Electricity Investment in Liberalised Markets

The study looks at the dynamics of investment in power generation in liberalised electricity markets. It surveys the theoretical arguments and practical experience to date, with the aim of drawing out key messages, in particular in relation to the impact on the environment and on the expansion of the electricity system in developing countries.

Research contact Malcolm Keay

Investment Under Uncertain Emissions Policy for Electricity Generating Firms

Given the relationship between fossil fuel combustion and gaseous and particulate emissions, much attention has been focused on environmental policy for the electricity generating industry. Because of the tradeoff between emissions regulation and electricity generation objectives, however, the establishment of environmental policy is not a simple matter and is often wrought with issues of credibility and uncertainty. This paper seeks to model the effects of such policy uncertainty on the irreversible capacity investment decisions (timing and plant-type) of electricity generating firms through real options analysis. Research thus far shows theoretically that uncertain environmental policy leads to a delay and reduction in “clean” generating options. Lindsay Tuthill will be continuing this project as part of her ongoing DPhil research and will be supervised by Malcolm Keay.

Research contact Lindsay Tuthill

The Fuel Choice and Technological Change Effects of the Tradable Sulfur Permit Scheme on the US Electricity Generating Industry

This paper uses monthly firm-level data to characterize fuel choice and technical change in the United States electricity generating industry in response to the market-based tradable sulfur allowance program. This program was instituted in 1995 by the Clean Air Act Amendments of 1990 and provides the first and longest-running example of the successful implementation of a cap-and-trade allowance scheme. Here, we use data covering the years 1990-2004 in a flexible translog cost function to determine the Allen-Uzawa and Morishima elasticities of substitution for the three main fossil fuel inputs (coal, oil and natural gas) and the rate and direction of technical change. Given the length of time required for the design and construction of a new power plant, it is assumed that capital is fixed, allowing us to use a short run variable cost function and the associated variable cost shares attained through Shephard’s Lemma. Because the sulfur content of the three fossil fuel inputs differ by type, and because some firms are better equipped to accommodate this (i.e. some have installed scrubbers, some operate dual-fired boilers, etc.), the allowance price differentially effects the relative price of the fuels. Here, the effects of emissions policy are followed through to input demand accounting for these relative price differences and firm-specific technologies. The results allow for the assessment of potential future environmental policy, and the methodology is applicable to other tradable emissions allowance scenarios.

Research contact Lindsay Tuthill

Electric Utilities’ Cost Efficiency and Tradable SO2 Permits: The Case of the US Clean Air Act Amendments 1990

This paper analyzes the cost efficiency effects of the tradable SO2 permit scheme implemented in the US in 1995 by the Clean Air Act Amendments of 1990. Using a method of stochastic frontier analysis (SFA), the error term of a standard neoclassical cost function is assumed to have two components: one standard stochastic portion representing statistical noise, and a second one-sided portion attributed to cost inefficiency. Thus, I construct a cost frontier representing “best-practice” over the period, and calculate firm- and time-specific relative cost inefficiency as measured by an observation’s distance the cost frontier. The objectives are 1) to analyze the impact of the SO2 permit price and other firm characteristics on cost inefficiency and 2) to inform the debate about the imposition of private costs upon firms under environmental regulation.

Research contact Lindsay Tuthill

Environmental costs of restructuring the electricity sector in Mexico

The aim of this research is to simulate if the policy change “electricity reform”, which implies changes in ownership and competition, would affect the costs of externalities in Mexico. Electricity reform is defined in two ways. First is as a radical liberalization. The second is more realistic: to allow competition in the fossil fuel generation market, but keeping hydro and nuclear generation capacity in public hands. Externalities are defined as the unwanted emission of gases produced while electricity is generated. Two effects are analyzed. First is if the expected improvement in electricity firms’ productivity and efficiency leads to a higher level of emissions. Second is if liberalization changes current technology mix towards a more/less polluting mix. A computable general equilibrium model is used to simulate these effects.

This project is part of Mr Fuentes' on-going PhD research.

Research contact: Rolando Fuentes

Europe's Power Play: A Single Energy Market – How Desirable, How Feasible?

The European Union's efforts to create a joined up energy policy, including the links and contradictions between market liberalisation, energy security and combating climate change.

Macroeconomic Carbon Correlations: Methods and Empirical Evidence

Given the obvious connection between physical production and energy use, on the one hand, and the dominance of fossil fuels in the energy mix world-wide on the other, it would not be surprising if there were a strong correlation between a country's carbon dioxide emissions and its national income.

