nep-ene New Economics Papers
on Energy Economics
Issue of 2010‒08‒28
twenty papers chosen by
Roger Fouquet
Basque Climate Change Centre, Bilbao, Spain

  1. The Creation of a Market for Retail Electricity Supply By Littlechild, S.
  2. Generalized Nash Equilibrium and Market Coupling in the European Power System By Smeers, Y.; Oggioni, G.; Allevi, E.; Schaible, S.
  3. Estimation of Search Frictions in the British Electricity Market By Giulietti, Monica; Waterson, Michael; Wildenbeest, Matthijs R.
  4. The price elasticity of electricity demand in South Australia By Shu Fan; Rob Hyndman
  5. Concentrating Solar Power in China and India: A Spatial Analysis of Technical Potential and the Cost of Deployment By Kevin Ummel
  6. Less Smoke, More Mirrors: Where India Really Stands on Solar Power and Other Renewables By David Wheeler and Saurabh Shome
  7. Towards a Green Post-Crisis Economy - The Position of Finland in Environmental Technologies By Christopher Palmberg; Tuomo Nikulainen
  8. Energy Consumption and Carbon Emission-Based Productivity Change and Industrialization in Post-Reform By Chen, Shiyi; Santos-Paulino, Amelia U.
  9. Interfuel Substitution and Energy Use in the UK Manufacturing Sector By Steinbuks, J.
  10. Prices vs. Quantities with Fiscal Cushioning By Moritz Rohling; Markus Ohndorf
  11. The Impact of Oil Prices on the Exchange Rate and Economic Growth in Norway By Al-mulali, Usama
  12. Modeling the Volatility in Global Fertilizer Prices By Chen, P.-Y.; Chang, C-L.; Chen, C-C.; McAleer, M.J.
  13. Conditional Correlations and Volatility Spillovers Between Crude Oil and Stock Index Returns By Chia-Lin Chang; Michael McAleer; Roengchai Tansuchat
  14. The changing pattern of international trade and capital flows of the GCC countries By Marga Peeters
  15. Oil Exports and the Iranian Economy By Hadi Salehi Esfahani; Kamiar Mohaddes; M. Hashem Pesaran
  16. Minimizing the Cost of Innovative Nuclear Technology Through Flexibility: The Case of a Demonstration Accelerator-Driven Subcritical Reactor Park By Cardin, M.A.; Steer, S.J.; Nuttall, W.J.; Parks, G.T.; Gonçalves, L.V.N.; de Neufville, R.
  17. Greening Supply Chains: Impact on Cost and Design By Mallidis, I.; Vlachos, D.; Dekker, R.
  18. HEALTH EFFECTS OF TRANSPORT EMISSIONS - A review of the state of the art of methods and data used for external costs calculations By Mellin, Anna; Nerhagen, Lena
  19. Impacts of climate change on water resources and agriculture in Sri Lanka: a review and preliminary vulnerability mapping By Eriyagama, Nishadi; Smakhtin, Vladimir; Chandrapala, L.; Fernando, K.
  20. Sharing the Cost of Global Warming By Etienne Billette de Villemeur; Justin Leroux

  1. By: Littlechild, S.
    Abstract: In September 1989, as part of its privatization program, the Government laid down an eight year timetable for opening up to retail competition the entire electricity market of England and Wales, phased over the period 1990-1998. It might be assumed that the Government was in a position to specify all the arrangements, and that this was part of a considered policy to facilitate the introduction and implementation of competition. But previous accounts suggest that the outcome was part of a deal between generators and regional companies to limit competition (Henney 1994), or was intended to set targets to force companies, regulators and government to come up with practical solutions (Helm 2004). The Department of Energy’s internal History of Electricity Privatisation, only now available, shows that there is merit in these last two suggestions. However, it also documents the significantly evolving views within Government as the implications of retail competition became clearer, not least for electricity contracts and for privatization of the coal industry. Initially, retail competition was hardly worth mentioning, later it was a mild concern that could be met by a small tranche of spot-price contracts, by July 1989 the plan was to introduce full competition immediately with short-term instead of long-term contracts. But the industry resisted, and in September 1989 the Government accepted the industry proposal of a franchise monopoly to enable a mix of short, medium and long-term contracts, though it insisted that the franchise should have an eight year limit. The approach may not be a model for others, but it may not be atypical of how governments actually behave in balancing conflicting objectives and practical constraints, save perhaps for the distinctive commitment to competition exhibited by the leading actors here.
