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The Energy Journal
Volume 40, Number 5




Switching on Electricity Demand Response: Evidence for German Households

Manuel Frondel and Gerhard Kussel

DOI: 10.5547/01956574.40.5.mfro
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Abstract:
Empirical evidence on households' awareness of electricity prices and potentially divergent demand responses to price changes conditional on price knowledge is scant. Using panel data originating from Germany's Residential Energy Consumption Survey (GRECS), we fill this void by employing an instrumental-variable (IV) approach to cope with the endogeneity of the consumers'tariff choice. By additionally exploiting information on the households'knowledge about power prices, we combine the IV approach with an Endogenous Switching Regression Model to estimate price elasticities for two groups of households, finding that only those households that are informed about prices are sensitive to price changes, whereas the electricity demand of uninformed households is entirely price-inelastic. Based on these results, to curb the electricity consumption of the household sector and its environmental impact, we suggest implementing low-cost information measures on a large scale, such as improving the transparency of tariffs, thereby increasing the saliency of prices.




Socially Responsible Investment and Market Performance: The Case of Energy and Resource Companies

Janusz Brzeszczynski, Binam Ghimire, Tooraj Jamasb, and Graham McIntosh

DOI: 10.5547/01956574.40.5.jbrz
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Abstract:
Do financial markets reward the energy and resource companies for adopting socially responsible practices? In this study, we investigate the stock market performance of major international energy and resource firms, classified within the socially responsible investment (SRI) category, from 2005 to 2016. We simulate investments in the portfolios of the SRI energy and resource companies stocks during this 11-year period and we further assess their risk-adjusted performance. The returns of the energy and resource SRI portfolio as a whole were neither consistently superior nor inferior to those of the benchmark indices. However, there exist substantial differences across the individual sub-sectors. The overall results show that markets do not reward or penalize the energy and resource firms for their SRI attitudes. We also find that the crude oil price consistently had a significant influence on the stock returns of the SRI energy and resource companies.




Capital Adjustment and the Optimal Fuel Choice

Marie Hyland and Jevgenijs Steinbuks

DOI: 10.5547/01956574.40.5.mhyl
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Abstract:
We propose a novel approach to analyze interfuel substitution that explicitly incorporates heterogenous fuel-using capital stocks in the estimation of the optimal fuel choice. Our econometric framework structurally estimates the frictionless level of fuel-using capital stocks and employs non-parametric analysis to reveal information on the form of adjustment costs facing firms. To illustrate this approach we use a large panel of Irish manufacturing firms over the period 2004-2009. The econometric estimates show a large variation in the optimal response of capital to changing fuel prices across different fuel-using technologies and imply substantial costs to capital adjustment. These results underscore the significance of the frequently ignored link between capital adjustment and the choice of fuels used by manufacturing firms.




The Impact of Competition Policy Enforcement on the Functioning of EU Energy Markets

Tomaso Duso, Jo Seldeslachts, and Florian Szucs

DOI: 10.5547/01956574.40.5.tdus
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Abstract:
We investigate the impact of competition policy enforcement on the functioning of European energy markets while accounting for sectoral regulation. For this purpose, we compile a novel dataset on the European Commission's (EC) and EU member states' competition policy decisions in energy markets and combine it with firm- and sector-level data. We find that EC merger policy has a positive and robust impact on (i) the level of competition, (ii) investment and (iii) productivity. This impact, however, only shows up in low-regulated sectors. Other competition policy tools - EC state aid control and anti-trust, as well as all member state policy variables - do not have a uniform effect on energy markets. Our findings are consistent with the idea that the EC's merger policy actions have been used to overcome obstacles to a well-functioning EU energy sector and may have contributed to the overall development of gas and electricity markets in Europe.




