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The Energy Journal
Volume 45, Number 2



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Carbon-free Electricity Supply in a Cournot Wholesale Market: Israel

Irena Milstein, Asher Tishler, and Chi-Keung Woo

DOI: 10.5547/01956574.45.2.imil

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Abstract:
We develop a two-stage model to analyze a Cournot wholesale electricity market in which competing firms use photovoltaics augmented with batteries (PVB) or combined cycle gas turbines (CCGTs) to meet time-varying demands. Capturing the complex interactions of output and investment decisions made by multiple profit-maximizing PVB and CCGT firms, our model yields the market's long-run equilibrium of capacity mix and short-run equilibrium of electricity generation and price levels. Accounting for the sun's irradiation that determines solar generation level, our model computes the battery cost reduction necessary for batteries entering the optimal capacity mix. Using Israel as a case study, we show how declining battery cost may cause PVB firms to displace CCGT firms, resulting in carbon-free electricity supply as a market-based outcome. The battery cost threshold initiating this outcome is ~24% of CCGT's capacity cost, implying that natural gas is a transitional fuel in Israel's pathway to deep decarbonization.




How to Value Proved but Undeveloped Petroleum Reserves

Lawrence M. Vielhaber

DOI: 10.5547/01956574.45.2.lvie

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Abstract:
Proved undeveloped reserves (PUDs) are typically assigned a value of zero when the cost to produce them is greater than the prevailing forward curve. The zero valuation occurs despite the option value contained in even the most expensive PUDs. While PUDs are worthless if spot and forward prices forever remain below the cost to produce them, they have positive value if either the spot price or a contracted futures price exceeds the cost at any time. Since the probability that future prices exceed cost is positive, PUDs have positive option value despite the industry practice.Zero valuation occurs primarily because financing is unavailable when hedging is contingent on uncertain future outcomes where probabilities cannot be modeled. The failure of models to recognize contingent hedging is a limitation that leads to chronically undervalued PUDs in marginal and sub-marginal price environments. The literature is silent on contingent hedging where financing is dependent on forward curves that will not exist until some future date. This paper introduces a model that addresses these limitations.




How Does Industrial Intellectualization Affect Energy Intensity? Evidence from China

Haitao Wu, Ruohan Zhong, Zhen Wang, Yuanfeng Qu, Xiaodong Yang, and Yu Hao

DOI: 10.5547/01956574.45.2.hawu

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Abstract:
Since the 21st century, as the digital economy has flourished and the Fourth Industrial Revolution has deepened, emerging technologies have exerted a significant influence on social development, leading to the rapid informatization and digitalization of society. Therefore, in the digital age, industrial intellectualization and energy intensity may interact. In this study, an industrial intelligent system is constructed considering three aspects, and the relationship is explored between industrial intellectualization and energy intensity from 2006 to 2018 in China. Industrial intellectualization can effectively improve energy efficiency and thus restrain energy intensity with a significant lag effect. In addition, China's energy intensity is highly spatially autocorrelated and spatially agglomerated. The negative spatial spillover effect of industrial intellectualization on energy intensity is also of concern. Finally, the nonlinear effects of industrial intellectualization on energy intensity are comprehensively analyzed under different levels of economic growth, technological progress, industrial restructuring, educational progress, financial development, and environmental regulation.




Evaluating Oil Price Forecasts: A Meta-analysis

Michail Filippidis, George Filis, and Georgios Magkonis

DOI: 10.5547/01956574.45.2.mfil

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Abstract:
Oil price forecasts have traditionally attracted the interest of both the empirical literature and policy makers, although research efforts have been intensified in the last 15 years. The present study investigates the forecasting characteristics that have the greatest impact on the accuracy level of such forecasts. To achieve this, we employ a meta-analysis approach of more than 6,000 observations of relative root mean squared errors (RRMSEs) which are pooled within a Bayesian Model Averaging (BMA) method. The findings indicate that forecasting frameworks such as MIDAS and combined forecasts tend to report significantly lower forecast errors. In addition, the choice of the oil price benchmark is an important factor, with the Brent price to offer lower forecast errors. Furthermore, the short-run horizons tend to produce more accurate forecasts and the same holds for the real, instead of the nominal oil prices. A number of robustness tests confirms the validity of these results. Overall, the findings of this study serve as a guide for future oil price forecasting exercises.




An Analysis of Households Choice of Solid Fuels as a Primary and Supplementary Heating Fuel

John Eakins, Bernadette Power, and Gordon Sirr

DOI: 10.5547/01956574.45.2.jeak

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Abstract:
The residential sector in Ireland is a large user of solid fuels for space heating purposes. Solid fuels are commonly used to supplement other forms of heating rather than as the primary source. Using a survey data set of Irish households and a multinomial logit approach, differences between the household characteristics of primary and supplementary solid fuel users are identified, including for levels of education, age of dwelling, location and pro-environmental attitudes. Evidence also shows that increases in income lead to a transition away from primary solid fuel use but not supplementary consumption, suggesting that an energy stacking model explains the household's choice of heating fuels in Ireland. Given the established effects that solid fuels have on air quality and the scale of supplementary solid fuel use, policies to promote a transition to cleaner fuels need to account for the clear differences in the features of the two user groups.