    Keywords: Retail competition, Electricity regulation
    JEL: L94
    Date: 2010–08–16
  2. By: Smeers, Y.; Oggioni, G.; Allevi, E.; Schaible, S.
    Abstract: "Market Coupling'' is currently seen as the most advanced market design in the restructuring of the European electricity market. Market coupling, by construction, introduces what is generally referred to as an incomplete market: it leaves several constraints out of the market and hence avoids pricing them. This may or may not have important consequences in practice depending on the case on hand. Quasi-Variational Inequality problems and the associated Generalized Nash Equilibrium can be used for representing incomplete markets. Recent papers propose methods for finding a set of solutions of QuasiVariational Inequality problems. We apply one of these methods to a subproblem of market coupling namely the coordination of counter-trading. This problem is an illustration of a more general question encountered for instance in hierarchical planning in production management. We first discuss the economic interpretation of the Quasi-Variational Inequality problem. We then apply the algorithmic approach to a set of stylized case studies in order to illustrate the impact of different organizations of counter-trading. The paper emphazises the structuring of the problem. A companion paper considers the full problem of market coupling and counter-trading and presents a more extensive numerical analysis.
    Keywords: Generalized Nash Equilibrium, Quasi-Variational Inequalities, Market Coupling, Counter-Trading, European Electricity Market
    JEL: D52 D58 Q40
    Date: 2010–08–16
  3. By: Giulietti, Monica (Nottingham University Business School); Waterson, Michael (Department of Economics, University of Warwick); Wildenbeest, Matthijs R. (Kelley School of Business, Indiana University)
    Abstract: This paper studies consumer search and pricing behaviour in the British domestic electricity market following its opening to competition in 1999. We develop a sequential search model in which an incumbent and an entrant group compete for consumers who nd it costly to obtain information on prices other than from their current supplier. We use a large data set on prices and input costs to structurally estimate the model. Our estimates indicate that consumer search costs must be relatively high in order to rationalize observed pricing patterns. We confront our stimates with observed switching behaviour and nd they match well. Keywords:
    Keywords: electricity ; consumer search ; price competition JEL Classification: C14 ; D83 ; L13
    Date: 2010
  4. By: Shu Fan; Rob Hyndman
    Abstract: In this paper, the price elasticity of electricity demand, representing the sensitivity of customer demand to the price of electricity, has been estimated for South Australia. We first undertake a review of the scholarly literature regarding electricity price elasticity for different regions and systems. Then we perform an empirical evaluation of the historic South Australian price elasticity, focussing on the relationship between price and demand quantiles at each half-hour of the day. This work attempts to determine whether there is any variation in price sensitivity with the time of day or quantile, and to estimate the form of any relationship that might exist in South Australia.
    Keywords: Electricity demand; Price elasticity
    JEL: C32
    Date: 2010–08
  5. By: Kevin Ummel
    Abstract: Coal power generation in China and India is expected to double and triple, respectively, over the next 20 years, increasing exposure to fuel price volatility, exacerbating local air pollution, and hastening global climate change. Concentrating solar power (CSP) is a growing source of utility-scale, pollution-free electricity, but its potential in Asia remains largely unexamined. High-resolution spatial data are used to identify areas suitable for CSP and estimate power generation and cost under alternative land-use scenarios. Total technical potential exceeds current coal power output by a factor of 16 to 23 in China and 3 to 4 in India. A CSP expansion program and attendant transmission requirements are simulated with the goal of providing 20 percent of electricity in both countries by midcentury. Under conservative assumptions, the program is estimated to require subsidies of $340 billion in present dollars; coal-associated emissions of 96 GtCO2eq are averted at an average abatement cost of $30 per tCO2eq. Estimated costs are especially sensitive to the assumed rate of technological learning, emphasizing the importance of committed public policy and financing to reduce investment risk, encourage expansion of manufacturing capacity, and achieve long-term cost reductions. The results highlight the need for spatially explicit modeling of renewable power technologies and suggest that existing subsidies might be better used through integrated planning for large-scale solar and wind deployment that exploits spatiotemporal complementarities and shared infrastructure.
