxation Contingent on Counter-Factual Investment Behaviour

Petter Osmundsen, Magne Emhjellen, Thore Johnsen, Alexander Kemp and Christian Riis

Year: 2015
Volume: Volume 36
Number: Adelman Special Issue
DOI: 10.5547/01956574.36.SI1.posm
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Abstract:
Petroleum administration can be regarded as a principal-agent problem. The government allocates exploration and production rights to petroleum companies on behalf of the population. The government is the principal and the companies are agents. With the aim of capturing revenue for the state, the government devises a petroleum tax system which takes account of the investment decisions made by the companies, while acknowledging for the fact that the companies may report strategically to the government. An important issue is how tax deductions are to be treated in investment analysis. A discrepancy arises here between assumptions made in some areas of tax theory and the actual investment analyses conducted by the companies. Tax theory has given rise to discussion and controversial tax proposals for the petroleum sector in Norway, Denmark and Australia. It led, for example, to reductions in tax-related depreciation for the Norwegian petroleum industry in May 2013. The article reviews this tax debate and analyses the implications of basing tax design on counter-factual investment behaviour.



Enhancing Intraday Price Signals in U.S. ISO Markets for a Better Integration of Variable Energy Resources

Ignacio Herrero, Pablo Rodilla, and Carlos Batlle

Year: 2018
Volume: Volume 39
Number: Number 3
DOI: 10.5547/01956574.39.3.iher
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Abstract:
Efficient operation of power systems increasingly requires accurate forecasting of load and variable energy resources (VER) production, along with flexible resources and markets, capable of adapting to changing conditions in the intraday horizon. It is of utmost importance to reflect these needs in price signals, to align the incentives of market agents with the new challenges. The two-settlement system used by U.S. ISOs falls short to provide efficient intraday economic signals and a cost reflective allocation of intraday rescheduling costs. This paper advocates for a multi-settlement system, which entails calculating intraday prices as forecasts are updated and re-schedules are executed. This approach incorporates more granular prices, as in European intraday markets, while keeping the efficient centralized dispatch logic of the ISO model. A stylized case example illustrates the virtues of a multi-settlement system, which sends cost reflective signals, and consequently facilitates VER integration.



Taxation and Investment Decisions in Petroleum

Graham A. Davis and Diderik Lund

Year: 2018
Volume: Volume 39
Number: Number 6
DOI: 10.5547/01956574.39.6.gdav
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Abstract:
When governments apply high tax rates targeted at natural resource rent, there must be generous deductions in order to avoid investment disincentives. How generous is disputed. Based on standard finance theory and recommendations from the OECD and the IMF, the value that firms attach to future deductions depends on the risks of these, and the companies' after-tax weighted-average cost of capital cannot be applied directly. As an example, a simple model quantifies the difference between pre-tax and post-tax systematic risk when tax deductions are less risky than pre-tax cash flows. Osmundsen et al. (2015) suggest that the difference must be ignored by oil companies, since they cannot find the separate market values of tax deductions. But companies operating in different jurisdictions cannot then appreciate differences in tax systems, not even approximately, which will lead to suboptimal decisions. Tax designers may instead assume that companies have gradually adopted more sophisticated methods of investment decision making.



Investigating Price Formation Enhancements in Non-Convex Electricity Markets as Renewable Generation Grows

Ali Daraeepour, Eric D. Larson, and Chris Greig

Year: 2022
Volume: Volume 43
Number: Number 5
DOI: 10.5547/01956574.43.5.adar
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Abstract:
Continued growth in wind energy penetration increases the demand for operational flexibility on the grid. It is not well-understood if the price formation process in current U.S. electricity markets will appropriately reward the provision of operational flexibility. This study investigates how continued growth in wind penetration impacts conventional marginal pricing efficiency and assesses its ability to remunerate operational flexibility. It also investigates the extent to which alternative marginal pricing schemes that seek to minimize out-of-market payments enhance remuneration of flexibility. Using a custom-built model, we simulate PJM's hourly electricity market outcomes under conventional and alternative marginal pricing schemes for three wind penetration levels. We find that the increasing demand for operational flexibility increases the frequency and magnitude of unrepresentative price events that suppress energy prices and thus the market's ability to remunerate flexibility. We find that the alternative of convex-hull pricing, which minimizes out-of-market payments, can largely overcome these issues.





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