nep-ene New Economics Papers
on Energy Economics
Issue of 2006‒11‒18
sixteen papers chosen by
Roger Fouquet
Imperial College, UK

  1. Storage and the Electricity Forward Premium By Julia Popova; Stratford Douglas
  2. Can the German Electricity Market Benefit from the EU Enlargement? : Results of Scenario Calculations Using the EMELIE Model By Manfred Horn; Claudia Kemfert; Vitaly Kalashnikov
  3. Demand Elasticity and Market Power in the Spanish Electricity Market By Aitor Ciarreta; Maria Paz Espinosa
  4. Pricing Forward Contracts in Power Markets by the Certainty Equivalence Principle: Explaining the Sign of the Market Risk Premium By Fred Espen Benth; Alvaro Cartea; Ruediger Kiesel
  5. A Laboratory Investigation of Compliance Behavior under Tradable Emissions Rights: Implications for Targeted Enforcement By James J. Murphy; John K. Stranlund
  6. Aggregate Supply and Demand, the Real Exchange Rate and Oil Price Denomination By Yiannis Stournaras
  7. The real interest rate, the real oil price, and US unemployment revisited By Spyros Andreopoulos
  8. Energy Regulation, Roll Call Votes and Regional Resources: Evidence from Russia By Theocharis N. Grigoriadis; Benno Torgler
  9. Myanmar's Economic Relations with China: Can China Support the Myanmar Economy? By Kudo, Toshihiro
  10. Forests, biomass use, and poverty in Malawi By Bandyopadhyay, Sushenjit; Shyamsundar, Priya; Baccini, Alessandro
  11. Impacts of the European Emission Trade System on Finnish Wholesale Electricity Prices By Juha Honkatukia; Ville Mälkönen; Adriaan Perrels
  12. Interplay between Environmental Regulation and Power Markets By Klaus Skytte
  13. The impact of policies to control motor vehicle emissions in Mumbai, India By Takeuchi, Akie; Cropper, Maureen; Bento, Antonio
  14. Voluntary Emission Reductions, Social Rewards, and Environmental Policy By Michael Rauscher
  15. The Regulatory Choice of Noncompliance in Emissions Trading Programs By John K. Stranlund

  1. By: Julia Popova (Department of Economics, West Virginia University); Stratford Douglas (Department of Economics, West Virginia University)
    Abstract: We develop and test a model describing the influence of natural gas storage on the electricity forward premium. The model is constructed by linking the effect of gas storage on the higher moments of the distribution of electricity prices to an established model of the effect of those moments on the forward premium. The model predicts a (weakly) positive effect of gas storage on the electricity forward premium when loads are light, but a sharply negative effect when demand for electricity is high and demand for gas is low. The model predicts a daily pattern of stronger effects in the afternoon. Empirical results, based on PJM data, strongly support the model.
    Date: 2006
  2. By: Manfred Horn; Claudia Kemfert; Vitaly Kalashnikov
    Abstract: This paper investigates the impacts of the eastern enlargement of the European Union in 2004 and the liberalisation of European electricity markets on Germanys electricity exchange with neighbouring countries and on electricity prices. Thus, electricity imports from Czech Republic have increased sharply in the last few years and have dampened German wholesale prices for electricity. In this paper the EMELIE simulation model, a game theoretic model for the European electricity market, is applied to analyse possible long-term effects of these changes. In the model calculations it is assumed that competition will prevail on the European electricity market in 2030, as far as possible with the existing transmission capacities. Primary energy prices are assumed to increase moderately from 2004 to 2030 (30 % for gas and 15 % for hard coal), and the price for CO2-certificats is assumed to remain high (€25/t). It is further assumed that Germany sticks to the aim to shut down nuclear power stations [...]