    Keywords: solar thermal power, greenhouse gas mitigation, abatement cost, electricity generation, technological
    JEL: A12 J11 J13 J14 O13 Q01 Q56
    Date: 2010–07
  6. By: David Wheeler and Saurabh Shome
    Abstract: Until recently, India’s intransigent negotiating posture has conveyed the impression that it will not accept any carbon emissions limits without full compensation and more stringent carbon limitation from rich countries. However, our assessment of India’s proposed renewable energy standard (RES) indicates that this impression is simply wrong. India is seriously considering a goal of 15 percent renewable energy in its power mix by 2020, despite the absence of any meaningful international pressure to cut emissions, no guarantees of compensatory financing, and a continuing American failure to adopt stringent emissions limits. If India moves ahead with this plan, it will promote a massive shift of new power capacity toward renewables within a decade. We estimate the incremental cost of this change from coal-fired to renewable power to be about $50 billion—an enormous sum for a society that must still cope with widespread extreme poverty. If India moves ahead with its current plan, it should give serious pause to those who have resisted U.S. carbon regulation on the grounds on that it will confer a cost advantage on “intransigent” countries such as India.
    Keywords: India, Solar Power, carbon emissions, renewable energy
    Date: 2010–03
  7. By: Christopher Palmberg; Tuomo Nikulainen
    Abstract: Climate change is a major global challenge and governments around the world are now promoting environmental technologies to address both climate change and realize new employment and growth opportunities in this rapidly expanding area. Investments have reached unprecedented levels and stimulus packages to tackle the recent economic crisis also contain noticeable commitments to green technologies. Innovation policies are now under pressure to capitalize these investments and define priorities in the application of environmental technologies to both boost competitiveness and eco-innovation. The aim of this paper is to clarify foreseen impacts of growing environmental technology investments, ‘green’ components of economic stimulus packages and the ideas of a ‘Global Green New Deal’ and ‘Green Growth’ and to assess how Finland is positioned in environmental technologies. The paper reviews existing studies, analyzes global and Finnish patenting and considers the role of environmental technologies in its industrial context in Finland. The findings suggest that renewable energy is the most rapidly expanding environmental technology area, while the economic stimulus packages will play a lesser role than originally anticipated in transitions to low-carbon economies. Finland is comparatively well positioned in environmental technologies by overall levels of patenting activity. Nonetheless, Finland does not have a specific specialization profile in the area, neither a comparative advantage in renewable energy technologies as the most rapidly expanding fields globally. Environmental technologies are developed in the context of a broad range of Finnish industries whereby the application potentials of these technologies are manifold
    Keywords: environmental technologies, ‘Global Green New Deal’, ‘Green Growth’, investments, patenting, Finland
    Date: 2010–08–13
  8. By: Chen, Shiyi; Santos-Paulino, Amelia U.
    Abstract: The paper investigates the determinants of productivity growth in China. It also analyses the sustainability of the country’s industrial growth by estimating sectoral productivity, accounting for energy usage and emission since the start of the marketoriented reforms in the late 1970s. The growth accounting analysis indicates that productivity is the most significant driver of growth. Energy and capital are also important factors promoting China’s industrial growth. The substantial productivity improvement of China’s industry is attributable more to high-tech light industrial sectors. Heavy industry, characterized by high energy emission levels, lags behind in terms of productivity and overall technical change.
    Keywords: productivity growth, industrial sustainability, energy consumption, carbon emission
    Date: 2010
  9. By: Steinbuks, J.
    Abstract: This paper investigates interfuel substitution in the UK manufacturing sector. Econometric models of interfuel substitution are applied to energy inputs aggregated by their energy use, and separately for thermal heating processes, where interfuel substitution is technologically feasible. Compared to aggregate data, estimated own-price fuel demand elasticities for all fuels and cross-price elasticities for fossil fuels are considerably higher for thermal heating processes. Nonetheless,electricity is found to be a poor substitute for other fuels based on both aggregate data and separately for the heating process. This study also finds that an increase in real fuel prices resulted in higher substitution elasticities based on aggregate data, and lower substitution elasticities for the heating process. The results of counterfactual decomposition of change in the estimated elasticities indicate that technological change was the major determinant of the differences in observed elasticities before and after the energy price increase.
