nep-ene New Economics Papers
on Energy Economics
Issue of 2005‒01‒16
twelve papers chosen by
Roger Fouquet
Imperial College, UK

  1. A Review of the Monitoring of Market Power The Possible Roles of TSOs in Monitoring for Market Power Issues in Congested Transmission Systems By Paul Twomey; Richard Green; Karsten Neuhoff; David Newbery
  2. Curvature-Constrained Estimates of Technical Efficiency and Returns to Scale for U.S. Electric Utilities By Supawat Rungsuriyawiboon; Chris O’Donnell
  3. Regulatory Reform and Economic Performance in US Electricity Generation By Supawat Rungsuriyawiboon; Tim Coelli
  4. An Analysis of Cost Structures in the Electricity Generation Industry By Supawat Rungsuriyawiboon
  5. The potential impact of cross-ownership in transmission: An application to the Belgian electricity market By Guido Pepermans; Bert Willems
  6. Comparison of Feed in Tariff, Quota and Auction Mechanisms to Support Wind Power Development By Lucy Butler; Karsten Neuhoff
  7. Microsimulating the Effects of Household Energy Price Changes in Spain By Xavier Labandeira; José M. Labeaga; Miguel Rodríguez
  8. Does Endogenous Technical Change Make a Difference in Climate Policy Analysis? A Robustness Exercise with the FEEM-RICE Model By Marzio Galeotti; Carlo Carraro
  9. Costs of Climate Policy when Pollution Affects Health and Labour Productivity. A general Equilibrium Analysis Applied to Sweden By Östblom, Göran; Samakovlis, Eva
  10. Russia: The Long Road to Ratification. Internal Institution and Pressure Groups in the Kyoto Protocol’s Adoption Process By Barbara Buchner; Silvia Dall’Olio
  11. Multi Pollutant Yardstick Schemes as Environmental Policy Tools By Laurent Franckx; Alessio D’Amato†, Isabelle Brose; Isabelle Brose
  12. Environmental Innovation, War of Attrition and Investment Grants By Michele Moretto; Cesare Dosi

  1. By: Paul Twomey; Richard Green; Karsten Neuhoff; David Newbery
    Abstract: The paper surveys the literature and publicly available information on market power monitoring in electricity wholesale markets. After briefly reviewing definitions, strategies and methods of mitigating market power we examine the various methods of detecting market power that have been employed by academics and market monitors/regulators. These techniques include structural and behavioural indices and analysis as well as various simulation approaches. The applications of these tools range from spot market mitigation and congestion management through to long-term market design assessment and merger decisions. Various market-power monitoring units already track market behaviour and produce indices. Our survey shows that these units collect a large amount of data from various market participants and we identify the crucial role of the transmission system operators with their access to dispatch and system information. Easily accessible and comprehensive data supports effective market power monitoring and facilitates market design evaluation. The discretion required for effective market monitoring is facilitated by institutional independence.
    Keywords: Electricity, liberalisation, market power, regulation
    JEL: D43 L13 L51 L94
    Date: 2005–01
  2. By: Supawat Rungsuriyawiboon; Chris O’Donnell (CEPA - School of Economics, The University of Queensland)
    Abstract: We estimate an input distance function for U.S. electric utilities under the assumption that non-negative variables associated with technical inefficiency are timeinvariant. We use Bayesian methodology to impose curvature restrictions implied by microeconomic theory and obtain exact finite-sample results for nonlinear functions of the parameters (eg. technical efficiency scores). We find that Bayesian point estimates of elasticities are more plausible than maximum likelihood estimates, technical efficiency scores from a random effects specification are higher than those obtained from a fixed effects model, and there is evidence of increasing returns to scale in the industry.
    Date: 2004–09
  3. By: Supawat Rungsuriyawiboon; Tim Coelli (CEPA - School of Economics, The University of Queensland)
    Abstract: In this paper we investigate the effect of the introduction of incentive regulation upon the total factor productivity (TFP) growth of electricity generation companies in the United States, using sample data on 61 firms observed over a 13-year period from 1986 to 1998. Empirical estimates of TFP growth are obtained using three techniques: Tornqvist index numbers, a stochastic cost frontier and a stochastic input distance function. The results obtained using the stochastic cost frontier are discarded because they are found to differ from those obtained using the other techniques, apparently as a consequence of violations of the required cost minimizing behavioral assumptions, which are not uncommon in regulated industries. Tests of hypotheses regarding the effect of regulatory reform upon TFP (using the distance function results) indicate that the introduction of incentive regulation has not had the desired positive effect upon the economic performance of the firms involved. In fact, in the case of these data, we find that performance is negatively related with the introduction of the new regulatory regimes, a result that is the opposite of the theoretical predictions.
