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The Energy Journal
Volume 44, Number 1



Analyzing Commodity Prices in the Context of COVID-19, High Inflation, and the Ukrainian War: An Interview with James Hamilton

Fredj Jawadi

DOI: 10.5547/01956574.44.1.fjaw
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Abstract:
The following interview with Prof. James Hamilton was conducted in September 2022 by Dr. Fredj Jawadi with the assistance of Professor Adonis Yatchew in association with the 6th International Workshop on Financial Markets and Nonlinear Dynamics (FMND) held in Paris, France. The interview includes 20 questions related to commodity price dynamics. The aim of the discussion was, first, to help readers gain a better understanding of the factors driving commodity price volatility during the COVID-19 pandemic. Second, we analyzed commodity reactions to the ongoing Ukrainian war. Third, we examined the impact of changes in commodity prices on the economy as a whole and on inflation in particular. Finally, we discussed projections related to the dynamics of commodity prices in the future and the impact on the energy transition process. We hope that this interview will give readers clearer insights into the causes and consequences of commodity price changes and their evolution over time.




The Cost of Carbon Leakage: Britain’s Carbon Price Support and Cross-border Electricity Trade

Bowei Guo and David Newbery

DOI: 10.5547/01956574.44.1.bguo
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Abstract:
Carbon taxes create global benefits unless offset by increased emissions elsewhere. An additional carbon tax in one country may cause leakage through imports and will also increase costs by creating a wedge between economic marginal costs in different markets, causing an offsetting deadweight loss. We estimate the global benefit, carbon leakage and deadweight cost of the British Carbon Price Support (CPS) on GB's cross-border electricity trade with France and The Netherlands. Over 2015–2020 the unilateral CPS created €72±20 m/yr deadweight loss, about 31% of the initial economic value created by the interconnector, or 2.5% of the global emissions benefit of the CPS at €2.9±0.1 bn/yr. About 16.3±3.5% of the CO2 emissions reduction is undone by France and The Netherlands, the monetary loss of which is about €584±127 m/yr.




Energy Efficiency Premium Issues and Revealing the Pure Label Effect

Aras Khazal and Ole Jakob Sonstebo

DOI: 10.5547/01956574.44.1.akha
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Abstract:
Following the European Union's implementation of Energy Performance Certificates (EPCs) for buildings, the capitalization of energy efficiency in transaction prices and rents has been subject to much research. This paper uses different identification strategies for the Norwegian residential sales (N = 750,000) and rental (N = 670,000) markets to highlight the endogeneity and methodological limitations associated with assessing the price effects of energy efficiency and the signaling effect of label adoption. We find that the valuation of energy efficiency is subject to unobserved location and quality bias, that labeling has immediate, short-run, and long-run price effects and that different effects are observed in different submarkets. We provide evidence that sample selection issues related to location and time, with methodological and data limitations, are essential factors that must be considered when assessing the effects of the EPC implementation.




Market Power and Long-term Gas Contracts: The Case of Gazprom in Central and Eastern European Gas Markets

Chi Kong Chyong, David M Reiner, and Dhruvak Aggarwal

DOI: 10.5547/01956574.44.1.cchy
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Abstract:
We explore a major European competition decision, the 2012-18 Gazprom case, using a global gas market simulation model. We find that access to LNG markets alone is insufficient to counterbalance Gazprom's strategic behaviour; central and eastern Europe (CEE) needs to be well interconnected with bidirectional flow capability. 'Swap deals' created by the decision facilitate CEE market integration, while limiting Gazprom's potential market power. Such deals may increase the diversity of contracted gas and number of market players, but do not improve physical supply diversity. In the next five years, swap deals could marginally impact negatively the utilization of strategic assets in CEE, but since Gazprom's commitments expire by mid-2026, utilization of these strategic assets may fall considerably, especially if Gazprom withholds supplies. As an unintended consequence, CEE markets may disintegrate from the rest of Europe. Avoiding such outcomes will require further gas market reforms, particularly, market design for gas transportation.