    Keywords: climate change levy, elasticities, energy use, interfuel substitution, manufacturing sector, United Kingdom.
    JEL: H23 Q41
    Date: 2010–08–16
  10. By: Moritz Rohling (Chair of Economics, Institute for Environmental Decisions IED, ETH Zurich); Markus Ohndorf (Chair of Economics, Institute for Environmental Decisions IED, ETH Zurich)
    Abstract: Regulating international externalities, like climate change, raises various enforcement problems. It is often argued that international price-based regulations (e.g. emission taxes) are more difficult to enforce than quantity-based regulations (e.g. tradable pollution permits). In this paper, we analyze the relative performance of price-based and quantity-based instruments when costs and benefits are uncertain and enforcement of quantity regimes is stricter than that of price regimes. We show that under these conditions, instrument choice solely based on the relative slopes of the marginal curves can yield inefficient results. If policy enforcement differs, rational policy choice should also take into account the level of the marginal benefit curve, as well as institutional parameters. In contrast to earlier analyses on "Prices vs. Quantities", we find that the choice of instrument also depends on the variance of the marginal abatement costs. Numerical simulations of our stylized model suggest that, for climate policies, quantity-regulations might well be preferable to price-based approaches after all.
    Keywords: market-based instruments, incomplete enforcement, uncertainty, environmental regulation
    JEL: D8 L51 K42 Q58
    Date: 2010–07
  11. By: Al-mulali, Usama
    Abstract: This study examines the impact of oil shocks on the real exchange rate and the gross domestic product in Norway using time series data from 1975 to 2008. The vector autoregressive has been implemented using the cointegration and the Granger causality test. The results of the study show that the increase in oil price is the reason behind Norway’s GDP increase and the increase of its competitiveness to trade by its real exchange rate depreciation. So it seems that oil price in this case is a blessing due to two reasons. First Norway uses the floating exchange rate regime which is a good shock absorber, increases the freedom of the monetary authority, and makes the adjustment smoother and less expensive. The second reason is that Norway has more flexible labor markets, improvements in monetary policy and smaller share of oil in production.
    Keywords: Oil Price, Real Exchange Rate,Economic Growth,VAR
    JEL: E30 F31 Q43
    Date: 2010–08–03
  12. By: Chen, P.-Y.; Chang, C-L.; Chen, C-C.; McAleer, M.J.
    Abstract: The main purpose of this paper is to estimate the volatility in global fertilizer prices. The endogenous structural breakpoint unit root test and alternative volatility models, including the generalized autoregressive conditional heteroskedasticity (GARCH) model, Exponential GARCH (EGARCH) model, and GJR model are estimated for six global fertilizer prices and the crude oil price. Weekly data for 2003-2008 for the seven price series are analysed. The empirical results suggest that the volatility of global fertilizer prices and crude oil price from March to December 2008 are higher than in other periods, and that the peak crude oil price caused greater volatility in the crude oil price and global fertilizer prices.
    Keywords: volatility;global fertilizer price;crude oil price;non-renewable fertilizers;structural breakpoint unit root test
    Date: 2010–08–16
  13. By: Chia-Lin Chang (Department of Applied Economics, National Chung Hsing University); Michael McAleer (Erasmus University Rotterdam, Tinbergen Institute, The Netherlands, and Institute of Economic Research, Kyoto University); Roengchai Tansuchat (Faculty of Economics, Maejo University)
    Abstract: This paper investigates the conditional correlations and volatility spillovers between the crude oil and financial markets, based on crude oil returns and stock index returns. Daily returns from 2 January 1998 to 4 November 2009 of the crude oil spot, forward and futures prices from the WTI and Brent markets, and the FTSE100, NYSE, Dow Jones and S&P500 stock index returns, are analysed using the CCC model of Bollerslev (1990), VARMA- GARCH model of Ling and McAleer (2003), VARMA-AGARCH model of McAleer, Hoti and Chan (2008), and DCC model of Engle (2002). Based on the CCC model, the estimates of conditional correlations for returns across markets are very low, and some are not statistically significant, which means the conditional shocks are correlated only in the same market and not across markets. However, the DCC estimates of the conditional correlations are always significant. This result makes it clear that the assumption of constant conditional correlations is not supported empirically. Surprisingly, the empirical results from the VARMA-GARCH and VARMA-AGARCH models provide little evidence of volatility spillovers between the crude oil and financial markets. The evidence of asymmetric effects of negative and positive shocks of equal magnitude on the conditional variances suggests that VARMA-AGARCH is superior to VARMA-GARCH and CCC.
