Energy Journal Issue

The Energy Journal
Volume 37, Number 1



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Did the EU ETS Make a Difference? An Empirical Assessment Using Lithuanian Firm-Level Data

Jurate Jaraite-Kažukauske and Corrado Di Maria

DOI: 10.5547/01956574.37.2.jjar

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Abstract:
We use a panel dataset of about 5,000 Lithuanian firms between 2003 and 2010, to assess the impact of the EU ETS on the environmental and economic performance of participating firms. Using a matching methodology, we are able to estimate the causal impact of EU ETS participation on CO2 emissions, CO2 intensity, investment behaviour and profitability of participating firms. Our results show that ETS participation did not lead to a reduction in CO2 emissions, while we identify a slight improvement in CO2 intensity. ETS participants are shown to have retired part of their less efficient capital stock, and to have made modest additional investments from 2010. We also show that the EU ETS did not represent a drag on the profitability of participating firms.




Improving Energy Codes

Grant Jacobsen

DOI: 10.5547/01956574.37.2.gjac

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Abstract:
Energy codes set efficiency standards for buildings in the majority of U.S. states. Under most energy codes, builders can comply by demonstrating that the projected private expenditures on energy bills for a proposed building are less than a certain threshold. Using theory and evidence, I show that energy codes would be improved if compliance was instead determined by the projected social damages. Relative to current practice, damage-based codes would likely provide stronger incentives for electricity than natural gas conservation, in most states. Implementation of damage-based codes would lead to substantial welfare gains.




The Impact of Energy Prices on Green Innovation

Marius Ley, Tobias Stucki, and Martin Woerter

DOI: 10.5547/01956574.37.1.mley

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Abstract:
Based on patent data and industry specific energy prices for 18 OECD countries over 30 years we investigate on an industry level the impact of energy prices on green innovation activities. Our econometric models show that energy prices and green innovation activities are positively related and that energy prices have a significantly positive impact on the ratio of green innovations to non-green innovations. More concretely, our main model shows that a 10% increase of the average energy prices over the previous five years results in a 3.4% and 4.8% increase of the number of green innovations and the ratio of green innovations to non-green innovations, respectively. We also find that the impact of energy prices increases with an increasing lag between energy prices and innovation activities. Robustness tests confirm the main results.




Integrating Thermal and Hydro Electricity Markets: Economic and Environmental Costs of not Harmonizing Pricing Rules

Etienne Billette de Villemeur and Pierre-Olivier Pineau

DOI: 10.5547/01956574.37.1.edev

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Abstract:
The electricity sector is the largest source of greenhouse gases (GHG) emissions in the world, and reducing these emissions can often be costly. However, because electricity markets remain integrated at a shallow level (with different pricing regulations), many gains from deeper integration (adoption of marginal cost pricing everywhere) are yet to be realized. This paper assesses the benefits of deep integration between a "hydro" jurisdiction and a "thermal" one. It also underscores the inefficiency of trade when pricing rules differ. Our detailed hourly model, calibrated with real data from the provinces of Ontario and Quebec, Canada, estimates price, consumption, emissions and welfare changes associated with fully integrating electricity markets, under transmission constraints. A negative abatement cost of $37/tonne of CO2 was found (for more than 1 million tonnes), clearly illustrating the untapped potential of wealth creation in carbon reduction initiatives. Furthermore, given the inefficiency of shallow integration between markets, we found that removing interconnections between markets offers a relatively affordable CO2-reduction opportunity, at $21.5/tonne.




Analysis and Forecasting of Electricty Price Risks with Quantile Factor Models

Derek Bunn, Arne Andresen, Dipeng Chen, Sjur Westgaard

DOI: 10.5547/01956574.37.1.dbun

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Abstract:
Forecasting quantile and value-at-risk levels for commodity prices is methodologically challenging because of the distinctive stochastic properties of the price density functions, volatility clustering and the importance of exogenous factors. Despite this, accurate risk measures have considerable value in trading and risk management with the topic being actively researched for better techniques. We approach the problem by using a multifactor, dynamic, quantile regression formulation, extended to include GARCH properties, and applied to both in-sample estimation and out-of-sample forecasting of traded electricity prices. This captures the specification effects of mean reversion, spikes, time varying volatility and demonstrates how the prices of gas, coal and carbon, forecasts of demand and reserve margin in addition to price volatility influence the electricity price quantiles. We show how the price coefficients for these factors vary substantially across the quantiles and offer a new, useful synthesis of GARCH effects within quantile regression. We also show that a linear quantile regression model outperforms skewed GARCH-t and CAViaR models, as specified on the shocks to conditional expectations, regarding the accuracy of out-of-sample forecasts of value-at-risk.




The Performance of U.S. Wind and Solar Generators

Richard Schmalensee

DOI: 10.5547/01956574.37.1.rsch

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Abstract:
Using data on hourly outputs and spot prices for a sample 25 wind and nine solar generating plants covering all seven U.S. ISOs for 2011 and up to 12 adjacent months, this study examines capacity factors, average output values, and several aspects of intermittency. Most performance measures studied vary substantially within and between ISOs, and some vary substantially over time. Implications for research, market design, and policies to support renewable generation are briefly discussed.