The Energy Efficiency Gap in the Rental Housing Market: It Takes Both Sides to Build a Bridge

Xavier Lambin, Joachim Schleich, and Corinne Faure

DOI: 10.5547/01956574.44.1.xlam
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Abstract:
We revisit the issue of the energy efficiency (EE) gap by explicitly acknowledging the two-sided nature of the rental housing market and two-sided asymmetries of information between tenants and landlords. Employing a theoretical matching model, we show that Energy Performance Certificates (EPCs) that signal a dwelling’s energy performance induce optimal EE investments by landlords only if tenants pay their energy expenditures in full. When landlords pay part of the energy expenditures, they seek tenants who will conserve energy. Our model shows that asymmetry of information over tenant characteristics results in suboptimally low investments in EE. This may even render EPCs counterproductive. As a remedy, we show that tenant-side signaling needs to be rolled out jointly with EPCs and may even be sufficient when contracts include energy expenditures. Data from an original survey provides support for these insights and suggests that information on the tenants’ side contributes to more EE investment.




Investing in Bridging Fuels: The Unit Commitment Problem of Public vs. Private Ventures

Filippos Ioannidis, Kyriaki Kosmidou, Iordanis Kalaitzoglou, Kostas Andriosopoulos, and Emilios Galariotis

DOI: 10.5547/01956574.44.1.fioa
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Abstract:
This paper presents an extensive comparison between public and private natural gas-fired units in managing the unit commitment problem in the context of the Greek electricity market. Using a unique hourly dataset from 2015–2019, our approach utilizes risk-weighted performance metrics—Cash Flows at Risk (CFaR) and Risk Weighted Return (RWR)—to analyze performance across the public and private units. Empirical findings indicate that publicly owned natural gas-fired units outperform privately owned natural gas-fired units in terms of operational efficiency, however the efficiency of privately owned natural gas-fired units is growing at a faster pace and is expected to surpass the efficiency of public units within 2 or 3 years.




The Negative Pricing of the May 2020 WTI Contract

Adrian Fernandez-Perez, Ana-Maria Fuertes, and Joelle Miffre

DOI: 10.5547/01956574.44.1.afer
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Abstract:
This paper sheds light on the negative pricing of the May 2020 WTI futures contract (CLK20) on April 20, 2020. The super contango of early 2020, triggered by COVID-19 lockdowns and geopolitical tensions, incentivized cash and carry (C&C) traders to be long CLK20 and short distant contracts, while simultaneously booking storage at Cushing. Our investigation reveals that C&C arbitrage largely contributed to the lack of storage capacity at Cushing in April 2020 and the price crash relates to the reversing trades of many long CLK20 traders without pre-booked storage. Additional aggravating factors included a liquidity crush, staggering margin calls and potential price distortions due to the trade-at-settlement mechanism. The analysis suggests that claims from experts that hold index trackers responsible for the crash are unwarranted: Index trackers did not trigger the negative pricing, nor widen the futures-spot spread by rolling their positions to more distant contracts ahead of maturity.




Compensating Solar Prosumers Using Buy-All, Sell-All as an Alternative to Net Metering and Net Purchasing: Total Use, Rebound, and Cross Subsidization

Peter M. Schwarz, Nathan Duma, and Ercument Camadan

DOI: 10.5547/01956574.44.1.psch
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Abstract:
Electric utilities are challenging net metering, which compensates owners of residential solar photovoltaic systems by crediting solar generation at the retail rate instead of reflecting the value of solar to the utility. In 2012, Austin Energy was the first US utility to replace net metering with Buy-All, Sell-All, where prosumers purchase all electricity at the retail rate and sell all electricity at the utility's value of solar rate. Using Austin Energy customer data for hot weather months, a load curve comparison of comparably sized houses shows that prosumers have higher consumption than non-solar customers during system peak hours. Regression analysis finds that prosumers use more energy for air conditioning, with a rebound effect of 20%. A simulation shows that under net metering and net purchasing almost 7% of prosumer bills would be paid by non-solar customers while total subsidy would be 18% due to the inclusion of increasing block rates.




Volatility Forecasting of Crude Oil Market: Which Structural Change Based GARCH Models have Better Performance?