    Keywords: Multivariate GARCH, volatility spillovers, conditional correlations, crude oil prices, spot, forward and futures prices, stock indices.
    JEL: C22 C32 G32
    Date: 2010–08
  14. By: Marga Peeters
    Abstract: Summary for non-specialistsThanks to policies that are geared towards opening up borders, the GCC countries have imparted a significant stimulus to the world economy, to a much greater extent than other oil exporting countries in similar conditions. The development of the gross capital flows in view of the recent global crisis and their composition are the main focus of this study. Aspects of globalization, trade and financial integration, such as the dependence on oil, regional integration, foreign direct investment and cross-border assets and loans are addressed.
    Keywords: Saudi Arabia United Arab Emirates Bahrain Kuwait Oman Qatar Angola Algeria Ecuador Iran Iraq Libya Nigeria Venezuela European Union
    JEL: F15 F21 F34 F4
    Date: 2010–06
  15. By: Hadi Salehi Esfahani (Department of Economics, University of Illinois); Kamiar Mohaddes; M. Hashem Pesaran
    Abstract: This paper develops a long run growth model for a major oil exporting economy and derives conditions under which oil revenues are likely to have a lasting impact. This approach contrasts with the standard literature on the "Dutch disease" and the "resource curse", which primarily focus on short run implications of a temporary resource discovery. Under certain regularity conditions and assuming a Cobb Douglas production function, it is shown that (log) oil exports enter the long run output equation with a coefficient equal to the share of capital. The long run theory is tested using a new quarterly data set on the Iranian economy over the period 1979Q1-2006Q4. Building an error correction specification in real output, real money balances, inflation, real exchange rate, oil exports, and foreign real output, the paper finds clear evidence for two long run relations: an output equation as predicted by the theory and a standard real money demand equation with inflation acting as a proxy for the (missing) market interest rate. Real output in the long run is shaped by oil exports through their impact on capital accumulation, and the foreign output as the main channel of technological transfer. The results also show a significant negative long run association between inflation and real GDP, which is suggestive of economic inefficiencies. Once the effects of oil exports are taken into account, the estimates support output growth convergence between Iran and the rest of the world. We also .find that the Iranian economy adjusts quite quickly to the shocks in foreign output and oil exports, which could be partly due to the relatively underdeveloped nature of Iran’s .financial markets.
    Date: 2010–07
  16. By: Cardin, M.A.; Steer, S.J.; Nuttall, W.J.; Parks, G.T.; Gonçalves, L.V.N.; de Neufville, R.
    Abstract: Presented is a methodology to analyze the expected Levelised Cost Of Electricity (LCOE) in the face of technology uncertainty for Accelerator-Driven Subcritical Reactors (ADSRs). It shows that flexibility in the design and deployment strategy of an ADSR park demonstrator significantly reduces its expected LCOE. The methodology recognizes in the conceptual design a range of possible technological outcomes for the ADSR accelerator system. It identifies flexibility “on” and “in” the design to modify the future development path in light of such uncertain scenarios. Uncertainty and flexibility are incorporated in the ADSR valuation. The resulting economic assessment is more realistic than typical discounted cash flow analysis that does not consider a range of development outcomes, or the flexibility to change development path.
