nep-ene New Economics Papers
on Energy Economics
Issue of 2006‒09‒16
nine papers chosen by
Roger Fouquet
Imperial College, UK

  1. Massachusetts’ Clean Energy Cluster By David Levy andDavid Terkla
  2. Energy price shocks and the macroeconomy: the role of consumer durables By Rajeev Dhawan; Karsten Jeske
  3. Using Probabilistic Analysis to Value Power Generation Investments Under Uncertainty By Fabien A. Roques; William J. Nuttall; Newbery, D.M.
  4. UK Gas Markets: the Market Price of Risk and Applications to Multiple Interruptible Supply Contracts By Alvaro Cartea; Thomas Williams
  5. Nonlinear Bivariate Comovements of Asset Prices: Theory and Tests By Marco Corazza; A.G. Malliaris; Elisa Scalco
  6. Asimetrías en la Respuesta de los Precios de la Gasolina en Chile By Felipe Balmaceda; Paula Soruco
  7. Reflections on U.S. Disaster Insurance Policy for the 21st Century By Howard Kunreuther
  8. Excise Taxation and Product Quality: The Gasoline Market By Todd M. Nesbit
  9. The Political Economy of Natural Disaster Insurance : Lessons from the Failure of a Proposed Compulsory Insurance Scheme in Germany By Reimund Schwarze; Gert G. Wagner