Yue-Jun Zhang and Han Zhang

DOI: 10.5547/01956574.44.1.yzha
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Abstract:
GARCH-type models have been widely used for forecasting crude oil price volatility, but often ignore the structural changes of time series, which may lead to spurious volatility persistence. Therefore, this paper focuses on the smooth and sharp structural changes in crude oil price volatility, i.e., smooth shift and regime switching, respectively, and investigates which structural change based GARCH models have better performance for forecasting crude oil price volatility. The empirical results indicate that, first, the flexible Fourier form (FFF) GARCH-type models considering smooth shift can accurately model structural changes and yield superior fitting and forecasting performance to traditional GARCH-type models. Second, the Markov regime switching (MRS) GARCH model incorporating regime switching exhibits superior fitting performance compared to the single-regime GARCH-type models, but it does not necessarily beat the counterparts for forecasting. Finally, the FFF-GARCH-type models outperform MRS-GARCH for forecasting crude oil price volatility and portfolio performance.




Household Solar Analysis for Policymakers: Evidence from U.S. Data

Rohan Best and Ryan Esplin

DOI: 10.5547/01956574.44.1.rbes
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Abstract:
There is a vast literature on household solar-panel uptake but there are mixed results for many explanatory variables such as income, education, age, and race. This creates a major challenge for policymakers, who devise solar-panel policies that relate to variables such as income. This study uses logit, probit, and linear probability models, along with the matching method of entropy balancing. We use household data from the 2019 American Housing Survey. Results using entropy balancing suggest that high housing values and older respondent age are key factors promoting solar-panel uptake. Income has some positive impacts, although detailed analysis tends to show insignificance. Education and race variables have insignificant coefficients when controlling for key variables. This paper could provide a basis for future policy approaches, such as means testing based on asset thresholds rather than income thresholds.




The Economics of Demand-side Flexibility in Distribution Grids

Athir Nouicer, Leonardo Meeus, and Erik Delarue

DOI: 10.5547/01956574.44.1.anou
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Abstract:
To avoid unnecessary distribution network investments, distribution tariffs are expected to become more cost-reflective, and DSOs are expected to procure flexibility. This will provide an implicit and an explicit incentive to provide demand-side flexibility. In this paper, we develop a long-term bi-level equilibrium model. In the upper level, the DSO optimizes social welfare by deciding the level of investment in the distribution network and/or curtailing consumers. The regulated DSO also sets a network tariff to recover the network and flexibility costs. In the lower level, the consumers, active and passive, maximize their own welfare. We find that implicit and explicit incentives for demand-side flexibility are complementary regulatory tools, but there are limits. If network tariffs are too imperfect, the resulting consumption profiles can become too expensive to fix with curtailment. We also find that it is difficult to set an appropriate level of compensation because of the reaction by prosumers.




Revisiting Energy Subsidy Calculations: A Focus on Saudi Arabia

Anwar A. Gasim and Walid Matar

DOI: 10.5547/01956574.44.1.agas
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Abstract:
The implicit nature of many energy subsidies has led to disagreements over what defines a ‘subsidy' while making it difficult to estimate their indirect fiscal cost. Most energy subsidies in Saudi Arabia are implicit, leading to forgone government revenue. Using a comprehensive dataset, we estimate energy subsidies in Saudi Arabia for ten fuels and electricity for the 2007–2018 period. We begin by applying the price-gap method, then introduce a formulation that better captures the forgone revenues from maintaining a subsidy, accounting for the domestic demand response to the removal of the subsidy, which in turn frees up exports that can reduce the international market price. Our method shows that the magnitude of Saudi Arabia's implicit energy subsidies may be overestimated. For instance, we find that the crude oil subsidy can fall from $8.6 billion (the price-gap estimate) to as low as $3.3 billion in 2018.




Manufacturing in a Natural Resource Based Economy: Evidence from Canadian Plants

Saeed Moshiri, Gry Ostenstad, and Wessel N. Vermeulen

DOI: 10.5547/01956574.44.1.smos
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Abstract:
This study investigates the effects of an oil boom on manufacturing plants performance. First, we derive several predictions using a model of heterogeneous firms. Second, we test these predictions on a plant level dataset using the Canadian Annual Survey of Manufacturers for 2000–2010. We exploit the time variation of the booming natural resource sector revenue in an oil-producing area in combination with the location of manufacturing plants to create an exogenous treatment variable. The outcome variables include plant level wages, employment, sales, and exports. We find that initial plant level productivity provides an important differentiation in average plants effects. Plants that are more productive become more likely to export in response to the oil boom, while less productive plants become less likely to export. Exporting firms become more likely to increase wages relative to non-exporting firms, but less likely to increase employment. While there is a great variety in the effect by sector, we do not observe that industry linkages with the resource industry drive plant performance.






 

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