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The Energy Journal
Volume 43, Number 6

Energy Storage Investment and Operation in Efficient Electric Power Systems

Cristian Junge, Dharik Mallapragada, and Richard Schmalensee

DOI: 10.5547/01956574.43.6.cjun
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We consider welfare-optimal investment in and operation of electric power systems with constant returns to scale in multiple available generation and storage technologies under perfect foresight. We extend a number of classic results on generation, derive conditions for investment and operations of storage technologies described by seven cost/performance parameters, and develop insights on power systems with multiple storage technologies. Simulation of a deeply decarbonized "Texas-like" power system with two available storage technologies shows both the non-existence of simple "merit-order" rules for storage operation and the value of frequency domain analysis to describe efficient operation. Our analysis points to the critical role of the capital cost of energy storage capacity in influencing efficient storage investment and operation.

A Real Options Analysis of the Effects of Oil Price Uncertainty and Carbon Taxes on the Optimal Timing of Oil Field Decommissioning

Yakubu Abdul-Salam

DOI: 10.5547/01956574.43.6.yabd
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We use a real options model to examine the effects of three important sources of oil price uncertainty on the optimal timing of oil field decommissioning. These are (1) the degree of oil price volatility, (2) the level of the long-run equilibrium oil price, and (3) the speed of reversion of oil prices to their long-run equilibrium. We find that lower levels of equilibrium oil prices and speed of reversion to equilibrium prices have the effect of fostering early decommissioning. Oil price volatility however has the opposite effect. Our findings provide valuable insights into how policymakers may identify windows of opportunity for policy interventions leading to (1) an acceleration of the drive towards sustainable energy transition; and/or (2) the maximisation of economic recovery (MER) from oil and gas resources. With regards the former, we show that the imposition of carbon taxes fosters early decommissioning to a significant extent. In the most unfavourable oil price environment and under an aggressive tax regime for example, decommissioning may occur at a very early period in oil field operations, owing to over 45% of oil reserves being uneconomic to produce. The results highlight the effectiveness of carbon taxes as policy lever in jurisdictions that seek accelerated decarbonisation, climate change mitigation and energy transition goals.

The Energy Kuznets Curve: Evidence from Developed and Developing Economies

Imad A. Moosa and Kelly Burns

DOI: 10.5547/01956574.43.6.imoo
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The energy environmental Kuznets curve is effectively an environmental Kuznets curve augmented by adding one or more energy-related variables. We suggest that the energy Kuznets curve (EKC) can be estimated separately from the conventional environmental Kuznets curve as a quadratic function of income. It is demonstrated that the environmental Kuznets curve implies and is implied by the EKC. The empirical results show consistently that both the environmental and EKC are valid for developed (high income) countries but not so for developing (low income) countries where the relations are positive and monotonic. The importance of considering energy consumption in conjunction with the environmental Kuznets curve is that economic growth on its own does not put an end to environmental degradation unless the underlying country is on the downward-sloping sections of both the environmental and EKC.

Promoting CCS in Europe: A Case for Green Strategic Trade Policy?

Finn Roar Aune, Simen Gaure, Rolf Golombek, Mads Greaker, Sverre A.C. Kittelsen, and Lin Ma

DOI: 10.5547/01956574.43.6.faun
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According to IEA (2018), there is a huge gap between the first-best social optimal utilization of Carbon Capture and Storage (CCS) technologies to lower global CO2 emissions and the current, negligible diffusion of this technology. This calls for a financial support mechanism for CCS. We study to what extent promotion of CCS in Europe should be through subsidizing development and production of CCS technologies—an upstream subsidy—or by subsidising the purchasers of CCS technologies—a downstream subsidy. This question is examined theoretically in a stylized model and numerically by using a new approach that integrates strategic trade policy with an economic model of the European energy markets. The theory model suggests that upstream subsidies should clearly be preferred, and this is confirmed by the numerical simulations. For the European power market, the numerical simulations suggest that subsidies to CCS coal power should exceed subsidies to CCS gas power.

Rockets and Feathers Revisited: Asymmetric Retail Gasoline Pricing in the Era of Market Transparency

Emmanuel Asane-Otoo and Bernhard C. Dannemann

DOI: 10.5547/01956574.43.6.easa
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In this paper, we revisit the empirical observation that prices rise like rockets when input costs increase but fall like feathers when input costs decrease. The analysis draws on a novel data set that includes daily retail prices of gasoline from 12,804 stations in Germany from January 1, 2014 to December 31, 2018. Our findings based on pooled-panel asymmetric error correction models indicate that the pattern of rockets and feathers is the norm rather than the exception. Our results further show that temporal aggregation of station-level price data leads to inaccurate inferences and could account for the inconclusive findings in the literature.

Modelling Required Energy Consumption with Equivalence Scales

Yuxiang Ye, Steven F. Koch, and Jiangfeng Zhang

DOI: 10.5547/01956574.43.6.yuye
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Due to difficulties in accessing detailed energy modelling and usage data that are required to estimate energy needs that are responsive to local circumstances, we propose an equivalence scale approach to the determination of required energy consumption. Our method requires the estimation of energy equivalence scales that are used to rescale reference household energy consumption and, thus, yield household-specific energy requirements. We apply the method using readily available income and expenditure data, finding that estimated required energy is well above actual energy expenditure for low- and middle-income households, which is consistent with an expectation that basic energy needs for poor households may not be met. The proposed approach is general enough to incorporate other features that might be deemed relevant and available in other settings, and, therefore, can be used to examine the affordability component of SDG 7, undertake energy poverty analysis or design appropriate policies.