EIA Storage Announcements, Analyst Storage Forecasts, and Energy Prices

Louis H. Ederington, Fang Lin, Scott C. Linn, and Lisa (Zongfei) Yang

DOI: 10.5547/01956574.40.5.lede
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Abstract:
Exploring properties both of the EIA's natural gas and crude oil storage announcements and of analyst forecasts of the EIA storage figures, we find that analyst storage forecasts bring additional information to the market beyond seasonal patterns and past storage flows and that the market promptly incorporates analyst forecasts into oil and gas prices prior to the EIA announcements. Analyst's natural gas forecasts efficiently impound the available time-series information but crude oil forecasts do not. We further find that the price reaction to subsequent EIA natural gas storage announcements is contingent on the level of analyst forecast uncertainty as proxied by analyst forecast disagreement. Storage flows higher or lower than analysts had expected one week tend to be partially reversed the following week and analyst forecast dispersion regarding future forecasts increases following large forecast errors.




Renewable Generation Capacity and Wholesale Electricity Price Variance

Erik Paul Johnson and Matthew E. Oliver

DOI: 10.5547/01956574.40.5.ejoh
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Abstract:
The share of electric power generated from renewable energy sources such as wind and solar must increase dramatically in the coming decades if greenhouse gas emissions are to be reduced to sustainable levels. An under-researched implication of such a transition in competitive wholesale electricity markets is that greater wind and solar generation capacity directly affects wholesale price variability. In theory, two counter-vailing forces should be at work. First, greater wind and solar generation capacity should reduce short-run variance in the wholesale electricity price due to a stochastic merit-order effect. However, increasing the generation capacity of these technologies may increase price variance due to an intermittency effect. Using an instrumental variables identification strategy to control for endogeneity, we find evidence that greater combined wind and solar generation capacity is associated with an increase in the quarterly variance of wholesale electricity prices. That is, the intermittency effect dominates the stochastic merit-order effect.




The Impacts of Lower Natural Gas Prices on Jobs in the U.S. Manufacturing Sector

Wayne Gray, Joshua Linn, and Richard Morgenstern

DOI: 10.5547/01956574.40.5.wgra
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Abstract:
The recovery of the U.S. manufacturing sector following the 2008-2009 economic recession coincided with a sharp drop in natural gas prices. To determine whether a causal connection in fact exists, we use confidential plant-level data for 1972-2012 to estimate the employment effects of changes in natural gas and other energy prices. Previous analyses have used aggregated data and failed to control for multiple drivers of employment dynamics, such as other input costs. We show that controlling for these factors substantially diminishes the effects of natural gas and electricity prices on manufacturing employment. Accounting for the direct effects of natural gas prices as well as the indirect effects via electricity prices, we estimate that the decline in natural gas prices between 2007 and 2012 raised overall manufacturing employment by 0.6 percent, and for gas-intensive industries, by 1.8 percent.




A Strategic Perspective on Competition between Pipeline Gas and LNG

Robert A. Ritz

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.




Cross-product Manipulation in Electricity Markets, Microstructure Models and Asymmetric Information

Chiara Lo Prete, William W. Hogan, Bingyuan Liu, and Jia Wang

DOI: 10.5547/01956574.40.5.cpre
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Abstract:
Electricity market manipulation enforcement actions have moved from conventional analysis of generator market power in real-time physical markets to materialallegations of sustained cross-product price manipulation in forward financial markets. A major challenge is to develop and apply forward market analyticalframeworks and models. This task is more difficult than for the real-time market. An adaptation of cross-product manipulation models from cash-settled financialmarkets provides an existence demonstration under uncertainty and asymmetric information. The implications of this analysis include strong empirical predictionsabout necessary randomized strategies that are not likely to be observed or sustainable in electricity markets. Absent these randomized strategies and othermarket imperfections, the means for achieving sustained forward market price manipulation remains unexplained.




Strategic Withholding through Production Failures

Sara Fogelberg and Ewa Lazarczyk

DOI: 10.5547/01956574.40.5.sfog
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Abstract:
Anecdotal evidence indicates that electricity producers use production failures to disguise strategic reductions of capacity in order to influence prices, but systematic evidence is lacking. We use an instrumental variable approach and data from the Swedish electricity market to examine such behavior. In a market without strategic withholding, reported production failures should not depend directly on the market price. We show that marginal producers in part base their decision to report a failure on prices, which indicates that production failures are a result of economic incentives as well as of technical problems.




Book Reviews

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DOI:
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