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2017 | Buch

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Energy Economics

Theory and Applications

verfasst von: Peter Zweifel, Aaron Praktiknjo, Georg Erdmann

Verlag: Springer Berlin Heidelberg

Buchreihe : Springer Texts in Business and Economics

Enthalten in: Springer Professional "Wirtschaft+Technik" , Springer Professional "Technik" , Springer Professional "Wirtschaft"

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Über dieses Buch

This book provides an introduction to energy economics. It shows how to apply general economic theory as well as empirical and advanced econometric methods to explain the drivers of energy markets and their development. Readers learn about the specific properties of energy markets as well as the physical, technological, environmental, and geopolitical particularities of energy sources and products. The book covers all types of energy markets, ranging from liquid fuels, gaseous fuels, and solid fuels to electricity. It also addresses emission allowances, energy efficiency, and nuclear risks. The authors discuss the engineering properties of energy technologies including renewables, the economics of natural resources and environmental protection, market liberalization, and energy trade as well as the experience of the German energy transformation. This book will serve students as a textbook and practitioners as a reference for their understanding of energy markets and their development.

Inhaltsverzeichnis

Frontmatter

1. Introduction

Abstract

This chapter seeks to answer a few questions of general interest:

Why has energy economics developed as a separate discipline of economics?
Why does energy economics cover more than the straightforward application of standard economic methods and models to energy markets?
What are the reasons for politicians to have a particular propensity to intervene in energy markets?

Peter Zweifel, Aaron Praktiknjo, Georg Erdmann

2. Energy in Science and Engineering

Abstract

Energy markets cannot be analyzed without discussing the relationship between energy and the natural sciences. Energy itself is a term with origins in physics. All types of energy conversion are based on physical, chemical, or biological processes. Professional statements regarding energy economics require an appropriate usage and correct interpretation of basic thermodynamic principles and properties.

The relationship between energy, the natural sciences, and engineering gives rise to several issues:

What is the role of energy in physics, chemistry, and biology?
How can different forms of energy be measured and how can they be converted?
What information is contained in an economy’s energy balance?
What is the relationship between primary, final, and useful energy?
How does the energy balance relate to an economy’s national accounts?
Why does a comprehensive measurement of a country’s energy requirements call for input-output analysis?

Peter Zweifel, Aaron Praktiknjo, Georg Erdmann

3. Investment and Profitability Calculation

Abstract

Capital budgeting and profitability accounting are necessary for assessing the economic viability of energy investments. Although the methodology for energy investments does not differ fundamentally from other applications, there are unique problems associated with it due to some particularities of investment in energy technologies. Long planning, construction, and operation periods make the result of an investment decision strongly dependent on the discounting of future cash flows.

These facts motivate consideration of the following issues:

What is the meaning of (net) present value of a flow of revenues (expenditures, respectively)?
Why is the interest rate especially important in investment projects relating to energy and what determines this rate of interest?
How can one account for future inflation (deflation, respectively)?
Would it be preferable to abstain from discounting altogether, in the interest of sustainability?
What insights can be gleaned from recent developments in the theory of finance?

Peter Zweifel, Aaron Praktiknjo, Georg Erdmann

4. Bottom-Up Analysis of Energy Demand

Abstract

Traditionally, energy economics has dealt with energy supply rather than demand. In contrast, this book gives demand precedence over supply, in keeping with the rule that without a minimum demand, supply does not come forth. Energy demand is often discussed in relation to the question of how to achieve ‘energy savings’, a term devoid of meaning without some prior knowledge of the factors affecting energy demand. These factors importantly derive from the profit-seeking actions of business managers and utility-oriented actions of consumers.

Over the years, two fundamentally different analytical approaches to the demand for energy have emerged: macroeconomic modeling (often called the top-down approach) and microeconomic process analysis (the bottom-up approach). The latter, to be expounded below, is based on the premise that energy demand is determined by the existing stock of energy-using capital, the intensity of its use, and its energy efficiency.

This approach gives rise to a series of questions:

Why is it important to distinguish between energy-using capital and the intensity of its use for analyzing energy demand?
What are the factors determining the acquisition of a particular energy-using capital good?
What are the factors determining the intensity of their use?

In addition, the issue of energy efficiency needs to be addressed:

Why is energy ‘wasted’ if it is a costly factor of production?
How can efficiency be improved?
Is there market failure in the case of investment in energy efficiency?
How can innovation boost energy efficiency?
How is energy efficiency defined to begin with?

Peter Zweifel, Aaron Praktiknjo, Georg Erdmann

5. Top-Down Analysis of Energy Demand

Abstract

The practical use of bottom-up models for analyzing energy demand is faced with significant micro-data requirements. In order to keep such models manageable, the individual components of energy demand are usually linked to the same macroeconomic variables such as the Gross Domestic Product (GDP), per-capita income, and relative energy prices. This gives rise to the question, “Why not model energy demand directly as a function of these macro variables?”. This macro approach is presented in this chapter, exploring the role of population growth, economic growth, and in particular changes in relative prices. However, this approach raises issues of its own:

How does one differentiate between short-term and long-term adjustments of demand?
Do rising and declining prices have the same effect on energy demand?
How can the effects of technological change be isolated from the effects of changes in energy prices?
Is the relationship between energy and other production inputs, in particular capital, substitutive or complementary?

