nep-ene New Economics Papers
on Energy Economics
Issue of 2006‒10‒14
nine papers chosen by
Roger Fouquet
Imperial College, UK

  1. Federal Tax Policy Towards Energy By Gilbert E. Metcalf
  2. A Simple Guide to the Basic Macroeconomics of Oil By Peter Sinclair
  3. Crude substitution: the cyclical dynamics of oil prices and the college premium By Linnea Polgreen; Pedro Silos
  4. Gas fired power plants: Investment timing, operating flexibility and abandonment By Fleten, Stein-Erik; Näsäkkälä, Erkka
  5. A new social compact: how university engagement can fuel innovation By Larry Isaac; Rick Mattoon; Laura Melle
  6. Optimal investment strategies in decentralized renewable power generation under uncertainty By Fleten, Stein-Erik; Maribu, Karl Magnus; Wangensteen, Ivar
  7. Irreversible Investment under Uncertainty in Electricity Generation: A Clay-Clay-Vintage Portfolio Approach with an Application to Climate Change Policy in the UK By Zon, Adriaan van; Fuss, Sabine
  8. Risk Aversion and Compliance in Markets for Pollution Control By John K. Stranlund
  9. Learning to Destroy By Per Hogselius

  1. By: Gilbert E. Metcalf
    Abstract: On Aug. 8, 2005, President Bush signed the Energy Policy Act of 2005 (PL 109-58). This was the first major piece of energy legislation enacted since 1992 following five years of Congressional efforts to pass energy legislation. Among other things, the law contains tax incentives worth over $14 billion between 2005 and 2015. These incentives represent both pre-existing initiatives that the law extends as well as new initiatives. In this paper I survey federal tax energy policy focusing both on programs that affect energy supply and demand. I briefly discuss the distributional and incentive impacts of many of these incentives. In particular, I make a rough calculation of the impact of tax incentives for domestic oil production on world oil supply and prices and find that the incentives for domestic production have negligible impact on world supply or prices despite the United States being the third largest oil producing country in the world. Finally, I present results from a model of electricity pricing to assess the impact of the federal tax incentives directed at electricity generation. I find that nuclear power and renewable electricity sources benefit substantially from accelerated depreciation and that the production and investment tax credits make clean coal technologies cost competitive with pulverized coal and wind and biomass cost competitive with natural gas.
    JEL: H20 Q48
    Date: 2006–10
  2. By: Peter Sinclair
    Date: 2006–09
  3. By: Linnea Polgreen; Pedro Silos
    Abstract: Higher oil price shocks benefit unskilled workers relative to skilled workers: Over the business cycle, energy prices and the skill premium display a strong negative correlation. This correlation is robust to different detrending procedures. We construct and estimate a model economy with energy use and heterogeneous skills and study its business cycle implications, in particular the cyclical behavior of oil prices and the skill premium. In our model economy, the skill premium and the ratio of hours worked by skilled workers to hours worked by unskilled workers are both negatively correlated with oil prices over the business cycle. For the skill premium and energy prices to move in opposite directions, the key ingredient is the larger substitutability of capital for unskilled labor than for skilled labor. The negative correlation arises even when energy and capital are fairly good substitutes.
    Date: 2006
  4. By: Fleten, Stein-Erik; Näsäkkälä, Erkka
    Abstract: We analyze investments in gas-fired power plants under stochastic electricity and natural gas prices. A simple but realistic two-factor model is used for price processes, enabling analysis of the value of operating flexibility, the opportunity to abandon the capital equipment, as well as finding thresholds for energy prices for which it is optimal to enter into the investment. Our case study uses representative power plant investment and operations data, and historical forward prices from well-functioning energy markets. We find that when the decision to build is considered, the abandonment option does not have significant value, whereas the operating flexibility and time-to-build option have significant effect on the building threshold. Furthermore, the joint value of the operating flexibility and the abandonment option is much smaller than the sum of their separate values, because both are options to shut down. The effects of emission costs on the value of installing CO2 capture technology are also analyzed.
    Keywords: Real options; spark spread; gas-fired power plant; forward prices
    JEL: C61 G12 D81 Q4
    Date: 2003–03
  5. By: Larry Isaac; Rick Mattoon; Laura Melle
    Abstract: Richard K. Lester feels that colleges and universities, because they are immobile, can replace local institutions whose leadership has been eroded by globalization. However, university attempts to improve the regional economy must be well-planned. North Dakota clearly illustrates benefits of a strategic approach to university and college interaction with the economy. This paper examines the degree to which their Higher Education Roundtable fits into the specific model of engagement proposed by Lester. Much of the specificity of the North Dakota plan came in the implementation, which has been guided by specific accountability measures. Because such measures can not only reflect priorities but also set them, this paper evaluates the new initiatives in North Dakota with an independent set of metrics that assess university efforts to foster innovation. While the two sets of metrics are largely compatible, North Dakota University System does not evaluate qualitative goals throughout the university system. This paper argues that qualitative outputs from higher education are often under reported in assessments of economic and social benefits attributed to universities and colleges.
    Date: 2006
  6. By: Fleten, Stein-Erik; Maribu, Karl Magnus; Wangensteen, Ivar
