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The Energy Journal
Volume 41, Number 2

Optimal Storage, Investment and Management under Uncertainty: It is Costly to Avoid Outages!

Joachim Geske and Richard Green

DOI: 10.5547/01956574.41.2.jges
View Abstract

We show how electricity storage is operated optimally when the load net of renewable output is uncertain. We estimate a diurnal Markov-process representation of how Germany's residual load changed from hour to hour and design a simple dynamic stochastic electricity system model with non-intermittent generation technologies and storage. We derive the optimal storage, generator output and capacity levels. If storage capacity replaces some generation capacity, the optimal storage strategy must balance arbitrage (between periods of high and low marginal cost) against precautionary storage to ensure energy is available throughout a long peak in net demand. Solving the model numerically under uncertainty (only the transition probabilities to future loads are known), we compare the results to perfect foresight findings. The latter over-estimate the cost-saving potential of energy storage by 27%, as storage can take up arbitrage opportunities that would not be chosen if there was a need for precautionary storage.

Time Commitments in LNG Shipping and Natural Gas Price Convergence

Atle Oglend, Petter Osmundsen, and Tore Selland Kleppe

DOI: 10.5547/01956574.41.2.aogl
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Inter-continental Liquefied Natural Gas (LNG) trade can facilitate the development of a global natural gas market. However, in addition to explicit shipping costs, such trade requires time commitments in shipping due to the long hauls of many shipping routes. We show that this time commitment adds an additional economic cost to LNG shipping, and creates a positive relationship between the economic cost of LNG trade and regional natural gas price spreads. Necessary time commitment therefore augments the other costs of LNG trade, and contributes to weaken the ties between global natural gas markets.

Spatial Effects of Wind Generation and Its Implication for Wind Farm Investment Decisions in New Zealand

Le Wen, Basil Sharp, and Erwann Sbai

DOI: 10.5547/01956574.41.2.lwen
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Spill-over effects on electricity nodal prices associated with increased wind generation have not been examined in the literature. To examine these effects, we use spatial econometric models to estimate the direct and indirect effects of wind generation on nodal wholesale electricity prices. Spatial econometric models allow us to provide quantitative estimates of spill-over magnitudes and statistical tests for significance. Results show negative and significant effects are associated with increases in wind penetration, and the effect is stronger during peak hours and weaker during off-peak hours. Simulation results demonstrate net savings of NZ$8 million per MW of additional wind capacity installed at the CNI2 wind site. The findings provide valuable information on the evaluation of wind farm development in terms of site location, wholesale prices, and financial feasibility. Our approach also contributes to forecasting location specific wholesale electricity prices, and provides a better understanding of the implications of locating wind sites.

Renewable and Nonrenewable Energy Consumption, Economic Growth, and Emissions: International Evidence

Thai-Ha Le, Youngho Chang, and Donghyun Park

DOI: 10.5547/01956574.41.2.thle
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This study aims to reexamine how energy consumption interacts with economic growth and emissions using a panel data of a global sample consisting of 102 countries, from 1996 to 2012. The effects of renewable energy and nonrenewable energy sources are separately examined. The consumption of both renewable and nonrenewable energy appears to have contributed significantly to the level of income across countries, implying that promoting renewable energy benefits economic development. The empirical evidence suggests that the use of non-renewable energy consumption significantly raised the level of emissions across different income groups of countries. On the other hand, our findings suggest that the use of renewable energy sources helped tackle emissions in developed countries but not in developing countries. The success of developed countries in controlling emissions through renewable energy has significant policy implications for developing countries.

Equilibrium Analysis of a Tax on Carbon Emissions with Pass-through Restrictions and Side-payment Rules

Gabriel Diaz, Francisco D. Munoz, and Rodrigo Moreno

DOI: 10.5547/01956574.41.2.gdia
View Abstract

Chile was the first country in Latin America to impose a tax on carbon-emitting electricity generators. However, the current regulation does not allow firms to include emission charges as costs for the dispatch and pricing of electricity in real time. The regulation also includes side-payment rules to reduce the economic losses of some carbon-emitting generating units. In this paper we develop an equilibrium model with endogenous investments in generation capacity to quantify the long-run economic inefficiencies of an emissions policy with such features in a competitive setting. We benchmark this policy against a standard tax on carbon emissions and a cap-and-trade program. Our results indicate that a carbon tax with such features can, at best, yield some reductions in carbon emissions at a much higher cost than standard emission policies. These findings highlight the critical importance of promoting short-run efficiency by pricing carbon emissions in the spot market in order to incentivize efficient investments in generating capacity in the long run.

Identifying Strategic Traders in China's Pilot Carbon Emissions Trading Scheme

Lei Zhu, Xu Wang, and Dayong Zhang

DOI: 10.5547/01956574.41.2.lzhu
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This paper uses a sample of 1,867 firms that participate in the "Top-10,000 Energy-Consuming Enterprises Program" in China and aims to identify strategic traders in its pilot emissions trading scheme. Firms included in the ETS can exert their market power and manipulate allowance prices to achieve low compliance costs, which will consequently influence the effectiveness of this platform. This is of great importance to regulators or designers of this system in identifying these strategic traders and understanding their impact. We follow the basic principle proposed by Godal (2005) and develop a simple and implementable empirical procedure to study firm-level data from seven pilot programs in China. The results show that strategic traders exist with clear regional and sectoral differences. As a consequence of strategic trading by these firms, the overall volume of trading falls remarkably, with a clear increase in total compliance costs.

