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The Energy Journal
Volume 42, Number 2

The Natural Gas Announcement Day Puzzle

Marcel Prokopczuk, Chardin Wese Simen, and Robert Wichmann

DOI: 10.5547/01956574.42.2.mpro
View Abstract

This paper studies natural gas futures returns on EIA storage announcement days. More than 50% of the annual return is earned on these days. We find a significant difference between announcement and non-announcement day returns, which cannot be explained by the announcement surprise or other control variables. At the intraday level, the return splits half into a pre- and post-announcement part. The pre-announcement return is entirely generated on days when storage levels exceed analysts' expectations casting doubt on explanations based on informed trading. After transaction and funding cost, a simple trading strategy yields substantial returns.

Cross-border Effects of Capacity Remuneration Mechanisms: The Swiss Case

Florian Zimmermann, Andreas Bublitz, Dogan Keles, and Wolf Fichtner

DOI: 10.5547/01956574.42.2.fzim
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In this article, cross-border effects of different market design options are analyzed using Switzerland, which is strongly interconnected to larger neighboring markets, as a case study. An investigation is conducted with an agent-based model where in one scenario, all market designs are represented according to the current legislation, and in another, energy-only markets (EOM) are assumed in all considered countries. The results show that wholesale electricity prices are highly dependent on the chosen market design and in the annual average are up to 27% higher in the EOM scenario. Due to expected larger interconnector capacities, this increase is evident in all simulated markets. Furthermore, the results indicate that the planned market design changes in the neighboring countries decrease investments in Switzerland. However, generation adequacy is still guaranteed due to the high Swiss hydropower storage capacity. Our results suggest that, under the current circumstances, a domestic mechanism in Switzerland is not required.

In Light of Democracy and Corruption: Institutional Determinants of Electricity Provision

Frida Boräng, Sverker C. Jagers, Marina Povitkina

DOI: 10.5547/01956574.42.2.fbor
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Long-lasting democratic institutions have been found to matter for the universal provision of reliable electricity. In this article we revisit this finding, suggesting that the effect of democracy on electricity provision is moderated by the quality of institutions shaping the implementation of public policies. We test the hypothesis positing the interaction effect between democracy and corruption using cross-national data on the share of population living in unlit areas. The results show that democracy is associated with a higher electrification rate only in low-corrupt contexts. When corruption is widespread, democratic experience is not correlated with higher rates of electrification. These findings suggest that the effect of democratic institutions is conditional on the quality of the institutions that shape policy implementation.

An Experimental Study of Monthly Electricity Demand (In)elasticity

David P. Byrne, Andrea La Nauze, and Leslie A. Martin

DOI: 10.5547/01956574.42.2.dbyr
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We document substantial rigidity in household electricity demand in response to large price shocks. We partnered with an electricity retailer to run a field experiment in which randomly-selected households received discounts of up to 50% on their total electricity bill or up to 95% off their per unit cost of electricity for a full month. We show that the quantity of electricity consumed was unaffected by these discounts. Exploiting rich billing, smart meter, and survey data, we document responses that are much more inelastic than previously observed in scenarios that raise prices for a few hours or raise or lower prices for indefinitely-long periods of time. Our results hold even among subgroups that we ex-ante believed were most likely to respond.

The Variation in Capacity Remunerations Requirements in European Electricity Markets

Conor Hickey, Derek Bunn, Paul Deane, Celine McInerney, and Brian Ó Gallachóir

DOI: 10.5547/01956574.42.2.chic
View Abstract

This paper provides the first EU wide analysis of the variation in Capacity Remuneration Requirements throughout Europe which aim to resolve the �missing money� problems in various member states. The findings of this analysis point to an asymmetric investment case for gas-fired peaking power plants throughout the EU. Under the assumptions of the European Commission Reference Scenario, pan-European power optimisation and investment models are specified for 2030. The results show that future investment in gas generators will depend on the availability of capacity payments. Capacity remuneration mechanisms can provide this "missing money," but we show that capacity remuneration requirements vary considerably across countries. We consider and model the impacts of country specific climate policy targets, sovereign risk, capital allowances, corporate taxes and future gas network tariffs on investor returns and therefore remuneration requirements. In the context of harmonised energy trading, this raises questions of how generation adequacy should be achieved, particularly in the context of higher penetrations of renewables.

Internal Carbon Financing with Transferable Offsets from Renewable Portfolio Standard

Jongmin Yu and Hyo-Sun Kim

DOI: 10.5547/01956574.42.2.joyu
View Abstract

Power generation under the Renewable Portfolio Standard (RPS) can reduce greenhouse gas emissions below the baseline level, so entities may argue to use this attribute to meet the goal of Emission Trading Scheme (ETS). Although these two quantity-based regulation systems have different policy objectives, both mechanisms are implicitly linked by credit conversions depending on credit prices. This paper builds an analytic partial equilibrium model and derives market equilibria in a closed form to demonstrate how each mechanism influences the other by policy instruments such as a renewable requirement, a reduction target in greenhouse gas emission, levels of penalties, or marginal costs. We can compare "direct vs indirect" effectiveness of a regulatory changes across both markets with the case where converting renewable offsets are completed prohibited.