    Date: 2004–09
  4. By: Supawat Rungsuriyawiboon (CEPA - School of Economics, The University of Queensland)
    Abstract: This paper provides up to date firm level analysis of the production technology and cost structures in the U.S. electric power generation industry. The paper applies an econometric approach into a dual restricted variable cost function within a “temporal equilibrium” framework. The Generalized Method of Moments (GMM) estimation is used to estimate the cost structures in the electric power generation industry. This paper is empirically implemented using a panel data (1986-1998) on 32 nuclear power generations for major investor owned utilities. The major result indicates that most of electric utilities in the nuclear electricity generation industry overutilized capital in production over time. Technological progress may have slowed over the sample period of this study. The results also show that electric utilities with small generation were operating at decreasing returns to scale whereas those with large generation were operating at increasing returns to scale in the production of the electricity industry in the sample data.
    Date: 2004–09
  5. By: Guido Pepermans (K.U.Leuven-Center for Economic Studies); Bert Willems (K.U.Leuven-Center for Economic Studies)
    Abstract: This paper looks at the potential effect of partial ownership on the generation and the transmission sector of electricity markets. Ideally, in liberalized electricity markets, transmission is separated form generation. The transmission sector is a natural monopoly operated by a regulated transmission firm, while the generation sector is open for competition. This paper assumes that the transmission firm is not very well regulated and behaves strategically, that there is oligoplistic competition in generation, and that one of the generators, the incumbent, owns part of the transmission firm. We then study the effect of this partial ownership in a numerical model which is calibrated on the Belgian market. The model captures two kinds of partial ownership interactions: passive ownership, where the generation firm simply cashes its share of the transmission firm’s profit without having a direct impact on its decision process, and active ownership, where the generator has a direct influence on the transmission firm’s decision process. It is shown that ownership of the network operator by the incumbent generator reduces double marginalization (= welfare improving) but also reduces entry in the generation market (= welfare decreasing).
    Keywords: vertical integration, unbundling, cross-ownership, electricity
    JEL: L13 L22 L43 L94
    Date: 2005–01
  6. By: Lucy Butler; Karsten Neuhoff
    Abstract: A comparison of policy instruments employed to support onshore wind projects suggests that in terms of capacity installed, policies adopted in Germany have been more effective than those adopted in the UK. Price comparisons have frequently neglected differences in resource base: once accounted for we find the cost of policies to be similar. A developer survey identifies planning constraints as only one reason why installed capacity is greater in Germany, and indicates that price support is also important. Information provided by developers also suggests that although the tendering process adopted in the UK is highly competitive in terms of price paid for energy delivered, competition in other areas of the market is significantly lower than in Germany.
    Keywords: Wind Generation, Renewable Energy, Subsidy, Policy
    JEL: Q28 Q42 Q48
    Date: 2005–01
  7. By: Xavier Labandeira (Universidade de Vigo); José M. Labeaga (UNED); Miguel Rodríguez (Universidade de Vigo)
    Abstract: In this paper we present a microsimulation model to calculate the effects of hypothetical ex-ante price changes in the Spanish energy domain. The model rests on our prior estimation of a demand system which is especially designed for simultaneous analysis of different energy goods and uses household data from 1973 to 1995. Our objective is to obtain indepth information on the behavioural responses by different types of households, which will allow us to determine the welfare effects of such price changes, their distribution across society and the environmental consequences within the residential sector. Although the model used is able to reproduce any type of price change, we illustrate the paper with an actual simulation of the effects of energy taxes that resemble a 50 Euro tax on CO2 (carbon dioxide) emissions. The results show a significant response by households, sizeable emission reductions, tax revenues, welfare changes and distributional effects. The simulated policy can thus be considered a feasible option to tackle some of the current and severe inefficiencies in Spanish energy and environmental domains.
    Keywords: Energy, Taxation, Demand, Spain
    JEL: C33 H23 H31
    Date: 2004–12
  8. By: Marzio Galeotti (Fondazione Eni Enrico Mattei); Carlo Carraro (Università di Venezia and Fondazione Eni Enrico Mattei)
    Abstract: Technical change is generally considered the key to the solution of environmental problems, in particular global phenomena like climate change. Scientists differ in their views on the thaumaturgic virtues of technical change. There are those who are confident that pollution-free technologies will materialize at some time in the future and will prevent humans from suffering the catastrophic consequences of climate change. Others believe that there are inexpensive technologies already available and argue the case for no-regret adoption policies (e.g. subsidies). Others again believe that the process of technological change responds to economic stimuli. These economic incentives to technological innovation are provided not only by forces that are endogenous to the economic system, but also by suitably designed environmental and innovation policies. In this paper, we consider and translate into analytical counterparts these different views of technical change. We then study alternative formulations of technical change and, with the help of a computerized climate-economy model, carry out a number of optimization runs in order to assess what type of technical change plays a role (assuming it does) in the evaluation of the impact of climate change and of the policies designed to cope with it.