    Abstract: This paper presents a method for evaluating investments in decentralized renewable power generation under price un certainty. The analysis is applicable for a client with an electricity load and a renewable resource that can be utilized for power generation. The investor has a deferrable opportunity to invest in one local power generating unit, with the objective to maximize the profits from the opportunity. Renewable electricity generation can serve local load when generation and load coincide in time, and surplus power can be exported to the grid. The problem is to find the price intervals and the capacity of the generator at which to invest. Results from a case with wind power generation for an office building suggests it is optimal to wait for higher prices than the net present value break-even price under price uncertainty, and that capacity choice can depend on the current market price and the price volatility. With low price volatility there can be more than one investment price interval for different units with intermediate waiting regions between them. High price volatility increases the value of the investment opportunity, and therefore makes it more attractive to postpone investment until larger units are profitable.
    Keywords: Real options; Renewable electricity technologies; Electricity markets; Stochastic price; Distributed generation
    JEL: G13 Q42 Q2
    Date: 2005–03
  7. By: Zon, Adriaan van (UNU-MERIT); Fuss, Sabine (UNU-MERIT)
    Abstract: UK climate change policy has long been concerned with the transition to a more sustainable energy mix. The degree of competition in electricity markets rises as these markets become more and more liberalized. In order to survive in such an increasingly competitive setting, electricity producers have to handle as efficiently as possible the uncertainties associated with the volatility of fuel prices, but also uncertainties regarding the technological evolution of electricity production (including the development of renewable technologies). Technological uncertainty in combination with high capital costs are likely to deter investors from adopting renewable technologies on a larger scale than they are doing right now, even though they have to accept a higher degree of fuel price risk by doing so. By carefully composing a portfolio of technologies with different (co-)variances in the respective prices and rates of technical progress, risk-averse producers can effectively hedge the uncertainties mentioned above. In order to model this type of investment behaviour, we use an extended version of the van Zon and Fuss (2005) clay-clay-vintage-portfolio model that starts from the notion that investment in electricity production equipment is irreversible. However, a physical capital portfolio - in contrast to a portfolio of financial assets - can only be adjusted at the margin. This implies that it becomes extremely important to look ahead, and act on not just expectations themselves, but also their reliability. Using the extended model, we implement several features of present UK policy in order to illustrate the principles involved. We find that the reduction of risk goes together with an increase in total costs. We also find that for increasing values of risk-aversion, investors would be willing to adopt nuclear energy at earlier dates than otherwise would have been the case. In addition to this, we find that the embodiment of technical change, in combination with the expectation of a future switch towards another technology, may actually reduce current investment in that technology (while temporarily increasing current investment in competing technologies). The latter enables rational but risk-averse investors to maximise their productivity gain by waiting for ongoing embodied technical change to take place until the moment they plan to make the switch and then investing more heavily in the newest vintages associated with that technology at the time of the switch.
    Keywords: Investment, Energy Industry, Electric Utilities, Technology, Mathematical Modelling, Environmental Policy, United Kingdom
    JEL: O16 L94 C67 O13
    Date: 2006
  8. By: John K. Stranlund (Department of Resource Economics, University of Massachusetts Amherst)
    Abstract: This paper examines the effects of risk aversion on compliance choices in markets for pollution control. A firm’s decision to be compliant or not is independent of its manager’s risk preference. However, noncompliant firms with risk averse managers will have lower violations than otherwise identical firms with risk neutral managers. The violations of noncompliant firms with risk averse managers are independent of differences in their benefits from emissions and their initial allocations of permits if and only if their managers’ utility functions exhibit constant absolute risk aversion. However, firm-level characteristics do impact violation choices when managers have coefficients of absolute risk aversion that are increasing or decreasing in profit levels. Finally, in the equilibrium of a market for emissions rights with widespread noncompliance, risk aversion is associated with higher permit prices, better environmental quality, and lower aggregate violations.
    Keywords: Emissions Trading, Compliance, Enforcement, Risk Aversion
    JEL: L51 Q28
    Date: 2006–09
  9. By: Per Hogselius
    Abstract: This paper investigates the process of creative destruction and creative destuction management in the Baltic Sea region through a series of case studies of conrete technologies that both Eastern and Western countries in the region have tried to get rid of during the past decade or so. The cases are: old-style banking technologies, old-generation nuclear power, copper-wire telephone lines and fossil-fuel energy production. It is shown that it in general it has been extremely difficult for countries to creatively destroy these outdated technologies, but that it is also possible to point at a number of success stories. The paper identifies several factors underlying successful creative destruction in the Baltic Sea region, concluding that these factors differ between Eastern and Western countries. It also discusses the ways in which the corresponding processes have - and have not - been actively managed at the political level.
    Date: 2006–09

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