Oil Company Investment in Offshore Windfarms: A Business Case

Petter Osmundsen, Magne Emhjellen-Stendal, and Sindre Lorentzen

DOI: 10.5547/01956574.44.6.posm

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Abstract:
European petroleum majors have moved into offshore windfarm projects, with large investments and ambitious capacity and production targets. In aggressive bidding for Contracts for Difference in the UK, where oil companies have played a key part, we have seen the inflation-adjusted strike price fall 65% from 2015 to 2019. Researchers question whether LCOE will fall to the same extent and would like to see more research on the economic return of the companies making offshore wind investment. We address this by a transparent project economics analysis of the UK bottom-fixed Dogger Bank project. It is the largest offshore windfarm project in the world under development and the UK is the country with highest offshore wind capacity. The project is owned by Equinor, SSE Renewables and ENI. Our analysis shows that the project is expected to be unprofitable. Several of the input variables, however, are subject to considerable estimation uncertainty. We also present a low case and a high case scenario. Decomposition of the high case reveals factors that can contribute to a profitable wind power industry. We discuss financial issues facing oil company investment portfolios combining low return/low risk renewables and high return/high risk petroleum. Offshore windfarms are organised as special purpose vehicle (SPV) companies. We analyse the economic interactions between the SPVs and the oil companies, and address accounting and financial issues.




When and Under What Conditions Does an Emission Trading Scheme Become Cost Effective?

Hongyan Zhang, Lin Zhang, and Ning Zhang

DOI: 10.5547/01956574.45.2.hzha

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Abstract:
This paper studies when and under what conditions the actions undertaken by the power plants involved in China's emission trading scheme (ETS) pilot became cost effective. Based on unique plant-level panel data and the difference-in-differences strategy, we identify that an insignificant initial reduction in cost efficiency occurred at the announcement stage for power plants in the pilot provinces; however, the cost efficiency of the pilot plants increased significantly following formal policy implementation. Additionally, the by-stage treatment effects differed across the pilot provinces due to localized market and non-market variations. Localized conditions of higher marketization, stricter policy enforcement, and lower carbon dependence enhanced this positive effect. The synthetic control results confirmed this variation in the policy effects. The carbon trading pilots resulted in improved efficiency in power plants in Shanghai, Guangdong, and Tianjin during the period 2013–2017, with an associated total cost saving of approximately 29.75 million RMB. To enhance the efficacy of the ETS policy, our findings suggest that the design of the policy should consider localized external factors.




Measuring Switching Costs in the Italian Residential Electricity Market

Marco Magnani, Fabio M. Manenti, and Paola Valbonesi

DOI: 10.5547/01956574.45.2.mmag

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Abstract:
Residential electricity markets in European countries are still characterized by low consumer engagement, especially where regulated and liberalized markets coexist. Using an original dataset on 2015-2018 prices for the Italian electricity market, augmented with the number of residential consumers, we study the presence and magnitude of switching costs-i.e., time-based and cognitive-based costs on consumers changing providers-in the liberalized market. We find that switching from the incumbent involves high costs-almost as high as the yearly energy expenditure-while switching from competitors is less expensive. We also carry out two counterfactual analyses. In the first, we show that consumers would have incurred lower average switching costs over the years had the markset been less concentrated. In the second, we simulate how switching costs could evolve once regulated prices are phased out, and the market is fully liberalized.




The Asymmetric Relationship between Conventional/Shale Rig Counts and WTI Oil Prices

Massimiliano Caporin, Fulvio Fontini, and Rocco Romaniello

DOI: 10.5547/01956574.45.2.mcap

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Abstract:
This work analyses the asymmetric response of conventional and shale oil rig counts to WTI oil price returns. Our analysis shows that the rig count time series exhibited a structural change after the oil glut of 2014. All series are non-stationary in each sub-period but not cointegrated. Therefore, after controlling for possible confounding factors, a vector auto regressive (VAR) model is set up. Our specification accounts for the possible role of oil production and distinguishes between positive and negative oil price changes. It is shown that shale and conventional rig counts reacted differently in each subperiod to signed changes in oil price. Subsequently, by evaluating the response of rig counts to oil price shocks, their intensity and duration over time, we observe that the shale oil rig count reacts more intensively to positive than to negative oil price changes. On the contrary, the conventional rig count exhibits a modest reaction only to positive price changes. Finally, we robustify our findings by focusing on the data of the Permian basin, on the one hand, and the Anadarko, Bakken, Eagle Ford and Niobrara, on the other hand, which are characterized by different patterns in the number of Drilled but not Completed wells.




Cost Focus versus Comfort Focus: Evidence from a Discrete Choice Experiment with Swiss Residential Electricity Customers

Christian Winzer and Hongliang Zhang

DOI: 10.5547/01956574.45.2.cwin

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Abstract:
Based on a discrete choice experiment with 582 households in Switzerland, we find, that about 30% of the customers focus on price risks (cost focus) when they choose an electricity tariff, while 70% of the customers are more worried about volume risks (comfort focus). Customers with a cost focus, prefer contracts with low price risks and automatic load control, even when these contracts increased their volume risks and may lead to discomfort, while customers with a comfort focus are unlikely to choose a contract that exposes them to either price or volume risks. All customers prefer direct load control of individual appliances to capacity subscriptions or other demand response approaches which limit their total electricity demand. While customers with a cost focus likely accept direct load control even if this reduces their comfort, enrolling customers with a comfort focus will require further efforts and contracts avoiding comfort loss.




 

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