    Keywords: Climate policy, Environmental modeling, Integrated assessment, Technical change
    JEL: H0 H2 H3
    Date: 2004–12
  9. By: Östblom, Göran (National Institute of Economic Research); Samakovlis, Eva (National Institute of Economic Research)
    Abstract: Much of the debate over global climate change involves estimates of the direct costs of global climate change mitigation. Recently this debate has included the issue of <p> ancillary benefits. These benefits consist mainly of health improvements. Although it is <p> generally acknowledged that air pollution affects respiratory health, and that valuations <p> of these impacts make up a significant proportion of the damage costs of air pollution, <p> these impacts are often neglected when evaluating the costs of climate policy. Since <p> reducing greenhouse gases has the effect of also reducing other pollutants affecting <p> human health and labour productivity these effects should be taken into consideration. <p> The analysis incorporates a linkage between air pollution and health effects into a <p> general equilibrium model for Sweden through a theoretical consistent framework. <p> Results from recent Swedish concentration-response and contingent valuation studies <p> are used to model direct disutility and indirect health effects that negatively affects the <p> productivity of labour. The costs of feedback effects on health and productivity are <p> compared in three different scenarios for attaining the Swedish carbon dioxide target <p> with alternative projected emission levels in the baseline scenario as well as alternative <p> harmful emission levels. Results show that not including feedback effects could mean <p> overstating the costs of climate policy. The magnitude of these effects are, however, <p> very sensitive to projected emission levels and to the judgement of harmful emission <p> levels.
    Keywords: air pollution; ancillary benefits; climate policy; general equilibrium; health
    JEL: D58 I10 Q52 Q53
    Date: 2004–12–28
  10. By: Barbara Buchner (Fondazione Eni Enrico Mattei); Silvia Dall’Olio (Fondazione Eni Enrico Mattei)
    Abstract: The Russian Federation played a crucial role in the ratification of the Kyoto Protocol. Indeed, after the US decision not to comply with the treaty, its ratification turned out to be indispensable for the Protocol to become legally binding. In early 2002, the Russian government decided to initiate the ratification process. However, notwithstanding this initial commitment, the country long hesitated to fulfil its promises, and for the last two years it sent numerous contradictory signals with respect to its position on climate policy. As a consequence, the factors that shape Russia’s behaviour in the context of climate negotiations received increasing attention. The main focus has been on the economic and international aspects motivating the Russian strategy. This paper attempts to complete this analysis by concentrating on a further feature that significantly contributed to Russia’s final decision, namely domestic forces. These factors have often been overlooked in the discussion of the Russian strategy. In order to fill this gap, this paper reconstructs the Russian ratification process, trying to identify the main domestic players and their role. Our findings provide various indications on the reasons of the recent developments in Russia, confirming the key role of the Russian President.
    Keywords: Agreements, Climate, Incentives, Negotiations, Policy
    JEL: H11 P27 P28 Q28 Q58
    Date: 2004–12
  11. By: Laurent Franckx (Department of Economics and Management, Royal Military Academy); Alessio D’Amato†, Isabelle Brose (University of Rome “Tor Vergata”); Isabelle Brose (Department of Economics and Management, Royal Military Academy)
    Abstract: We consider environmental regulation of n risk-averse, multiple pollutant firms. We develop a “yardstick competition” scheme where the regulatory scheme depends on the dierence between a firm’s “aggregate” performance and the average “aggregate” performance of the industry. Whether this instruments dominates Pigovian taxation depends on the complete structure of the covariance matrix of the “common” random terms in measured pollution. Moreover, if the number of firms is large enough, the “yardstick scheme” is always superior to Pigovian taxation. This analysis also provides new arguments in favor of strict liability rather than negligence liability as regulatory tool.
    Keywords: yardstick competition, multitasking, environmental regulation, asymmetric information
    Date: 2004
  12. By: Michele Moretto (University of Brescia); Cesare Dosi (University of Padova)
    Abstract: The paper analyses the timing of spontaneous environmental innovation when second-mover advantages, arising from the expectation of declining investment costs, increase the option value of waiting created by investment irreversibility and uncertainty about private payoffs. We then focus on the design of public subsidies aimed at bridging the gap between the spontaneous time of technological change and the socially desirable one. Under network externalities and incomplete information about firms. switching costs, auctioning investment grants appears to be a cost-effective way of accelerating pollution abatement, in that it allows targeting grants instead of subsidizing the entire industry indiscriminately.
    Keywords: Environmental innovation, Investment irreversibility, Network externalities, Investment grants, Second-price auction
    JEL: Q28 O38
    Date: 2004–12

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