Financial Aspects in Energy

European energy markets have been becoming increasingly integrated and competitive; take for instance the markets for renewable energy and emission allowances. Prices on spot markets and futures markets follow suit and a new pricing regime emerges. Also, whereas the supervision as to e.g. energy contracts remains in their hands, European states hand over much sovereign power to the European Union. While governmental controls in energy industries thus remain valid, firms have an opportunity to create economic value in this regulatory framework. In this vein, this book provides a timely guidance armed with chapters covering a wide spectrum of financial aspects of energy, particularly regarding the scope of a speedily changing environment.

Europe has been engaged in a debate aimed at building an integrated and competitive energy market since the early 1990s. The European Union has instituted to share the responsibility to develop a strategic policy to change current trends, and hence a truly competitive, single European electricity and gas market is expected to open the competition of Europe-wide companies. In this vain, the aim of this chapter is to analyze the developments of European energy markets and regional markets in accordance to the market efficiency criteria and financial aspects of energy. Despite the physical, economic, and political barriers, the number of financial players participating in these markets is continuously increasing and a considerable success has been achieved for efficiency of the markets. However, 10 years after the Lisbon Treaty, the European energy markets are significantly far from the unique energy market goal. Moreover, in Europe’s energy market there are serious malfunctions causing moves to regional fragmentation. Generally, it is agreed that the future structure of the European energy market has not been yet clearly defined.

This chapter introduces the most relevant renewable technologies from the European perspective, and provides an analysis of their risk profiles and their advantages and disadvantages in the energy mix. The regulatory frameworks for stimulating investments in renewable energy at both the EU level and in the different member states provide a heterogeneous set of incentives and add an additional source of (policy) uncertainty to potential investors. The analysis starts out with policy at the EU level, and gives examples of how the European policy goals are sought to be realized at the country level. The Spanish experiences with solar feed-in tariffs, for instance, should provide a lesson to the British, for example, who are thinking about heavy subsidies directed at renewables to increase their share in the UK energy mix. A thorough review of these issues from a financial theory perspective provides insights for current and future policymaking.

The trading of carbon dioxide (CO₂) emission allowances, or permits, has been established in recent years as one of the primary mechanisms for tackling global warming and climate change. The European Union (EU) has taken an important initiative in this direction by establishing in 2003 the first ever mandatory cap-and-trade system for CO₂ permits: the EU Emissions Trading Scheme (EU ETS). The purpose of this paper is to initially provide a brief introduction to the EU ETS and subsequently assess its operation during the years 2005–2010 from a financial market perspective. The insights gained through this analysis are particularly important not only for policy makers and market stakeholders but also for the growing community of the so-called ‘carbon’ investors.

During the last decade of the twentieth century energy markets changed rapidly. National orientated electricity networks were more and more linked to each other. A large step was the coupling of the spot markets of Belgium, France and The Netherlands in 2006. The integration of markets is a continuing process with realization in 2010 of a market coupling between Central Western European region (CWE, consisting of Belgium, Germany, France, Luxemburg and Netherlands) and the Nordic region. In 2011 the United Kingdom will also be part of an enlarged area where market coupling is applied, expected to be followed by further extensions of the region with Southern- and/or Eastern European markets. This chapter deals with the imperfections of the electricity spot markets. We will focus on the (capacity of) interconnectors between national grids in Europe. The relevant question is: are connectors a limiting factor in the priceforming process on electricity day ahead markets.

In this chapter we examine the price formation process in European energy markets during the period 2005–2009. In order to assess the development of these markets, we identify potential theoretical relations related in the price formation process, using a set of factors including energy prices and European Union allowance prices as well as controlling for important influences such as economic growth. In terms of our methodology, we adopt both static and recursive versions of the Johansen (J Econ Dyn Control 12:231–254, 1988) multivariate cointegration likelihood ratio test, as well as a variation on this test in order to control for time varying volatility effects, to estimate these potential theoretical relations. The findings are indicative of a new pricing regime emerging since January 2008 which empirically interlinks the coal, gas and oil markets with European Union allowance futures contracts. It would appear that European Union allowance contract prices play an integral role in the price formation process in European energy markets.

This chapter firstly provides an overview of the day-ahead and futures electricity markets of APX-ENDEX that is one of Europe’s most experienced energy exchanges, operating spot and futures markets for electricity and natural gas in the Netherlands, the United Kingdom and Belgium. An empirical analysis on the relationship between spot and futures electricity market of APX-ENDEX is then covered. We handle the most liquid year, which is 2008, of traded electricity futures contracts and we find that the market is in normal backwardation. Our regression analysis extents the Fama (J Monet Econ 1984;14:319–338) regressions and rejects the efficiency hypothesis. Our results indicate that the futures prices are not unbiased predictors of the future spot prices. Remarkably, the difference between the spot and futures prices is associated with the risk premium and the change in spot prices, supports the arbitrage and speculation opportunities in the market.

