nep-ene New Economics Papers
on Energy Economics
Issue of 2006‒05‒27
six papers chosen by
Roger Fouquet
Imperial College, UK

  1. The single European electricity market: A long road to convergence By François Coppens; David Vivet
  2. The Stability of Electricity Prices: Estimation and Inference of the Lyapunov Exponent By Mikael Bask; Tung Liu; Anna Widerberg
  3. Deregulated Wholesale Electricity Prices in Italy. By Bruno Bosco; Lucia Parisio; Matteo Pelagatti
  4. CO2 cost pass through and windfall profits in the power sector By Jos Sijm; Karsten Neuhoff; Yihsu Chen
  5. On the Robustness of Robustness Checks of the Environmental Kuznets Curve By Marzio Galeotti; Matteo Manera; Alessandro Lanza
  6. Firm valuation in an environmental overlapping generations model By Dam, Lammertjan

  1. By: François Coppens (National Bank of Belgium, Microeconomic information Department); David Vivet (National Bank of Belgium, Microeconomic information Department)
    Abstract: In the context of a first Working Paper the authors argued that electricity has a number of characteristics that set it apart from other commodities. It was demonstrated that some of these characteristics might complicate the deregulation process. This paper analyses the ongoing deregulation process in the European electricity sector and attempts to establish whether these difficulties can more readily be solved at European level. It would appear that some problems, e.g. economies of scale in electricity generation, have less of an impact at European level than within smaller national markets. However, a number of difficulties have to be overcome before a unified European electricity market can become a reality. These include the limited interconnection capacities between Member States. The European Commission has taken steps to improve the situation, for example by offering financial support for investments and promoting the development of regional markets as an interim measure ultimately leading to a fully integrated market. Apart from the difficulties related to electricity generation and transmission there are also exogenous factors that influence the ongoing deregulation process, e.g. the implementation of the Kyoto protocol and the dramatic increases in primary fuel prices. This paper argues that a consistent, stable and uniform European regulatory framework must be put in place if the impact of these difficulties is to be minimised.
    Keywords: Electricity deregulation
    JEL: L94
    Date: 2006–05
  2. By: Mikael Bask (Monetary Policy and Research Department, Bank of Finland,); Tung Liu (Department of Economics, Ball State University); Anna Widerberg (Department of Economics,)
    Abstract: The aim of this paper is to illustrate how the stability of a stochastic dynamic system is measured using the Lyapunov exponents. Specifically, we use a feedforward neural network to estimate these exponents as well as asymptotic results for this estimator to test for unstable (chaotic) dynamics. The data set used is spot electricity prices from the Nordic power exchange market, Nord Pool, and the dynamic system that generates these prices appears to be chaotic in one case.
    Keywords: Feedforward Neural Network; Nord Pool; Lyapunov Exponents; Spot Electricity Prices; Stochastic Dynamic System
    JEL: C12 C14 C22
    Date: 2006–04
  3. By: Bruno Bosco; Lucia Parisio; Matteo Pelagatti
    Abstract: In this paper we analyze the time series of daily average prices generated in the Italian electricity market, which started to operate as a Pool in April 2004. The objective is to characterize the high degree of autocorrelation and multiple seasonalities in the electricity prices. We use periodic time series models with GARCH disturbances and leptokurtic distributions and compare their performance with more classical ARMA-GARCH processes. The within-year seasonal variation is modelled using the low frequencies components of physical quantities, which are very regular throughout the sample. Results reveal that much of the variability of the price series is explained by deterministic multiple seasonalities which interact with each other. Periodic AR-GARCH models seem to perform quite well in mimicking the features of the stochastic part of the price process.
    Keywords: Electricity auctions, Periodic Time Series, Conditional Heteroskedasticity, Multiple Seasonalities
    JEL: D44 C22 L94 Q40
    Date: 2006–03
  4. By: Jos Sijm; Karsten Neuhoff; Yihsu Chen
    Abstract: This paper analyses the implications of the EU ETS for the power sector, notably the impact of free allocation of CO2 emission allowances on the price of electricity and the profitability of power generation. Besides some theoretical reflections, the paper presents empirical and model estimates of CO2 cost pass through, indicating that pass through rates vary between 40 and 100 percent of CO2 costs, or - in absolute terms - between 3 and 18 €/MWh, depending on the carbon intensity of the marginal production unit and other, market or technology specific factors concerned. As a result, power companies realise substantial windfall profits, indicated by empirical and model estimates presented in the paper. In order to avoid these windfall profits, the paper concludes that free allocation to power companies should be phased out in favour of auctioning.
    Keywords: Emissions trading; allocation; CO2 cost pass through; windfall profits; power sector
    JEL: C81 L11 L94
    Date: 2006–05
  5. By: Marzio Galeotti; Matteo Manera; Alessandro Lanza
    Abstract: Since its first inception in the debate on the relationship between environment and growth in 1992, the Environmental Kuznets Curve has been subject of continuous and intense scrutiny. The literature can be roughly divided in two historical phases. Initially, after the seminal contributions, additional work aimed to extend the investigation to new pollutants and to verify the existence of an inverted-U shape as well as assessing the value of the turning point. The following phase focused instead on the robustness of the empirical relationship, particularly with respect to the omission of relevant explanatory variables other than GDP, alternative datasets, functional forms, and grouping of the countries examined. The most recent line of investigation criticizes the Environmental Kuznets Curve on more fundamental grounds, in that it stresses the lack of sufficient statistical testing of the empirical relationship and questions the very existence of the notion of Environmental Kuznets Curve. Attention is in particular drawn on the stationarity properties of the series involved – per capita emissions or concentrations and per capita GDP – and, in case of presence of unit roots, on the cointegration property that must be present for the Environmental Kuznets Curve to be a well-defined concept. Only at that point can the researcher ask whether the long-run relationship exhibits an inverted-U pattern. On the basis of panel integration and cointegration tests for sulphur, Stern (2002, 2003) and Perman and Stern (1999, 2003) have presented evidence and forcefully stated that the Environmental Kuznets Curve does not exist. In this paper we ask whether similar strong conclusions can be arrived at when carrying out tests of fractional panel integration and cointegration. As an example we use the controversial case of carbon dioxide emissions. The results show that more EKCs come back into life relative to traditional integration/cointegration tests. However, we confirm that the EKC remains a fragile concept.
    Keywords: Environment, Growth, CO2 Emissions, Panel Data, Fractional Integration, Panel Cointegration Tests
    JEL: O13 Q30 Q32 C12 C23
    Date: 2006–01
  6. By: Dam, Lammertjan (Groningen University)
    Abstract: Inter-generational externalities associated with the conservation of the environment are usually tackled through fiscal policy. The recent increase in socially responsible investment funds creates a potential role for the stock market to deal with these environmental externalities. We study this alternative approach in an overlapping generations model in which agents choose between investing in clean or polluting technologies. Since agents are short-lived, they do not account for the long-term effects of pollution. We show that when firm property rights are traded separately on a forward looking stock market, proper firm valuation can resolve the conflict between current and future generations.
    Date: 2006

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