    Keywords: Accelerator-driven subcritical reactor, real options, flexibility in design, electricity production, economics
    JEL: D81
    Date: 2010–08–16
  17. By: Mallidis, I.; Vlachos, D.; Dekker, R.
    Abstract: The consideration of environmental issues has emerged as a topic of critical importance for today’s globalized supply chains. The purpose of this paper is to develop a strategic-tactical decision-support methodology to assist managers in evaluating the impact of environmental issues, related to transportation emissions, on the transport geography of a region. Specifically we provide a tool that addresses: (i) supply chain network design, including port of entry and transportation mode, and (ii) decisions on leasing vs. outsourcing of transportation and distribution centers. The applicability of the proposed methodology is examined through the development of a sustainable supply chain network in the South-Eastern Europe region. The results indicate that in most cases outsourcing distribution centers to Third Party Logistics operators improves both the cost and the environmental performance of a company. In all cases outsourcing of transportation operations minimizes the amount of CO2 and PM emissions generated, while leasing minimizes costs.
    Keywords: supply chain sustainability;carbon footprint;supply chain design
    Date: 2010–08–16
  18. By: Mellin, Anna (VTI); Nerhagen, Lena (VTI)
    Abstract: The purpose is to provide a background for a discussion concerning the methods and values used in cost-benefit analysis in Sweden for air pollutions', from traffic, impact on human health and the research needs in this area. We provide an overview of the current state of the art of models used for and input needed for external cost calculations of the health impacts. The calculations are not straightforward and depend on the collaboration between several research disciplines. In the ExternE projects, which have been used as a reference point in this study, there are still uncertainties concerning which pollutants to take into consideration. <p> Regarding the health impacts, we have recapitulated some of the main conclusions in a review by the American Heart Association (2010). They state that e.g. the following issues need further research: the importance of ultrafine particles, what constituent parts make traffic related air pollution more harmful than PM2.5 in general and the importance of coarse particles. <p> Concerning external cost calculations these can be of help to reveal important health aspects to consider in further research, if done in a transparent way. Some pollutants which are very harmful are released in such small concentrations that the overall effect is still relative limited. Hence, undertaking external cost calculations gives an indication of which pollutants to cover in the models and analyses to make them relevant but at the same time manageable. <p> Further, there are the questions of how to handle the relationship between Value of a Statistical Life and age, and of which values that should be used for children. This is an area where little research has been carried out. One important area is how to use discounting to account for the time dimension since current air pollution may influence children’s health in the future. More research is also needed regarding the valuation of morbidity. Here there are two issues to consider, the value of the welfare loss from being ill and the cost of illness. We have not found reliable estimates of these components for Sweden.
    Keywords: Health effects; External cost calculations; ExternE; Emissions; Transport
    JEL: H23
    Date: 2010–08–18
  19. By: Eriyagama, Nishadi; Smakhtin, Vladimir; Chandrapala, L.; Fernando, K. (International Water Management Institute; International Water Management Institute)
    Keywords: Climate change / Rain / Water resource management / Crops / Mapping / Sri Lanka
    Date: 2010
  20. By: Etienne Billette de Villemeur; Justin Leroux
    Abstract: Due to meteorological factors, the distribution of the environmental damage due to climate change bears no relationship to that of global emissions. We argue in favor of offsetting this discrepancy, and propose a “global insurance scheme” to be financed according to countries’ responsibility for climate change. Because GHG decay very slowly, we argue that the actual burden of global warming should be shared on the basis of cumulated emissions, rather than sharing the expected costs of actual emissions as in a Pigovian taxation scheme. We characterize new versions of two well-known cost-sharing schemes by adapting the responsibility theory of Bossert and Fleurbaey (1996) to a context with externalities. <P>Du fait de phénomènes météorologiques, la répartition des dommages environnementaux est indépendante de celle des émissions de gaz à effet de serre (GES). Nous explorons la possibilité de corriger cette inadéquation via un « fonds assuranciel global », financé en fonction de la responsabilité de chaque pays concernant les changements climatiques. Étant donné la très longue durée de vie de plusieurs GES dans l'atmosphère, nous avançons que les dommages observés doivent être partagés en fonction des émissions cumulées, plutôt que de partager les coûts futurs espérés des émissions actuelles, comme le ferait une taxe pigouvienne. Nous employons la théorie de la responsabilité de Bossert et Fleurbaey (1996), adaptée à un contexte avec externalités, pour caractériser de nouvelles versions de deux mécanismes de partage connus.
    Keywords: climate change, cost sharing, responsibility, compensation , changements climatiques; partage de coûts, responsabilité, compensation
    JEL: D62 D63 Q54
    Date: 2010–08–01

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