The concept of sovereignty in international law addresses the principle that a sovereign state, through its ruler or government has the right to determine and enforce the laws which it believes are appropriate for its own territory, and that it has the further right to protect its interests at an international level, whether those interests be from a trade or security perspective. However, the concept of sovereignty operates within a broader framework of international law, part of which is the rule of law in international affairs. This involves the existence of a comprehensive system of law which provides predictability as to the legal consequences of conduct, and the effective and impartial application of the law. This then relies upon the ‘adoption’ of a form of sociality, which implies that sovereign states will act in a manner which maximises optimal co-operation between regimes and/or governmental structures. The European Union (EU) has sought, by virtue of the notion of legislative networks to dissolve the concept of individual state sovereignty, thus weakening the ability of sovereign states to determine that which is most appropriate to its own territory, and seeking the imposition of policies and laws which arguably reflect common interests, such as the development of the energy sector. However, the recent global financial and economic crises have highlighted that economic co-operation is far more fragile and problematic than previously thought, and this combined with the fact that energy sources are largely located in sovereign states not part of the EU, some of which have a high ranking of political risk, arguably poses a new and real problem. This chapter argues that the concept of sovereignty is central to sustainable energy policy development in the EU. Accordingly there will be an examination of the concept of sovereignty, its relationship with political risk, and this will be followed by an econometric analysis by using country risk oil industry stock market data and related political risk indicators. The reader should note that this paper is primarily written from a legal perspective, so the language and concepts as used throughout is reflective of this perspective. Furthermore, inclusion of the econometric analysis is illustrative of the notion that the energy sector is highly influenced by the actions of sovereign states and by the political risk attached to those actions.

The Lisbon Treaty led to a major modification of EU Primary Law and pushed the boundaries of European integration forward to the next level. Especially the energy sector has been the subject of significant amendments due to the introduction of an own chapter titled XXI “Energy” in Art. 194 TFEU, a novelty in EU history. In this chapter we will therefore mainly focus on an in-depth analysis of Art. 194 TFEU and in particular on the question whether the EU has gained supplementary competencies in the field of energy - or not. Additionally the further energy-related competencies given by TFEU as well as the Energy Charter Treaty will be discussed in order to evaluate the EU's power to conclude energy supply related measures on a international level and concerning third countries. The paper concludes with an outlook on new tendencies in the EU's secondary law, especially in terms of Internal Market as well as environment and climate protection related aspects.

Energy trade, including trade in energy derivatives, may entail various potential risks. Conceivably, these risks could jeopardize European Union objectives, such as consumer protection. Under the European Third Energy Package, which recently entered into force, Member States are required to confer new competencies upon national energy regulators to regulate this type of trade. This chapter elaborates on the sector-specific regulation of the financial aspects of energy trade, with reference to several types of energy contracts. It also deals with the overlaps and differences between this particular type of regulation and financial regulation in general. Furthermore, the article explores whether the current regulation of trade in energy derivatives is sufficient.

Global awareness of renewable energy has grown markedly in response to concerns about increasing greenhouse-gas emissions from fossil fuels, and price and availability problems related to non-renewable energy sources. This so-called “hype” around bioenergy has fuelled wide-ranging interest in renewable energy sources, and especially in biomass, which is expected to play a key role in the fight against climate change. The emerging bioenergy business offers promising avenues for value creation, especially for the firms in the pulp and paper industry that exercise control over forest-based biomass resources and have a wealth of experience related to global large-scale industrial processes. Moreover, these traditional forest-industry companies exemplify the changing nature of the competitive environment in many industries facing with drastic challenges through being forced to search for new value-creating strategies in order to create competitive advantage. Exploitation of this emergent business opportunity will nevertheless require the knowledge and resources of multiple actors, including energy-industry know-how about producing energy from various raw-material bases and distributing it to the markets. Given such a starting point, this particular study focuses on the determinants of value creation in the context of the bioenergy sector, which is emerging at the interface between the forest and energy industries. It thus explores the novel business opportunities related to biomass-for-energy in terms of what they are and how forest and energy companies could exploit them. The research perspective is primarily on Finland, which is one of the world’s leading bioenergy-using countries. By way of theoretical background, the paper builds on the literature on strategic management. This article enhances understanding of how value can be captured in the new forest-based bioenergy business, and of the determinants affecting the value creation. It thus sheds light on the value-creating opportunities that are just starting to take shape. In that sense it adds to the growing strand of literature on value creation from renewable energy sources. Moreover, its applicability extends even further to firms that assess their value creation when dealing with innovation and the redefinition of their business models.

This chapter attempts to provide a theoretical work on natural monopoly versus perfect markets through concentrating on the energy sector. In specific we discuss the natural monopolistic structure of Turkish natural gas and electricity markets by comparing those of various countries in Europe. In this vein, our chapter starts with the introduction of natural monopoly in both electricity and natural gas markets and the tools and regulations that targets on tackling this imperfection. Furthermore we present the historical phases of regulations to tackle natural monopoly in Turkish electricity and natural gas markets. Both price-demand and income-demand relationships are important guides for developing energy efficient programs for governments and hence income and price elasticities are channels for the relevant regulations. Armed with this in order to provide comparison, our chapter concludes with discussing the extent of the natural monopoly in each country through demonstration of income and price elasticities of demand for both electricity and natural gas.