Changing Market Structure and Evolving Ways to Compete: Evidence from Retail Gasoline

Taehwan Kim

DOI: 10.5547/01956574.43.6.tkim
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This paper examines the pricing behavior of sellers in a market undergoing a significant restructuring, using data from the ongoing introduction of self-service technology in the Korean gasoline market in the 2000s. I provide evidence that full-service premium increased during the market transition. I further show that a monopolistic competition model is not enough to explain the increasing premium. The pricing behavior of sellers differs by product position: self-service sellers compete for price-sensitive consumers, whereas full-service sellers differentiate their product by offering a variety of bundled products and services, such as coffee, carwash or even nail salons, to compete for less-price-sensitive consumers. Taken together, the strategic choices of sellers evolve in different ways when the market structure changes, with each type of seller using its unique position, resulting in an increase in full-service premium during the market transition from full-service to self-service.

Green Growth, Carbon Intensity Regulation, and Green Total Factor Productivity in China

Xiaobo Shen and Boqiang Lin

DOI: 10.5547/01956574.43.6.xshe
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Based on input-oriented Malmquist productivity index and parametric decomposition approach, this paper measures China's green total factor productivity (TFP) index and its growth sources using a panel dataset of 30 provinces of China mainland from 1997 to 2014, and assesses the effect of CO2 intensity regulation on the green TFP growth in China. The results show that the green TFP has been growing at a yearly averaged rate of –1.51% during this period. The results also indicate that the policy of CO2 intensity regulation does not generate significant effect on the green total factor productivity of China's provinces when using the two stage least squares (2SLS) estimator to control for the potential endogeneity biases. On the other hand, there exists significant heterogeneity in the effect of the CO2 intensity regulation on the green TFP of China's provinces. Specifically, the CO2 intensity regulation promotes the green development performance of provinces in the eastern area, while it does not generate obvious impacts on the green TFP of provinces in both central and western areas.

The Social Efficiency of Electricity Transition Policies Based on Renewables. Which Ways of Improvement?

Manuel Villavicencio and Dominique Finon

DOI: 10.5547/01956574.43.6.mvil
View Abstract

Climate and energy policies use to be embedded in joint packages with seeming coherent goals on which the electricity sector is targeted. However, the complexity of power systems is rarely fully apprehended while setting up such packages, particularly when technical externalities from variable renewable energies (VRE) become widespread and different sources of flexibility need to be considered. We use a detailed power system model subject to a combination of RE goals and CO2 caps to seize their interplays and propose a methodology to rank the resulting equilibriums in terms of environmental effectiveness and economic efficiency. We show that: only modest levels of VRE develop without subsidies regardless the level of the CO2 cap; technical externalities create trade-offs between VRE penetration and environmental effectiveness; new flexibility technologies may correct or exacerbate these externalities, impacting effectiveness, costs, and coherence of such packages, requiring a sensitive target hierarchization and fine-tuning of such instruments.

Market Segmentation and Energy Efficiency: Evidence from China’s Regional Economies

Liang Nie and ZhongXiang Zhang

DOI: 10.5547/01956574.43.6.lnie
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Existing studies have focused on the negative impact of inefficient resource allocation on energy performance in China, but neglected to explore the underlying reason for this phenomenon from the perspective of market segmentation. To fill this research gap, the epsilon-based measure model is used to estimate energy efficiency, and the measurement method of market segmentation is improved in this paper. On the basis of a theoretical hypothesis, we use fractional regression models to conduct empirical research. The results show that market segmentation has a significant negative effect on China's energy efficiency. Additionally, this inhibitory effect is robust but heterogeneous. The impact mechanism test indicates that energy price distortion, enterprise technology innovation, and industrial agglomeration are three intermediate influence channels. Based on these analyses, we suggest that China should accelerate market-oriented reform and eliminate market segmentation in pursuit of energy-saving and emission-abating goals.

Investor Attention to Fossil Fuel Divestment Movement and Stock Returns

Imane El Ouadghiri, Mathieu Gomes, Jonathan Peillex, and Guillaume Pijourlet

DOI: 10.5547/01956574.43.6.ioua
View Abstract

This study investigates whether the investor attention to the fossil fuel divestment (FFD) movement is related to the stock returns on firms involved in extracting fossil fuels. Three complementary indicators of investor attention to the FFD movement are considered: (1) the U.S. weekly Google Search Volume Index on the topic "fossil fuel divestment," (2) the U.S. weekly media coverage of fossil fuel divestment, and (3) the number of weekly visits to the "fossil fuel divestment" page on Wikipedia. Based on a sample of weekly returns on 1,850 U.S. firms over the period 2012–2020, our econometric estimations report a positive relationship between investor attention to FFD and excess stock returns for U.S. fossil fuel–related firms. Therefore, contrary to what the FFD campaigners might expect, the stigmatization of the fossil fuel industry does not drive down the stock returns on fossil fuel–related firms.

Energy Efficiency and Energy Governance: A Stochastic Frontier Analysis Approach

J. Barrera-Santana, G.A. Marrero, and F.J. Ramos-Real

DOI: 10.5547/01956574.43.6.jbar
View Abstract

This work analyzes the impact of energy governance on energy efficiency in a set of 29 OECD countries. A Stochastic Frontier Analysis (SFA) approach is conducted to estimate the energy efficiency levels in this sample of countries between 2000 and 2015. Energy governance is measured by an Energy Efficiency Governance Index (EEGI) constructed in Barrera-Santana et al. (2020). The results suggest that increasing the average quality of energy governance by 10% could raise energy efficiency levels by around 9.20%, according to the estimate of our preferred SFA model. To achieve this outcome there are two key requirements: set quantified and achievable targets, and carry out an extensive evaluation of the results of energy policies. Our results are robust to different econometric approaches and variations of the EEGI.

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