    Keywords: Solow model, regional convergence, spatial lags, spatial filtering
    Date: 2006
  3. By: Aitor Ciarreta (Departamento de Fundamentos del Analisis Economico II, Universidad del Pais Vasco); Maria Paz Espinosa (Departamento de Fundamentos del Analisis Economico II, Universidad del Pais Vasco)
    Abstract: In this paper we check whether generators' bid behavior at the Spanish wholesale electricity market is consistent with the hypothesis of pro?fit maximization on their residual demands. Using OMEL data, we ?find the arc-elasticity of the residual demand around the system marginal price. The results suggest that the larger ?firms are not actually pro?fit-maximizing on their residual demands while smaller generators' behavior is consistent with profit maximization. We argue how the regulatory environment may drive these results. Finally, we repeat the analysis for the ?first session of the intra-day market where presumably ?firms may not have the same incentives as in the day-ahead market
    Keywords: market power, electricity market, residual demand elasticity, pro?fit maximization
    JEL: L11 L13 L51
    Date: 2006–07
  4. By: Fred Espen Benth; Alvaro Cartea (School of Economics, Mathematics & Statistics, Birkbeck); Ruediger Kiesel
    Abstract: In this paper we provide a framework that explains how the market risk premium, defined as the difference between forward prices and spot forecasts, depends on the risk preferences of market players. In commodities markets this premium is an important indicator of the behaviour of buyers and sellers and their views on the market spanning between short-term and long-term horizons. We show that under certain assumptions it is possible to derive explicit solutions that link levels of risk aversion and market power with market prices of risk and the market risk premium.
    Keywords: Contango, backwardation, market price of risk, electricity forwards, market risk premium, forward risk premium, forward bias.
    Date: 2006–10
  5. By: James J. Murphy (Department of Resource Economics, University of Massachusetts Amherst); John K. Stranlund (Department of Resource Economics, University of Massachusetts Amherst)
    Abstract: This paper uses laboratory experiments to test the theoretical observations that both the violations of competitive risk-neutral firms and the marginal effectiveness of increased enforcement across firms are independent of differences in their abatement costs and their initial allocations of permits. This conclusion has important implications for enforcing emissions trading programs because it suggests that regulators have no justification for targeting their enforcement effort based on firm-level characteristics. Consistent with the theory, we find that subjects’ violations were independent of parametric differences in their abatement costs. However, those subjects that were predicted to buy permits tended to have higher violation levels than those who were predicted to sell permits. Despite this, we find no statistically significant evidence that the marginal effectiveness of enforcement depends on any firmspecific characteristic. We also examine the determinants of compliance behavior under fixed emissions standards. As expected, we find significant differences between compliance behavior under fixed standards and emissions trading programs.
    Keywords: enforcement, compliance, emissions trading, permit markets, standards, commandand- control
    JEL: C91 L51 Q58
    Date: 2005–02
  6. By: Yiannis Stournaras (Bank of Greece and University of Athens)
    Abstract: In an aggregate supply, aggregate demand model of an open economy with imperfect competition in labour and product markets, the effectiveness of monetary and fiscal policies depends on the degree of wage indexation, the exchange rate regime and the currency denomination of the international prices of raw materials, such as oil. In a two country world with a floating exchange rate, real consumer wage rigidity and the prices of imported raw materials fixed in the currency of Country 2, monetary policy is effective only in Country 2, but fiscal policy is relatively more effective in Country 1. These results may explain certain characteristics and have certain implications for economic policy in the US and the Eurozone.
    Keywords: Open economy macroeconomics, real exchange rate, oil price denomination
    JEL: F41 Q43
    Date: 2005–07
  7. By: Spyros Andreopoulos
    Abstract: The time series evidence on the relationship between unemployment and the real prices of capital and energy is re-examined for US data. In contrast to previous studies, results indicate that the real interest rate matters little, if at all, for equilibrium unemployment. Using a Markov Switching vector autoregressive method proposed by Psaradakis, Ravn, Sola (2005) [JApplEconometrics 20(5), pp. 665-683] to investigate time-varying Granger causality, the paper shows that the real rate helps forecast unemployment during NBER expansions only. Granger causality from the oil price to unemployment occurs in recessions. The results support the view that the price of crude induces at least some recessions, while not being a regular feature of the US business cycle.
