Energy Journal Issue

The Energy Journal
Volume 44, Number 4



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Oil Price Uncertainty and M&A Activity

Samuel D. Barrows, Magnus Blomkvist, Nebojsa Dimic, and Milos Vulanovic

DOI: 10.5547/01956574.44.4.sbar

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One Price Fits All? On Inefficient Siting Incentives for Wind Power Expansion in Germany under Uniform Pricing

Lukas Schmidt and Jonas Zinke

DOI: 10.5547/01956574.44.4.lsch

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Abstract:
This paper evaluates investment incentives for wind power under two market designs: uniform and nodal pricing. An electricity system model is developed, that allows for investments in wind power capacities while carefully accounting for static transmission grid constraints. Wind power capacities are assumed to reach the same expansion target by 2030 under both market designs. The results show that the introduction of nodal prices leads to investments in wind power plants shifting to locations with lower wind yield. The amount of electricity fed into the grid from wind power plants, however, is higher under nodal pricing as curtailment is reduced by two-thirds. Furthermore, grid-optimal wind locations are shown to require higher direct subsidy payments but decrease yearly variable supply costs by 1.5% in 2030. Yet distributional effects present an obstacle to the introduction of a nodal pricing regime, with about 75% of German demand facing an increase in electricity costs of about 5%. To mitigate the distorted investment signals arising from uniform pricing regimes, restricting investments within grid expansion areas proves to be more promising than including latitude-dependent generator-component in the grid tariff design.




Evidence of a Homeowner-Renter Gap for Electric Appliances

Lucas W. Davis

DOI: 10.5547/01956574.44.4.ldav

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Abstract:
This paper provides the first empirical analysis of the homeowner-renter gap for electric appliances. Using U.S. nationally representative data, the analysis shows that renters are significantly more likely than homeowners to have electric heat, electric hot water heating, an electric stove, and an electric dryer. The gap is highly statistically significant, prevalent across regions, and holds after controlling for the type, size, and age of the home, as well as for climate and household characteristics. The paper argues that this gap arises from the same split incentives that lead to the "landlord-tenant problem" and discusses the implications of the gap for an emerging set of policies aimed at reducing carbon dioxide emissions through building electrification.




Futures Prices are Useful Predictors of the Spot Price of Crude Oil

Reinhard Ellwanger and Stephen Snudden

DOI: 10.5547/01956574.44.4.rell

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Abstract:
How well do futures prices forecast the spot price of crude oil? Contrary to the established view, futures prices significantly improve upon the accuracy of monthly no-change forecasts. This results from two innovations. First, we document that independent of the construction of futures-based forecasts, longer-horizon futures prices have become better predictors of crude oil spot prices since the mid-2000s. Second, we show that futures curves constructed using end-of-month prices instead of average prices have consistently been able to generate large accuracy-improvements for short-horizon forecasts of average prices. These findings are remarkably robust and apply to all major crude oil benchmarks.




The Distribution of Energy Efficiency and Regional Inequality

Puja Singhal and Andrew Hobbs

DOI: 10.5547/01956574.44.4.psin

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Abstract:
This paper uses data on heating bills to study the distribution of energy efficiency outcomes in the German multi-apartment residential building stock. To uncover the underlying energy efficiency of buildings, we estimate the causal response of heat energy demand to variability in heating degree days. We examine the heterogeneity in temperature response using both fixed effects regressions and causal forests, and pay close attention to the regional socioeconomic distribution. Our results suggest that the distribution of energy efficiency is not equitable in the West of Germany. We show that although the newer and more energy-efficient buildings are located in the South of Germany, the older building stock in less prosperous East regions of Germany are surprisingly energy efficient, likely as a result of large investments in renovations post-reunification. Finally, we show that the regional distribution of energy efficiency reflects, in part, differences in heating needs – thus, the poorer energy standards of buildings in the North-West should be weighed against the warmer climatic zone.




Does Income Affect Climbing the Energy Ladder? A New Utility-Based Approach for Measuring Energy Poverty

Luan Thanh Nguyen, Shyama Ratnasiri, and Liam Wagner

DOI: 10.5547/01956574.44.4.lngu

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Abstract:
Energy poverty measures are gradually becoming less relevant for fast-developing countries, where the energy mix consists of traditional and modern energies. We propose a new approach for measuring energy poverty by modifying the Exact Affine Stone Index (EASI) demand system to include implied disutility of energy use. The disutility arises from the effects of price or income changes and the use of polluting energies. Using data from Vietnam, we found that energy poverty could happen at higher income levels than the level considered in the literature, and higher incomes may not encourage households to climb the energy ladder. However, consuming carbon-intensive fuel does not necessarily mean energy poor.s




Decentralised Cross-Border Interconnection

Claude Crampes and Nils-Henrik M. von der Fehr

DOI: 10.5547/01956574.44.4.ccra

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Abstract:
Reaping the full benefits from cross-border interconnection typically requires reinforcement of national networks. When the relevant parts of the networks are complements, a lack of coordination between national transmission system operators results in investment below optimal levels in both interconnectors and national infrastructure. A subsidy to financially sustain interconnector building is not sufficient to restore optimality; indeed, even when possible, such subsidisation may have to be restrained so as not to encourage cross-border capacities that will not be fully utilised due to lack of investment in national systems.