Carbon Tax and Energy Intensity: Assessing the Channels of Impact using UK Microdata

Morakinyo O. Adetutu, Kayode A. Odusanya, and Thomas G. Weyman-Jones

DOI: 10.5547/01956574.41.2.made
View Abstract

Prior empirical studies indicate that carbon taxes have a negative impact on energy intensity, yet, the literature is unable to shed much light on the channels through which a moderate carbon tax reduces industrial energy intensity. Using a two-stage econometric approach, we provide the first comprehensive analysis of the five components of the energy intensity gain (EIG) arising from the UK climate change levy (CCL). First, we propose an EIG decomposition based on a stochastic energy cost frontier and a confidential panel of UK manufacturing plants covering 2001-2006. In the second stage, we identify the impact of the CCL on EIG components using an instrumental variable (IV) approach that addresses the endogeneity of the carbon tax rules. Factor substitution and technological progress are the dominant firm responses to the CCL, while energy efficiency is surprisingly the least responsive component. Our findings underscore the challenge arising from overreliance on narrow energy policy objectives such as energy efficiency improvements, suggesting that a broader policy approach aimed at improving overall firm resource allocation might be more appropriate.

Solar Bait: How U.S. States Attract Solar Investments from Large Corporations

Jed J. Cohen, Levan Elbakidze, and Randall Jackson

DOI: 10.5547/01956574.41.2.jcoh
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Past solar adoption literature has focused primarily on households without significant attention to the potential of commercial properties as sites for solar generation. We examine firms' decisions to install solar panels on their properties using state and firm level data from the U.S. We are interested in the effects of state level characteristics, including policies and regulations, on firm decisions regarding solar investments. We find that state characteristics that influence the return-on-investment from solar installations, most notably solar intensity, are important for commercial adoption decisions. Further, the results suggest that certain state level policies, including solar carve-outs in renewable portfolio standards, financing programs and tax breaks, can incentivize firms to install solar panels. Across different model specifications, we observe that firm installation decisions are correlated with personal electric vehicle ownership rates. This may indicate a 'green' business marketing strategy, whereby firms install solar to improve their social responsibility image.

Impact of Intensity Standards on Alternative Fuel Adoption: Renewable Natural Gas and California's Low Carbon Fuel Standard

Daniel Scheitrum

DOI: 10.5547/01956574.41.2.dsch
View Abstract

Natural gas is a rapidly growing transportation fuel. While fossil natural gas is only slightly cleaner than conventional fuels, it provides a vector to introduce renewable natural gas (RNG) which can yield substantial emissions reductions. This paper considers RNG supply estimates from four possible sources: dairy manure, municipal solid waste, wastewater treatment plants, and landfill gas along with other major transportation fuels to evaluate the impact of California's Low Carbon Fuel Standard (LCFS) a first of its kind fuel intensity standard. A static, multi-market, partial equilibrium, numerical model of the California fuel markets assesses the economic surplus and climate impact responses to the LCFS policy and compares the efficiency of the LCFS to a hypothetical carbon tax. Results indicate LCFS policy is sufficient to incentivize substantial quantities of RNG production. The LCFS approaches the efficiency of a carbon tax as the LCFS policy becomes more stringent when combined with a price ceiling.

Effects of Privatization on Price and Labor Efficiency: The Swedish Electricity Distribution Sector

Erik Lundin

DOI: 10.5547/01956574.41.2.elun
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I examine the effects of privatization, in the form of acquisitions, in the Swedish electricity distribution sector. As the majority of the distribution networks have remained publicly owned, I use a synthetic control method to identify the effects on price and labor efficiency. In comparison to their synthetic counterparts, I find that the acquired networks increased labor efficiency by 8-18 percent depending on model specification, while no effect is found on price. Thus, the evidence suggests economically meaningful efficiency gains but that these are not fed through to consumer prices. Robustness results using a conventional difference-in-differences estimator largely confirms the results, although the estimated efficiency gains are either comparable to or less pronounced than their synthetic control counterparts.

The Role of Banks in EU Emissions Trading

Johanna Cludius and Regina Betz

DOI: 10.5547/01956574.41.2.jclu
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This paper is an empirical investigation of the role of banks in the EU Emissions Trading System (EU ETS). This topic is of particular interest considering that banks are responsible for a large and increasing share of overall transactions under the EU ETS and that they provide regulated companies with services related to emissions trading. Using both semi-structured interviews as well as descriptive and regression analysis, we investigated the different roles banks play in EU emissions trading and whether their importance as trading partners differs in relation to different types of regulated companies. Our regressions based on data from the first trading period of the EU ETS show that large companies with trading experience are more likely to choose a trading strategy involving interaction with a range of financial intermediaries, in particular banks or exchanges, than smaller, less professionalized companies, which tend to follow a trading strategy involving brokers (in particular for selling allowances). These findings can help policymakers decide on the level of involvement of non-regulated companies in their systems, which is currently allowed to varying degrees under different ETS. We recommend that this decision should be closely linked to provisions of market oversight and the level of control over the different types of financial players active in emissions trading.