Closer to One Great Pool? Evidence from Structural Breaks in Oil Price Differentials

Michael Plante and Grant Strickler

DOI: 10.5547/01956574.42.2.mpla
View Abstract

We show that the oil market has become closer to "one great pool," in the sense that price differentials between crude oils of different qualities have generally become smaller over time. We document, in particular, that many of these price differentials experienced a major structural break in or around 2008, after which there was a marked reduction in their means and volatilities. Differentials between residual fuel oil, a low-quality fuel, and higher-valued products, such as gasoline and diesel, experienced similar breaks during the same time period. A growing ability of the global refinery sector to process lower-quality crude oil and the U.S. shale boom, which has unexpectedly boosted the supply of high-quality crude oil, are two factors consistent with these changes. Differentials between crude oils of similar quality in general did not experience breaks in or around 2008, although we do find evidence of breaks at other times.

Why Has China Overinvested in Coal Power?

Mengjia Ren, Lee G. Branstetter, Brian K. Kovak, Daniel Erian Armanios, and Jiahai Yuan

DOI: 10.5547/01956574.42.2.mren
View Abstract

In spite of ambitious investments by the Chinese government in renewable energy sources, the country�s investment in coal power accelerated in recent years, raising concerns of massive overcapacity and undermining the central policy goal of promoting cleaner energy. In this paper, we ask why this happened, focusing on policies that incentivized excessive entry in the coal power sector and using a simple economic model to illustrate the policies� effects. Using coal-power project approval records from 2013 to 2016, we find the approval rate of coal power was about 3 times higher after approval authority was decentralized, with larger effects in regions producing more coal. We estimate that local coal production accounts for an additional 54GW of approved coal power in 2015 (other things equal), which is about 1/4 of total approved capacity in that year.

Does Global Value Chain Participation Decouple Chinese Development from CO2 Emissions? A Structural Decomposition Analysis

Hui Wang, Chen Pan, B.W. Ang, and Peng Zhou

DOI: 10.5547/01956574.42.2.hwan
View Abstract

Decoupling economic activities and CO2 emissions is central to achieving the climate goals of China. The country's participation in global value chains has profound impacts on its economy as well as CO2 emissions. Assessing the impacts is fundamental to identifying strategies to decouple China's development from emissions. To this end, we adopt the multi-region structural decomposition analysis technique to quantify the global value chain determinants of China's CO2 emission intensity from both the production and consumption perspectives. It is found that China's decoupling from emissions in 2007�2012 was driven mainly by global value chains. Nonetheless the decoupling slowed down after the global financial crisis. In particular, the value chains within China played a more important role in greening Chinese economy. Despite the considerable improvement in 2007�2012, global value chains remained the primary obstacle to environmental sustainability of China. More detailed results with policy implications are presented.

Energy Cost Information and Consumer Decisions: Results from a Choice Experiment on Refrigerator Purchases in India

Manisha Jain, Anand B. Rao, and Anand Patwardhan

DOI: 10.5547/01956574.42.2.mjai
View Abstract

Appliance labels allow consumers to choose products based on their energy use. In most countries, the widely adopted comparative categorical labels give information on energy use in physical units such as kilowatt-hour. Studies on the impact of monetary cost information on labels have reported different results across appliances within studies, and for the same appliances across studies. Recent studies on refrigerators show that monetary information increases the probability of cost-effectiveness analysis and fosters choice of energy-efficient refrigerators but do not estimate the consumer willingness to pay for higher efficiency category. In a discrete choice experiment, we observe choices of a sample of households divided into groups based on whether they get operating cost information on hypothetical choices. We estimate a mixed logit model with correlated random parameters and estimate the magnitude and distribution of consumer willingness to pay for higher energy efficiency category. We find that energy cost information on labels facilitate comparison of refrigerators based on energy-efficiency and leads to a positive willingness to pay for higher levels of energy efficiency. It also increases the share of respondents having a positive willingness to pay for higher efficiency. We conclude that annual energy cost information on refrigerator labels can improve the effectiveness of labelling policy in India.

Institutions and Geography: A "Two Sides of the Same Coin" Story of Primary Energy Use in Sub-Saharan Africa

Laté Ayao Lawson and Phu Nguyen-Van

DOI: 10.5547/01956574.42.2.llaw
View Abstract

Do institutional and geographical characteristics matter for energy consumption similar to the case of economic development? Why do coastal Sub-Saharan African (SSA) countries appear to be more energy-consuming than inland ones? To answer these questions, surprisingly rarely addressed in the existing literature, we empirically assess the determinants of primary energy use across SSA, exploiting spatial analysis methods. Our results highlight the existence of positive geographical spillovers in primary energy use. We also derive factors (income, exports, population dynamics and urbanization) explaining the reasons coastal countries are more energy-intensive. Furthermore, good political institutions and geographical location enhance primary energy use, connoting a �two sides of the same coin� role played by both factors. Our results impel SSA countries to develop alternative energy strategies and deploy energy resources management policies since adverse environmental consequences associated with increasing fossil energies use are to expect in the near future.

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