Energy Journal Issue

The Energy Journal
Volume 44, Number 5



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The Threshold Role of FDI Flows in the Energy-Growth Nexus: An Endogenous Growth Perspective

Olayeni Olaolu Richard, Jemiluyi Olayemi Olufunmilayo, Aviral Kumar Tiwari, and Shawkat Hammoudeh

DOI: 10.5547/01956574.44.4.oric

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Abstract:
In this paper, we have investigated the implications of the threshold effect of changes in FDI inflows for the nexus between energy consumption and economic growth in eight under-researched sub-Saharan African countries for the period 1971–2016. The countries are Benin, Congo, Kenya, Nigeria, Senegal, South Africa, Sudan, and Zambia. Using the lag-augmented VAR (LAVAR) model (corrected for cross-sectional dependence), we develop an empirical framework tightly linked to the endogenous growth model that allows for a threshold effect of changes (strength and weakness) in FDI inflows on the nexus. Our findings show that the FDI inflows matter for the causal link between energy consumption and economic growth in some countries, although, for the cross-section as a whole, our bootstrap simulation supports the neutrality hypothesis. The overall results suggest that an energy demand policy, such as an energy conservation policy, should not cause any significant adverse side-effects to economic growth in those sub-Saharan African countries. Policy implications of the threshold effect for the nexus for individual sub-Saharan African countries are also provided.




Green Bonds for Renewable Energy in Latin America and the Caribbean

Juan David González-Ruiz, Juan Camilo Mejía-Escobar, Javier Rojo-Suárez, and Ana-Belén Alonso-Conde

DOI: 10.5547/01956574.44.4.jgon

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Abstract:
This paper comprehensively analyzes the overall status of the green bond market in Latin America and the Caribbean (LAC) for the renewable energy sector. Our results show that, in most cases, issuers are non-financial corporations. Also, despite LAC's low perception of transparency, 78% of the volume issued has been externally reviewed. In general terms, the barriers imposed on issuance by local governments, mainly municipal debt ceiling, low credit rating and solvency, limited capabilities to prepare bankable projects, and lack of communication channels between the financial sector and local governments, constrain the green bond market in LAC. Furthermore, although the presence of development institutions that promote the issuance of green bonds in the renewable sector has improved in recent years, it is mandatory to continue making progress in this area. For that purpose, closer cooperation and alliances are essential to share responsibilities and knowledge in LAC.




Climate Policy and Strategic Operations in a Hydro-Thermal Power System

Farzad Hassanzadeh Moghimi, Hanna Ek Fälth, Lina Reichenberg, and Afzal S. Siddiqui

DOI: 10.5547/01956574.44.4.fmog

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Abstract:
Decarbonisation of the Nordic power sector entails substantial variable renewable energy (VRE) adoption. While Nordic hydropower reservoirs can mitigate VRE output's intermittency, strategic hydro producers may leverage increased flexibility requirements to exert market power. Using a Nash-Cournot model, we find that even the current Nordic power system could yield modest gains from strategic reservoir operations regardless of a prohibition on "spilling" water to increase prices. Instead, strategic hydro producers could shift generation from peak to off-peak seasons. Such temporal arbitrage becomes more attractive under a climate package with a €100/t CO2 price and doubled VRE capacity. Since the package increases generation variability, lowers average prices, and makes fossil-fuelled plants unprofitable, strategic hydro producers face lower opportunity costs in shifting output from peak to off-peak seasons and encounter muted responses from price-taking fossil-fuelled plants. Hence, a climate package that curtails CO2 emissions may also bolster strategic hydro producers' leverage.




A Quantitative Model of the Oil Tanker Market in the Arabian Gulf

Lutz Kilian, Nikos Nomikos, and Xiaoqing Zhou

DOI: 10.5547/01956574.44.4.lkil

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Abstract:
Using a novel dataset, we develop a structural model of the Very Large Crude Carrier (VLCC) market between the Arabian Gulf and the Far East. We study how fluctuations in oil tanker rates, oil exports, shipowner profits, and bunker fuel prices are determined by shocks to the supply and demand for oil tankers, to the utilization of tankers, and to the cost of operating tankers, including bunker fuel costs. Our analysis shows that time charter rates are largely unresponsive to tanker cost shocks. In response to higher costs, voyage profits decline, as cost shocks are only partially passed on to round-trip voyage rates. Oil exports from the Arabian Gulf also decline, reflecting lower demand for VLCCs. Positive utilization shocks are associated with higher profits, a slight increase in time charter rates and lower fuel prices and oil export volumes. Tanker supply and tanker demand shocks have persistent effects on time charter rates, round-trip voyage rates, the volume of oil exports, fuel prices, and profits with the expected sign.