What is surprising is that, while there has been a lot of misuse of alleged correlations – usually in terms of 'carbon elasticities' or 'carbon intensities' – often for political reasons, the economic research community has so-far failed to make any significant contribution to this issue.

There have been a considerable number of peer reviewed econometrics papers investigating the possibility of an inverted u-shape (Kuznets-type) relation between (per capita) national income and (per capita) CO2 emissions. However, all papers that have claimed to have found such a correlation were subsequently found to be statistically flawed for one reason or another.

This research, a collaborative effort with modelers and econometricians from the Department of Economics at the University of Berne/Switzerland, considers the methodological problems and possible solutions to these issues.

Research contact Benito Müller

Evaluation of the impact on the Western Hemisphere heavy sour crude oil market of upgrading facilities at source

This research focuses on the implications of the increasing supply of heavy sour crude oil as well as upgraded/partially upgraded or synthetic crude oil in the western hemisphere. Given the resistance to construction of new deep conversion capacity in the traditional markets for heavy sour crude, the potential netback losses for heavy crude producers in accessing new markets, the overall tight capacity in global refining, the current dominance of heavy grades of crude in Middle East spare capacity, a preferred strategy might be to upgrade at source an retain a greater share of the value. The objective then is to analyze the factors that will influence decisions to invest in source upgraders versus the merits of developing new markets for heavy sour crude. The cases of Venezuela and of Canada will be empirically compared.

Research contact Adrian Lara

Russia and OPEC

The aim of the project is to examine the key factors that could make Russia more susceptible to co-operation with the Organisation of Petroleum Exporting Countries in supply management. It in this assessment the research project focuses on three areas:

Russia’s technical ability to manage its oil output;
Russia’s political and economic dependency on oil exports;
Geopolitical considerations.

Research contact: Shamil Yenikeyeff

Where does Russia stand?

Russia appears to be at a crossroads in its emerging stance towards major forces in the world energy markets. A major shift in the behaviour of this key non-OPEC producer could have considerable implications on how global markets develop. In the current times of high energy prices Russia is quickly developing features usually present in traditional oil/gas exporting economies. Shamil Yenikeyeff’s project will attempt to establish whether these features show that the Russian government has failed to diversify the national economy making it even more sensitive to export revenues. In this respect the project will examine the changing role of the state in the Russian oil/gas industry and Russia’s growing fiscal dependency on exports of mineral resources.

Research contact: Shamil Yenikeyeff

Dr Keun-Wook Paik: Sino-Russian Oil and Gas Cooperation

The project on Sino-Russian oil and gas cooperation will review China and Russia's oil and gas cooperation since 1993; examining the status of the oil and gas industry in China and Russia. Factors affecting oil and gas cooperation between the two energy giants will be analysed and the crucial question of how far that cooperation can go will be addressed.

Governance in the Mexican Petroleum Industry: Assessing prospects of reform.

The Mexican petroleum industry has not developed to its capacity and influential actors in and outside the government blame a governance structure that lacks the mandate for accountability, transparency and to create value. Proposals for transformation have emerged, and range from suggestions for minor reform in the regulatory framework to recommending quasi-absolute autonomy (from the government) for the petroleum sector. However, while it is true that there is room for improvement within the current arrangement, there are important obstacles for change. Issues like high dependence on petroleum-related revenue to sustain the Federal budget, make transformation challenging. Nonetheless, reform is ranking high in the public policy agenda. Therefore, it is fundamental to provide: a description of the current governance structure and a diagnosis of its shortcomings, an analysis of the agendas and proposals of interest groups pushing for change, and an assessment of the possible scenarios and pitfalls of reform.

Research contact Pedro Gomez

US Energy and Climate Change Policies

David Robinson is writing a book on the subject of US energy and climate change policies. The book provides an analytical framework for understanding the development of these policies, as well as their implications. Basically, it argues that energy (security) and climate change have provided a powerful argument to support government intervention: namely “market failures”, both real and imaginary. Government direction on key decisions, such as the choice of technology for new electricity generation plant, undermines the basic logic of market liberalisation, which was to shift risks and decision making to the competitive market. The challenge is now to avoid costly “policy failures” which are significantly greater than the market failures they seek to redress. The book analyses policies and policy proposals at municipal, state, regional and federal levels in the US. It identifies actual and likely winners and losers, opportunities for investors and how these policies affect international energy markets and negotiations over climate change. It also assesses what role can and should be played by markets and market mechanisms in this new policy-driven paradigm.