Common Stock Returns around Farmout Announcements in the Oil and Gas Industry

Luiz Fernando Distadio, Andrew Ferguson, and Peter Lam

DOI: 10.5547/01956574.44.4.ldis

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Abstract:
We examine market reactions to farmout agreements, a common form of strategic alliance undertaken by oil and gas explorers internationally. Using an Australian sample of 722 farmout agreements announced during the 1990–2016 period, we find that farmout announcements generate a positive cumulative average abnormal return of 3.60% for farmors and 1.90% for farminees over a 3-day event window. Cross-sectional analysis of farmors' event returns provides results consistent with the resource pooling hypotheses. We also find that farmors' announcement returns are sensitive to the underlying oil price volatility, consistent with the real options view of farmout arrangements.




Reaching New Lows? The Pandemic’s Consequences for Electricity Markets

David Benatia and Samuel Gingras

DOI: 10.5547/01956574.44.4.dben

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Abstract:
The COVID-19 crisis has disrupted electricity systems worldwide. This article disentangles the effects of the demand reductions, fuel price devaluation, and increased forecast errors on New York's day-ahead and real-time markets by combining machine learning and structural econometrics. From March 2020 to February 2021, statewide demand has decreased by 4.6 TWh (-3%) including 4 TWh (-8%) for New York City alone, and the day-ahead market has depreciated by $250 million (-6%). The real-time market has, however, appreciated by $15 million (+23%) because of abnormally large forecast errors which significantly undermined system efficiency.




Oil Price Shocks and Current Account Imbalances within a Currency Union

Timo Baas and Ansgar Belke

DOI: 10.5547/01956574.44.4.tbaa

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Abstract:
For over two decades, current account imbalances have been an essential issue in the global policy debate as they threaten the world economy's stability. More recently, the government debt crisis of the European Union shows that internal current account imbalances of a currency union may also add to these risks. Moreover, oil price fluctuations and a contracting monetary policy that reacts to oil prices, previously discussed to affect the current account, may threaten the currency union by increasing internal imbalances. Therefore, this paper analyzes the oil price shock's impact on current account imbalances of a currency union with asymmetric labor market institutions. In this context, we show that oil price shocks can have a long-lasting effect on internal balances that the common monetary policy authority can reduce by choosing a core inflation target. Targeting core inflation, however, comes at the cost of lower production and higher unemployment. We show that these costs can be significantly reduced by increasing labor market flexibility.




Cross-border Effects between the Spanish and French Electricity Markets: Asymmetric Dynamics and Benefits in the Light of European Market Integration

Ignacio Mas Urquijo and Florentina Paraschiv

DOI: 10.5547/01956574.44.4.imas

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Abstract:
We investigate cross-border dynamics between the Spanish and French electricity markets in the light of EU's market integration. The analysis is highly relevant given the isolation of the Iberian Peninsula from the rest of European markets and its unique electricity market design. Results show the shift in the merit order curve in each market. Electricity prices in Spain follow the dynamics of the French ones, fostered by Spain's import-dependence. Benefits of grid integration are asymmetric, with Spanish users taking advantage of the market integration with France. The substitution effect between domestic fuel-based units and imported green electricity allows Spain to further decarbonize its energy mix and increase the security of supply. The expansion of the cross-border grid until 2030 will be key for a successful phasing out of the remaining coal-based units. Our findings should be considered in support schemes for integration projects to align the incentives of participants.




Turkish Straits and an Important Oil Price Benchmark: Urals

Duygu Ekin Ayasli, Yeliz Yalcin, Serkan Sahin, and M. Hakan Berument

DOI: 10.5547/01956574.44.4.daya

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Abstract:
The Turkish Straits is one of the busiest waterways in the World. Around 4% of the world's crude oil trade passes through the Turkish Straits. We model the CIF Mediterranean price of Urals crude, one of the world's most critical medium gravity crude brands that passes through the Turkish Straits. The empirical evidence provided here suggests that congestion (measured in terms of the waiting time for entering the Turkish Straits) increases the CIF Mediterranean price of Urals crude up to 5.05% and 3.09% for the İstanbul and Çanakkale straits, respectively. However, similar supporting evidence could be found for neither an important benchmark oil (Brent) nor Iranian Light, which has similar characteristics and can be considered a close substitute for Urals crude in the Mediterranean refinery market. This shows that the Turkish Straits have an important impact on the price of this important medium crude oil in world oil markets.




Book Reviews

America's Energy Gamble: People, Economy, and Planet, by Shanti Gamper-Rabindran - Book Review by: Timothy Fitzgerald

Handbook on Electricity Markets, edited by Jean-Michel Glachant, Paul Joskow, and Michael G. Pollitt - Book Review by: Blake Shaffer

Power Shift. The Global Political Economy of Energy Transitions, by Peter Newell - Book Review by: Philip Andrews-Speed





 

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