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The Energy Journal
Volume 39, Number 5

Analyzing and Forecasting Zonal Imbalance Signs in the Italian Electricity Market

Francesco Lisi and Enrico Edoli

DOI: 10.5547/01956574.39.5.flis
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In this paper, within the Italian electricity market, we analyse the features and the dynamics of the imbalance sign, defined as the sign of the algebraic sum of energy bought and sold by the national Transmission and System Operator during the real-time balancing of the electric network. The analyses provide evidence that the probability of having a positive (negative) sign exhibits a serial dependence structure and a dependence on the load periods, as well as on past history. Based on this evidence, we build a suitable model for zonal sign dynamics, and we use it for an out-of-sample forecasting exercise concerning the probability of a positive imbalance sign, πt. The results show that the zonal imbalance sign is 'predictable.' An economic evaluation of the benefits of using the proposed model is also provided. Keywords: Balancing and ancillary services markets, IPEX market, Zonal imbalance sign, Binary data models, Forecasting

Real Option Valuation in a Gollier/Weitzman World: The Effect of Long-Run Discount Rate Uncertainty

Djerry C. Tandja M., Gabriel J. Power, and Josée Bastien

DOI: 10.5547/01956574.39.5.dtan
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Large-scale investment projects face significant long-run uncertainty in interest rates. However, little is known about the effect of long-term discount rate uncertainty on capital investment real option values. This paper bridges the long-run discount rate uncertainty literature developed in climate change economics with the financial literature on interest rate models and real options. First, we derive an Ingersoll-Ross real option model under the assumption of a declining discount rate model (DDR) following Gollier and Weitzman, and show how optimal investment timing is affected. Second, we study the problem of an open oil field with an abandonment option. We find that, compared with DDR, standard models using constant or mean-reverting interest rates undervalue projects and their real options to wait or to abandon. Indeed, results under DDR are more consistent with recent evidence on corporate decision-making under incomplete preferences or ambiguity. The results have implications for both energy investment under uncertainty and climate finance. Keywords: Oil and gas investment, Capital budgeting, Real options, Interest rates, Declining discount rate, Long-run uncertainty

A New Game Theoretical Approach for Modeling Export Energy Markets Equilibria

Ibrahim Abada and Andreas Ehrenmann

DOI: 10.5547/01956574.39.5.iaba
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For resource-based economies, regulating exports is crucial. Nevertheless, we observe different countries deploying different export policies. We explain this difference via strategic interactions by giving two competing countries the possibility to design their export markets and select the level of competition they exert. In a first step, we test standard models and find that they fail to explain the multitude of observed behaviors: under the closed loop Nash equilibrium paradigm, the equilibrium is reached when countries completely open their export market. The Stackelberg game on the other hand concentrates the market in a plausible way but is not symmetric since it appoints a leader and follower. In a second step, we let countries choose between being strategic or passive in their interaction and demonstrate that the competitive outcome that we find in the closed loop Nash game rarely occurs. Only this last setup complies with the commonly observed situations.Keywords: Game theory, Cournot models, Open/closed loop models, Stackelberg models, Divisionalization

Oil Prices and Stock Markets: A Review of the Theory and Empirical Evidence

Stavros Degiannakis, George Filis, and Vipin Arora

DOI: 10.5547/01956574.39.5.sdeg
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Do oil prices and stock markets move in tandem or in opposite directions? The complex and time varying relationship between oil prices and stock markets has caught the attention of the financial press, investors, policymakers, researchers, and the general public in recent years. In light of such attention, this paper reviews research on the oil price and stock market relationship. The majority of papers we survey study the impacts of oil markets on stock markets, whereas, little research in the reverse direction exists. Our review finds that the causal effects between oil and stock markets depend heavily on whether research is performed using aggregate stock market indices, sectorial indices, or firm-level data and whether stock markets operate in net oil-importing or net oil-exporting countries. Additionally, conclusions vary depending on whether studies use symmetric or asymmetric changes in the price of oil, or whether they focus on unexpected changes in oil prices. Finally, we find that most studies show oil price volatility transmits to stock market volatility, and that including measures of stock market performance improves forecasts of oil prices and oil price volatility. Several important avenues for further research are identified.Keywords: Oil prices, oil price volatility, stock markets, interconnectedness, forecasting, oil-importers, oil-exporters