    Keywords: Unemployment, Real Interest Rate, Oil Price, Granger Causality, US Recessions, Markov Chain, Regime Switching, Structural Instability
    JEL: C32 E24 E32
    Date: 2006–11
  8. By: Theocharis N. Grigoriadis; Benno Torgler
    Abstract: This paper investigates the relative impact of regional energy production on the legislative choices of Russian Duma deputies on energy regulation between 1994 and 2003. We apply Poole’s optimal classification method of roll call votes using an ordered probit model to explain energy law reform in the first decade of Russia’s democratic transition. Our goal is to analyze the relative importance of home energy on deputies’ behavior, controlling for other factors such as party affiliation, electoral mandate, committee membership and socio-demographic parameters. We observe that energy resource factors have a considerable effect on deputies’ voting behavior. On the other hand, we concurrently find that regional economic preferences are constrained by the public policy priorities of the federal center that continue to set the tone in energy law reform in post-Soviet Russia.
    Keywords: energy regulation; energy roll law reform; energy resources; roll call votes; legislative politics; State Duma; Russia
    JEL: Q40 D72 K23 P27 P37 P31 R11
    Date: 2006–10
  9. By: Kudo, Toshihiro
    Abstract: Against the background of closer diplomatic, political and security ties between Myanmar and China since 1988, their economic relations have also grown stronger throughout the 1990s and up to 2005. China is now a major supplier of consumer and capital goods to Myanmar, in particular through border trade. China also provides a large amount of economic cooperation in the areas of infrastructure, energy and state-owned economic enterprises. Nevertheless, Myanmar’s trade with China has failed to have a substantial impact on its broad-based economic and industrial development. China’s economic cooperation apparently supports the present regime, but its effects on the whole economy will be limited with an unfavorable macroeconomic environment and distorted incentives structure. As a conclusion, strengthened economic ties with China will be instrumental in regime survival, but will not be a powerful force affecting the process of economic development in Myanmar.
    Keywords: Myanmar (Burma), China, trade, border trade, economic cooperation, energy, oil and gas, International economic relations, International trade, International cooperation
    JEL: F14 P28 Q41
    Date: 2006–07
  10. By: Bandyopadhyay, Sushenjit; Shyamsundar, Priya; Baccini, Alessandro
    Abstract: In this paper, the authors seek to answer three questions about poverty and forests in Malawi: (1) What is the extent of biomass available for meeting the energy needs of the poor in Malawi and how is this distributed? (2) To what extent does fuelwood scarcity affect the welfare of the poor? (3) How do households cope with scarcity? In particular, do households spend more time in fuelwood collection and less time in agriculture in response to scarcity? The authors attempt to answer these questions using household and remote-sensing data. They find that 80 percent of rural poor households in Malawi are likely to benefit from an increase in biomass per hectare in their community. Rural women respond to biomass scarcity by increasing the time they spend on fuelwood collection. But the actual decrease in consumption expenditure and increase in time in fuelwood collection are small and biomass scarcity is not associated with a reduction in agricultural labor supply.
    Keywords: Renewable Energy,Crops & Crop Management Systems,Wildlife Resources,Climate Change,Ecosystems and Natural Habitats
    Date: 2006–11–01
  11. By: Juha Honkatukia; Ville Mälkönen; Adriaan Perrels
    Abstract: This study deals with the matter to what extent the costs of the EU Emission Trade System (EU ETS) end up in the electricity prices. The study encompasses both a theoretical and an empirical review of electricity price formation. It includes an econometric analysis of electricity price formation and the impact of EU ETS on power prices. On the basis of the econometric analysis is concluded that cost compensation due to EU ETS is indeed occurring. On average, about 75% to 95% of a price change in EU ETS is passed on to the Finnish NordPool spot price. The analysis also shows that the degree of utilisation of generation capacity (and hence the network loads) have an effect on electricity prices. This hints at possible market imperfections and can aggravate the price effects of EU ETS.