Asymmetric Pass-Through in U.S. Gasoline Prices

Matthew Chesnes

DOI: 10.5547/01956574.37.1.mche

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Abstract:
This paper presents new evidence of asymmetric pass-through, the notion that upward cost shocks are passed through faster than downward cost shocks, in U.S. gasoline prices. Much of the extant literature comes to seemingly contradictory conclusions about the existence and causes of asymmetry, though the differences may be due to different aggregation (both over time and geographic markets) and the use of different price series including crude oil, wholesale, and retail gasoline prices. I utilize a large and detailed dataset to determine where evidence of a pass-through asymmetry exists, and how it depends on the aggregation and price series chosen by the researcher. Using the error correction model, I find evidence of pass-through asymmetry based on spot, rack and retail prices, though the largest effect is found in the rack to retail relationship. I find more asymmetry in branded prices compared with unbranded prices, consistent with a consumer search explanation for asymmetry. However, I also find evidence consistent with explanations based on market power as the magnitude of asymmetry is positively associated with retail concentration. On average, retail prices rise three to four times as fast as they fall.




Price coordination in vertically integrated electricity markets. Theory and empirical evidence

Bruno Bosco, Lucia Parisio and Matteo Pelagatti

DOI: 10.5547/01956574.37.1.bbos

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Abstract:
We analyse vertical integration between generators and retailers in electricity markets and we discuss the implications for price decisions of the presence of asymmetric (cost) information in a simple P-A framework. We analyze a situation in which generators post supply bids taking into account the profit of the entire vertically integrated group they belong to. We then discuss the way in which the degree of vertical integration affects this bidding strategy. Using Italian electricity auction data we show how bid prices posted by a pivotal producer are significantly influenced by variables incorporating vertical integration into the econometric model.




Emissions Trading in the Presence of Price-Regulated Polluting Firms: How Costly Are Free Allowances?

Bruno Lanz and Sebastian Rausch

DOI: 10.5547/01956574.37.1.blan

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Abstract:
We study whether to auction or to freely distribute emissions allowances when some firms participating in emissions trading are subject to price regulation. We show that free allowances allocated to price-regulated firms effectively act as a subsidy to output, distort consumer choices, and generally induce higher output and emissions by price-regulated firms. This provides a cost-effectiveness argument for an auction-based allocation of allowances (or equivalently an emissions tax). For real-world economies such as the Unites States, in which about 20 percent of total carbon dioxide emissions are generated by price-regulated electricity producers, our quantitative analysis suggests that free allowances increase economy-wide welfare costs of the policy by 40-80 percent relative to an auction. Given large disparities in regional welfare impacts, we show that the inefficiencies are mainly driven by the emissions intensity of electricity producers in regions with a high degree of price regulation.




Energy Sector Innovation and Growth: An Optimal Energy Crisis

Peter Hartley, Kenneth B. Medlock III, Ted Temzelides, Xinya Zhang

DOI: 10.5547/01956574.37.1.phar

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Abstract:
We study the optimal transition from fossil fuels to renewable energy in a neoclassical growth economy with endogenous technological progress in energy production. Innovations keep fossil energy costs under control even as increased exploitation raises mining costs. Nevertheless, the economy transitions to renewable energy after about 80% of available fossil fuels are exploited. The energy shadow price remains more than double current values for over 75 years around the switch time. Consumption and output growth decline sharply during the transition period, which we thus identify as an "energy crisis." The model highlights the important role energy can play in influencing economic growth.




Free Riding, Upsizing, and Energy Efficiency Incentives in Maryland Homes

Anna Alberini, Will Gans, and Charles Towe

DOI: 10.5547/01956574.37.1.aalb

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Abstract:
We use a unique dataset that combines an original survey of households, information about the structural characteristics of their homes, utility-provided electricity usage records and program participation status, to study the uptake of energy efficiency incentives and their effect on residential electricity consumption. Attention is restricted to homes where heating and cooling is provided exclusively by air-source heat pumps. We deploy a difference-in-difference study design and find that replacing a heat pump with a new one does reduce electricity usage by 8% on average. The effect differs dramatically across households based upon whether they receive an incentive towards the purchase of a new heat pump. Among incentive recipients, the effect is small, and the larger the incentive, the smaller the reduction in electricity usage. These findings suggest that capital costs are incorporated into the (long-term) cost of energy, generating an apparent rebound effect that is much more pronounced for incentive recipients.




Book Reviews

Clearer Skies Over China: Reconciling Air Quality, Climate, and Economic Goals, by Chris P. Nielse and Mun S. Ho - Book Review by: Songmin Yu

Financial Transmission Rights: Analysis, Experiences and Prospects, by Juan Rosellon and Tarjei Kristiansen - Book Review by: Frank A. Felder





 

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