Optimal Procurement of Distributed Energy Resources

David P. Brown and David E. M. Sappington

DOI: 10.5547/01956574.39.5.dbro
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We analyze the optimal design of policies to motivate electricity distribution companies to adopt efficient distributed energy resources (DER) and manage associated project costs. The optimal policy often entails a bias against new DER projects and implements cost sharing when DER projects are undertaken in order to foster cost containment while limiting excessive profit for the utility. Failure to adequately tailor the degree of cost sharing to the prevailing environment can raise procurement costs substantially. The distribution company may optimally be awarded more than the cost saving it achieves.Keywords: Distributed Energy Resources, Procurement, Regulation

Technology Choices in the U.S. Electricity Industry before and after Market Restructuring

Zsuzsanna Csereklyei and David I. Stern

DOI: 10.5547/01956574.39.5.zcse
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We study the drivers of the adoption of electricity generation technologies between 1970 and 2014 in the lower 48 U.S. states. Since the 1990s, major electricity market restructuring took place in some parts of the United States. We explore the implications of changing from a regulated "cost-of-service", or rate of return, system to liberalized wholesale electricity markets on technology and fuel choices. We find that wholesale market restructuring resulted in significant immediate investment in various natural gas technologies due to higher expected profits, and a reduction in coal investments. In states that adopted liberalized wholesale electricity markets, higher natural gas price expectations resulted in more investment in coal and renewable technologies, while higher coal price expectations resulted in lower coal-fired baseload power investments. Natural gas price expectations, therefore, have the potential to significantly shape the power generation landscape of the future.Keywords: Technology choices, Electricity industry, Market restructuring

Reliability in Multi-regional Power Systems: Capacity Adequacy and the Role of Interconnectors

Simeon Hagspiel, Andreas Knaut, and Jakob Peter

DOI: 10.5547/01956574.39.5.shag
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Based upon probabilistic reliability metrics, we develop an optimization model to determine the efficient amount and location of firm generation capacity to achieve reliability targets in multi-regional electricity systems. A particular focus lies on the representation and contribution of transmission capacities as well as variable renewable resources. Calibrating our model with a comprehensive dataset for Europe, we find that there are substantial benefits from regional cooperation. The amount of firm generation capacity to meet a perfectly reliably system could be reduced by 36.2 GW (i.e., 6.4%) compared to an isolated regional approach, which translates to savings of 14.5 bn EUR. Interconnectors contribute in both directions, with capacity values up to their technical maximum of close to 200%, while wind power contributions are in the range of 3.8-29.5%. Furthermore, we find that specific reliability targets heavily impact the efficient amount and distribution of reliable capacity as well as the contribution of individual technologies.Keywords: Reliability of supply, Capacity adequacy, Multi-regional power system, Interconnector, Variable renewable energy

Natural Gas Combined Cycle Utilization: An Empirical Analysis of the Impact of Environmental Policies and Prices

Kelly A. Stevens

DOI: 10.5547/01956574.39.5.kste
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Recent climate regulations include increased utilization of natural gas-fired combined cycle (NGCC) generators as a means for offsetting coal generation to reduce carbon emissions. There have been substantial increases in utilization for some generators, but most remain below baseload levels. This paper examines the factors that have driven NGCC utilization from 2003-2014. I run difference-in-difference models to evaluate the relationships between environmental policies and natural gas prices on NGCC utilization. Both low natural gas prices and the Clean Air Interstate Rule (CAIR) drive increases in utilization. However, the size of the impact by CAIR depends on the age of the plant. I use the estimates from this model for a counterfactual analysis which reveals CAIR had nearly twice the impact of low natural gas prices on increased utilization in nationwide averages.Keywords: Natural Gas, Utilization, Environmental Policy, Natural Gas Prices

Impact of High-Powered Incentive Regulations on Efficiency and Productivity Growth of Norwegian Electricity Utilities

Livingstone Senyonga and Olvar Bergland

DOI: 10.5547/01956574.39.5.lsen
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This study examines the hypothesis that changes to high-powered incentive regulations have a positive efficiency and productivity growth effects in a regulated electricity distribution industry. We estimate an input distance function using the stochastic frontier analysis method to compute technical efficiency scores for 121 Norwegian utilities over the period 2004-2012. We explore sources of productivity growth by parametrically decomposing the Malmquist productivity index into efficiency change, technical change, and scale change. Unlike previous studies, we examine the difference in performance across two regulatory regimes: yardstick competition (2007-2012) and RPI-X incentive regulation (2004-2006). Results show significant efficiency and productivity growth improvements with embodied technical change as the main driver.Keywords: Yardstick competition, Productivity growth, Efficiency, Input distance function, Stochastic frontier analysis, Electricity distribution, True fixed effects model

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