    Keywords: electricity markets, emission trading, competitiveness
    Date: 2006–11–08
  12. By: Klaus Skytte
    Abstract: This paper discusses the difficulty of having three different objectives for the electricity supply sectors in the EU: renewable energy goals, emission reduction goals and minimising consumer prices. In the environment associated with the power markets, the regulatory mechanisms interact with each other and thus the attainment of the specified goals. Analytical discussions in the paper show that synergies do exist between the different regulation mechanisms and the targets. However, the challenge of having the different targets lies in the fact that the mechanisms at present cover different geographical areas and sectors, and that the targets are set differently within each Member State.This is an analytical paper, and its aim is to shed some light on the complexity of this regulation area and inspire more researchers to work in it.
    Keywords: regulation; electricity; environmental policy
    Date: 2006–02–17
  13. By: Takeuchi, Akie; Cropper, Maureen; Bento, Antonio
    Abstract: This paper examines the impact of measures to reduce emissions from passenger transport, specifically buses, cars, and two-wheelers in Mumbai. These include converting diesel buses to compressed natural gas (CNG), as the Indian Supreme Court required in Delhi, which would necessitate an increase in bus fares to cover the cost of pollution controls. The authors model an increase in the price of gasoline, which should affect the ownership and use of cars and two-wheelers, as well as imposing a license fee on cars to retard growth in car ownership. The impact of each policy on emissions depends not only on how the policy affects the mode that is regulated, but on shifts to other modes. The results suggest that the most effective policy to reduce emissions from passenger vehicles-in terms of the total number of tons of PM10 (particulate matter that measure less than or equal to 10 micrometers in aerodynamic diameter) reduced-is to convert diesel buses to CNG. The conversion of 3,391 diesel buses to CNG would result in an emissions reduction of 663 tons of PM10 a year, 14 percent of total emissions from transport. The bus conversion program passes the cost-benefit test. In contrast, the results suggest the elasticities of emissions from transport with respect to a gasoline tax and a tax on vehicle ownership are -0.04 and -0.10 respectively. As a consequence, it would take substantial increases in the gasoline tax or vehicle ownership tax to produce reductions in emissions similar to the bus conversion program. These results, however, reflect the low shares of cars and two-wheelers in the Mumbai emissions inventory and need not apply to cities, such as Delhi, where these shares are higher.
    Keywords: Transport Economics Policy & Planning,Transport in Urban Areas,Transport and Environment,Roads & Highways,Urban Transport
    Date: 2006–11–01
  14. By: Michael Rauscher
    Abstract: Social norms and intrinsic motivations lead to environmentally friendly behaviour even in the absence of environmental policy. This paper looks at the interactions of social norms and environmental regulation in their impact on individual behaviour. People obtain social rewards for voluntary abatement efforts. These social rewards may be crowded out by environmental regulation taking the shape of standards or taxes. Moreover, the paper shows that environmental externalities and externalities related to social norms interact and that an optimal environmental policy should consider both types of externalities. From a general welfare point of view, emission taxes are superior to emission standards, but people responsive to social rewards prefer standards.
    JEL: H30 Q28 Z13
    Date: 2006
  15. By: John K. Stranlund (Department of Resource Economics, University of Massachusetts Amherst)
    Abstract: This paper addresses the following question: To achieve a fixed aggregate emissions target cost-effectively, should emissions trading programs be designed and implemented to achieve full compliance, or does allowing a certain amount of noncompliance reduce the costs of reaching the emissions target? The total costs of achieving the target consist of aggregate abatement costs, monitoring costs, and the expected costs of collecting penalties from noncompliant firms. Under common assumptions, I show that allowing noncompliance is cost-effective only if violations are enforced with an increasing marginal penalty. However, one can design a policy that induces full compliance with a constant marginal penalty that meets the aggregate emissions target at lower expected costs. This last result does not depend on setting an arbitrarily high constant marginal penalty. In fact, the marginal penalty need not be higher than the equilibrium marginal penalty under the policy with the increasing marginal penalty,and can actually be lower. Finally, tying the marginal penalty directly to the permit price allows the policy objective to be achieved without any knowledge of firms’ abatement costs.
    Keywords: Compliance, Enforcement, Emissions Trading, Monitoring, Transferable Permits
    JEL: L51 Q28
    Date: 2006–10
  16. By: Thomas Rawski
    Date: 2006–10

This nep-ene issue is ©2006 by Roger Fouquet. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.