  1. By: David Levy andDavid Terkla
    Abstract: The renewable energy industry in Massachusetts is identified through a “topdown” and “bottom-up” processes to determine the total employment and boundaries of this sector. Related sectors are also identified that are linked to the core renewable energy sector in the state and policies for enhancing this cluster are suggested.
    Keywords: Massachusetts, Energy, Cluster
    JEL: Q42 L99 R58
  2. By: Rajeev Dhawan; Karsten Jeske
    Abstract: So far, the literature on dynamic stochastic general equilibrium models with energy price shocks uses energy on the production side only. In these models, energy shocks are responsible for only a negligible share of output fluctuations. We study the robustness of this finding by explicitly modeling private consumption of energy at the household level in addition to energy use at the firm level to account for total energy use in the economy. Additionally, we distinguish between investment in consumer durables and investment in capital goods. The model economy is calibrated to match total energy use and durable goods consumption as observed in the U.S. data. Simulation results indicate that, despite higher total energy use, this economy has an even smaller proportion of output fluctuations attributable to energy price shocks. Productivity shocks continue to be the primary force behind business cycle fluctuations. The driving force behind our results is that the household now has the flexibility to rebalance its investment portfolio. Specifically, the energy price hike is absorbed by reducing durable goods investment more than investment in capital goods, thereby cushioning the hit to future production at the expense of current consumption. Hence, our model better matches the consumption volatility observed in the data.
    Date: 2006
  3. By: Fabien A. Roques; William J. Nuttall; Newbery, D.M.
    Abstract: This paper reviews the limits of the traditional ‘levelised cost’ approach to properly take into account risks and uncertainties when valuing different power generation technologies. We introduce a probabilistic valuation model of investment in three base-load technologies (combined cycle gas turbine, coal plant, and nuclear power plant), and demonstrate using three case studies how such a probabilistic approach provides investors with a much richer analytical framework to assess power investments in liberalised markets. We successively analyse the combined impact of multiple uncertainties on the value of alternative technologies, the value of the operating flexibility of power plant managers to mothball and de-mothball plants, and the value of mixed portfolios of different production technologies that present complementary risk-return profiles.
    Keywords: investment, uncertainty, Monte-Carlo simulation, operating flexibility
    JEL: C15 D81 L94
    Date: 2006–07
  4. By: Alvaro Cartea (School of Economics, Mathematics & Statistics, Birkbeck); Thomas Williams
    Abstract: We employ the Schwartz and Smith (2000) model to explore the dynamics of the UK gas markets. We discuss in detail the short-term and long-term market prices of risk borne by the market players and how deviations from expected cyclical storage affect the short-term market price of risk. Finally, we illustrate an application of the model by pricing interruptible supply contracts that are currently traded in the UK.
    Keywords: Interruptible supply contracts, gas markets, commodities, market price of short-term and long-term risk, multi-exercise Bermudan options, convenience yield.
    JEL: G12 C61
    Date: 2006–09
  5. By: Marco Corazza (Department of Applied Mathematics, University of Venice); A.G. Malliaris (Department of Economics, Loyola University of Chicago); Elisa Scalco (Department of Applied Mathematics, University of Venice)
    Abstract: Comovements among asset prices have received a lot of attention for several reasons. For example, comovements are important in cross-hedging and cross-speculation; they determine capital allocation both domestically and in international meanÐvariance portfolios and also, they are useful in investigating the extent of integration among financial markets. In this paper we propose a new methodology for the nonÐlinear modelling of bivariate comovements. Our approach extends the ones presented in the recent literature. In fact, our methodology outlined in three steps, allows the evaluation and the statistical testing of non-linearly driven comovements between two given random variables. Moreover, when such a bivariate dependence relationship is detected, our approach solves for a polynomial approximation. We illustrate our threeÐsteps methodology to the time series of energy related asset prices. Finally, we exploit this dependence relationship and its polynomial approximation to obtain analytical approximations of the Greeks for the European call and put options in terms of an asset whose price comoves with the price of the underlying asset.
    Keywords: Comovement, asset prices, bivariate dependence, non-linearity, t-test, polynomial approximation, energy asset, (vanilla) European call and put options, crossÐGreeks.
    JEL: C59 G19 Q49
    Date: 2006–09
  6. By: Felipe Balmaceda; Paula Soruco
    Date: 2006
  7. By: Howard Kunreuther
    Abstract: The devastation caused by hurricanes during the 2004 and 2005 seasons has been unprecedented and is forcing the insurance industry to reevaluate the role that it can play in dealing with future natural disasters in the United States. As shown in Table 1 the four hurricanes that hit Florida in the fall of 2004 -- Charley, Frances, Ivan and Jeanne---and Hurricanes Katrina and Rita in 2005 comprised half of the top 12 disasters with respect to insured losses between 1970 and 2005. On a related note, 18 of the 20 most costly disasters occurred between 1990 and 2005 and 10 occurred in the 21st Century. This context is totally different than the scale of economic loss the country has suffered from natural disasters and other extreme events in the 20th century. The first section of the paper addresses the first question by outlining two principles on which a disaster insurance program should be based. Section 3 then focuses on the second question by analyzing the insurability of a risk and examining the challenges facing the private sector in providing coverage against natural disasters. Section 4 turns to the third question and delineates the opportunities and challenges of a comprehensive disaster insurance program. Section 5 poses a set of open issues that are currently being addressed by a research project on disaster insurance undertaken by the Wharton Risk Center in conjunction with the Insurance Information Institute and Georgia State University. The concluding section summarizes the key issues associated with providing disaster insurance in the 21st century.
    JEL: G22 H23
    Date: 2006–08
  8. By: Todd M. Nesbit (Department of Economics, West Virginia University)
    Abstract: Following Barzel (1976), product quality increases in response to unit taxation but remains unchanged by ad valorem taxation. While many tax theorists agree this argument is theoretically sound, empirical support of Barzel’s theory is limited to the cigarette market. This paper tests and confirms his theory in the gasoline market, a market in which Barzel failed to find supporting evidence in his original article. Using a direct test proposed by Sobel and Garrett (1997) and improved data, I find the market shares of premium and mid-grade gasoline rise in response to per-unit taxation but are unaffected by ad valorem taxation.
    Date: 2005
  9. By: Reimund Schwarze; Gert G. Wagner
    Abstract: This paper studies the politico-economic reasons for the refusal of a proposed compulsory flood insurance scheme in Germany. It provides the rationale for such scheme and outlines the basic features of a market-orientated design. The main reasons for the political down-turn of this proposal were the misperceived costs of a state guarantee, legal objections against a compulsory insurance, distributional conflicts between the federal government and the Ger-man states (Länder) on the implied administrative costs, and the well-known charity hazard of ad-hoc disaster relief. The focus on pure market solutions proved to be an ineffective strategy for policy advice in this field.
    Date: 2006

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