Coal-Biomass Co-firing within Renewable Portfolio Standards: Strategic Adoption by Heterogeneous Firms and Emissions Implications

Brayam Valqui, Mort D. Webster, Shanxia Sun, and Thomas W. Hertel

DOI: 10.5547/01956574.44.4.bval

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Abstract:
As electricity from coal declines, co-firing coal plants with biomass has been proposed to extend coal unit life, increase production, and reduce carbon emissions. Previous studies reach conflicting conclusions on whether coal biomass co-firing would result in a net increase or decrease in carbon emissions. We explore whether biomass co-firing would decrease emissions using a novel framework that includes two critical features of electricity markets: strategic adoption decisions by firms and intertemporal constraints on power plant operations. We apply this framework to a case study based on the Midwestern U.S. electricity market and show that profit maximizing firms will retrofit mid-efficiency coal units, rather than the most or least efficient units. We demonstrate that, contrary to expectations, this strategy leads to a net increase in system-wide carbon emissions under high carbon prices because of the other generators displaced by co-firing units.




Intraday Return Predictability in the Crude Oil Market: The Role of EIA Inventory Announcements

Zhuzhu Wen, Ivan Indriawan, Donald Lien, and Yahua Xu

DOI: 10.5547/01956574.44.4.zwen

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Abstract:
We study the impact of the announcements released by the US Energy Information Administration (EIA) on crude oil storage every Wednesday at 10:30 ET (the beginning of the third half-hour interval) on intraday return predictability, that is, intraday momentum. Our results indicate that returns on the third half-hour on EIA announcement days can significantly and positively predict the returns in the last half-hour, whereas, on non-EIA announcement days, only returns in the first half-hour have significant predictability. The dominant source of prediction in the first half-hour return mainly comes from the overnight component. EIA announcements contribute to intraday momentum because they attract more informed traders and because the period surrounding their release is often associated with a reduction in liquidity. Substantial economic gains can be made by using efficient intraday predictors as trading signals.




Renewable Portfolio Standards

Rachel Feldman and Arik Levinson

DOI: 10.5547/01956574.44.4.rfel

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Abstract:
State-level renewable portfolio standards (RPSs) aim to encourage renewable energy and discourage greenhouse gas (GHG) emissions from the electric power sector in the United States. Do they work? Some prominent government agencies and advocacy groups assert that U.S. renewables growth has been largely due to RPSs. That seems unlikely, given that in most regions, renewables exceed RPS requirements. But it is not an easy question to answer, thanks to interstate trading and the possibility that states with abundant renewable resources might set the most ambitious RPS goals. We combine the best features of four recent academic studies, using ordinary least-squares and instrumental variables approaches. In some specifications, RPSs do appear to reduce the use of natural gas to generate electricity and decrease GHG emissions, while boosting the use of wind and solar power. But the effects are small—consistent with the academic findings and in contrast to the public claims and policy goals.




The Influence of OPEC+ on Oil Prices: A Quantitative Assessment

Dominic Quint and Fabrizio Venditti

DOI: 10.5547/01956574.44.4.dqui

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Abstract:
Since 2017, a new coalition of oil producers led by OPEC and Russia (known as OPEC+) implemented production cuts to limit downward pressure on crude prices. The Covid-19 shock led to a temporary collapse of this coalition and to a price war among OPEC+ members, which contributed to the oil price slump that had originally been caused by widespread containment measures. As the oil market balance seems to crucially hinge on the stability of this coalition, we draw on the 2017–2020 experience to assess the effectiveness of OPEC+ in sustaining oil prices. Using a counterfactual analysis based on two complementary structural vector autoregression (SVAR) models, we find that the impact of OPEC+ on the price of oil was small, owing to significant deviations of oil producers from their assigned quotas. On average, without the OPEC+ cuts, the oil price would have been 6 percent (4 USD) lower than observed.




Residential CO2 Emissions in Europe and Carbon Taxation: A Country-Level Assessment

Dorothée Charlier, Mouez Fodha, and Djamel Kirat

DOI: 10.5547/01956574.44.4.dcha

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Abstract:
This paper examines the determinants of residential CO2 emissions, which are not covered by the European Union Emissions Trading System (EU ETS), in 19 European countries between 2000-2017. Using both static and dynamic panel models, we found strong relationships between CO2 emissions per capita, GDP per capita, energy prices and heating needs. We then assessed the impact of European carbon taxation and show that a €20/tonne CO2 tax lowers emissions by 1% on average. We found that this tax affects countries differently in terms of tax revenue-to-GDP ratio. Poland and the Czech Republic would have to pay the highest contribution, and Portugal and Denmark the lowest. Finally, we propose a scenario that equalizes countries' tax burdens. We show that, were Europe to redistribute all tax revenues, the main beneficiaries would be Poland and Belgium, while Denmark and Luxembourg would have to pay a surtax.




Gender, Energy Expenditure and Household Cooking Fuel Choice in Nigeria

Jennifer Uju Dim

DOI: 10.5547/01956574.44.4.jdim

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Abstract:
This paper investigates the impact of women's intra-household bargaining power on household cooking fuel choice. It further analyzes the determinants of household energy spending after the decision to use a given fuel has been made. The results reinforce the important role women play in the household cooking fuel choice and energy transition from traditional to modern fuel. In addition, income and education are found to be crucial factors that influence both household cooking fuel choice and energy expenditure. These findings imply that energy transition policies need to consider gender dimension and women's intra-household bargaining power.




What Should be Taken into Consideration when Forecasting Oil Implied Volatility Index?

Panagiotis Delis, Stavros Degiannakis, and Konstantinos Giannopoulos

DOI: 10.5547/01956574.44.4.pdel

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Abstract:
This study forecasts the oil volatility index (OVX) incorporating information from other implied volatility (IV) indices. We provide evidence for the existence of long memory in the OVX in order to justify the use of the Heterogeneous AutoRegressive (HAR) model. We extend the HAR model by implementing a dynamic model averaging (DMA) method in order to allow for IV indices from other asset classes to be applicable at different time periods. Apart from the statistical evaluation, a straddle options trading strategy validates our results from an economic point of view. The IV of Dow Jones is highly significant for short- and mid-run forecasting horizons, whereas, at longer horizons, the IV of Energy Sector provides accurate forecasts but only from an economic point of view.




Distributed Renewable Energy Investment: The Effect of Time-of-Use Pricing

Lu-Miao Li, Peng Zhou, and Wen Wen

DOI: 10.5547/01956574.44.5.luli

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Abstract:
This paper examines the effects of time-of-use (TOU) pricing on distributed renewable energy (DRE) investment for a non-power generating firm. We develop an electricity consumption cost-minimization model by considering the intermittent generation as well as the firm's electricity consumption. It has been found that implementing full retail prices compensation for the surplus renewable electricity is probably not good as it may lead to DRE over-investment. Moreover, we find that the firm's optimal investment strategy is not necessarily sensitive to the price signal of TOU pricing (i.e., the ratio of peak to off-peak price). Particularly, when the service-level difference in meeting a firm's electricity consumption between peak and off-peak periods by adopting DRE technology is above a critical threshold in relation to the peak time, a strong price signal will not promote the firm's optimal DRE capacity investment. This paper yields a policy insight that "getting the time right" may be more important than "getting the price right" in terms of enabling DRE investment for TOU pricing design.




What Drives Credit Spreads of Oil Companies? Evidence from the Upstream, Integrated and Downstream Industries

Yihong Ma, Simon Cottrell, Sarath Delpachitra, Xiao Yu, Ping Jiang, and Quan Tran Ha Minh

DOI: 10.5547/01956574.44.5.yima

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Abstract:
The aim of this paper is to examine how a shock in the oil industry affects firms' debt funding obligations using credit default swaps in different segments of the oil industry's value chain. In particular, it focuses on two types of shocks suffered by upstream, integrated and downstream firms in the industry, namely (1) endogenous shocks resulting from oil-market shocks, and (2) exogenous shocks resulting from the recent financial crisis and the Covid-19 pandemic. Using a wide data set ranging from 2007 to 2020, this paper measures the dynamic relationships between the CDS spreads of oil-related firms, US dollar exchange rates, and crude oil prices at different sectors of the oil-industry value chain, namely, upstream, integrated and downstream. Overall results show that the upstream firms have suffered the largest impacts during the COVID-19 crisis, when experiencing shocks from USD rates or oil prices. Integrated firms have suffered the second-largest effects, however, and interestingly, no significant impacts from shocks are observed on CDS spreads for downstream firms.




Book Reviews

Commodity Exchanges, Concepts, Tools and Guidelines, by Issouf Soumare - Book Review by: Scott C. Linn

Electricity Capacity Markets, by Todd S. Aagaard and Andrew N. Kleit - Book Review by: Sylwia Bialek





 

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