Peter Zweifel, Aaron Praktiknjo, Georg Erdmann

6. Energy Reserves and Sustainability

Abstract

The finiteness of fossil energy sources gives rise to the question of whether sustainable economic development is possible at all since these resources will increasingly become scarce and even cease to be available. Resource economics—the theory of dealing with the efficient use of exhaustible resources—has been addressing this problem. Grounded in the pertinent economic models, this chapter revolves around the following issues:

How are energy reserves measured and how large are they?
What is the optimal extraction strategy for the owners of an exhaustible resource?
What is the optimal rate of extraction from a welfare point of view?
Does market failure occur, i.e. are there systematic deviations from the optimal extraction path?
What are the consequences of the increasing physical scarcity of energy sources for the price of energy?
How far can these prices rise?

However, the optimum from the point of resource economics, while resulting in an efficient use of exhaustible energy resources, need not be sustainable. The relationship between economic efficiency and (so-called weak) sustainability therefore needs to be clarified. This leads to additional questions:

What are the conditions that make sustainable development possible in spite of continued use of non-renewable energy sources?
For instance, does the global oil market satisfy these conditions?
What interventions might be called for in order to satisfy the conditions for weak sustainability?

Peter Zweifel, Aaron Praktiknjo, Georg Erdmann

7. External Costs

Abstract

A great deal of man-made residue and emissions is connected with the energy economy—from extraction, transformation, and transportation on to the final use of energy. Concepts have been developed in environmental economics for solving the associated problems in an economically efficient way. They revolve around the terms externality, external cost, and avoidance cost (also called abatement cost). Provided damages and risks can be quantified and monetized, internalization strategies are available which shift external costs back to the consumers of energy in the guise of higher energy prices. Market participants are made to extend their avoidance effort to the point where the marginal abatement cost equals marginal damage cost avoided. This is the social optimum.

While these lines of thought look conceptually simple enough, there are several issues that need to be addressed:

How can externalities be linked to specific emissions?
How are they to be quantified and expressed in money as to become external costs?
Frequently, marginal external cost avoided cannot be easily measured, as e.g. in the case of improved air quality. How is one to proceed for determining the optimum?
An economic expression of the marginal benefit of avoidance is (marginal) willingness to pay of those affected by the externality. Are there ways to measure this?
So-called market experiments have become popular for estimating willingness to pay. How can they be performed? What are their limitations?
The so-called standard-price constitutes an alternative. In what circumstances is it to be recommended?

Peter Zweifel, Aaron Praktiknjo, Georg Erdmann

8. Markets for Liquid Fuels

Abstract

This chapter focuses on markets for crude oil and oil products including gasoline, kerosene, diesel, heating oil, as well as biogenic fuels such as biodiesel, bioethanol, and synthetic fuels. Since the mid-twentieth century, crude oil has been the world’s most important energy source. However, the future prospects of crude oil are more unclear than ever. A lot of issues have to be analyzed:

What is the development of oil extraction?
What technical and economic consequences are to be expected if conventional crude oil extraction falls short of the demand for liquid fuels?
What about the so-called peak oil hypothesis from an economic perspective?
At what oil prices would alternative fuels, such as unconventional oils, biogenic fuels, and liquefied coal become competitive?
How can the structure of the oil industry be explained in economic terms?
What is the role of governments in exporting and importing countries?
What are the influences on the price of oil in the short, medium, and long term?
What is the relationship between spot and future prices?
To what extent are oil prices influenced by speculation?

Peter Zweifel, Aaron Praktiknjo, Georg Erdmann

9. Markets for Gaseous Fuels

Abstract

This chapter discusses markets for natural gas, biogas, and hydrogen. While the markets for biogas and hydrogen are still in their infancy, natural gas ranks third globally among primary energy sources (after crude oil and hard coal). One of its advantages are technologies with high fuel efficiencies which release relatively little carbon dioxide (CO₂). Another advantage is the fact that existing infrastructure can be used for distributing gas from new, unconventional reserves. On the other hand, its transportation calls for a capital-intensive and geographically inflexible network of pipelines which cannot be used for other purposes and is therefore factor-specific. This raises several questions concerning the properties of natural gas markets:

Are pipeline investments economically viable without long-term contracts?
Can market liquidity for gas be achieved without abolishing long-term contracts?
How can supply be secured in the absence of long-term contracts?
Is vertical integration along the value chain economically beneficial or not?
Can liquid natural gas (LNG) play the role of a game changer, making consuming countries less dependent on suppliers with monopoly power and political clout?

In many regions of the world, the highly seasonal demand for space heating determines the sales of natural gas. As gas customers usually lack storage capacities, deliveries by suppliers must track demand closely. This raises further questions that will be discussed in this chapter:

How can volatile demand be met?
What role could gas storage capacities play?
Regarding the potential for substitution between natural gas and heating oil, what are the implications for retail gas pricing?

Peter Zweifel, Aaron Praktiknjo, Georg Erdmann

10. Markets for Solid Fuels and CO2 Emissions

Abstract

Solid fuels are hard coal, lignite, and firewood. Their common properties are low energy densities resulting in high cost of transportation which in turn limits competition in solid fuel markets. Thanks to reduced costs of coal extraction, productivity increases in maritime transport, and reduced public subsidies, a global market for hard coal has nevertheless developed.

Due to coal’s high carbon content, coal combustion is the major source of global CO₂ emissions, amounting to about three tons of CO₂ per ton of hard coal. In addition, coal mining is associated with emission of methane (so-called pit gas), another important greenhouse gas. Thus the economics of coal markets cannot be discussed without referring to international efforts designed to reduce global emissions of CO₂ and other greenhouse gases. In an attempt to achieve this aim, the European Union created a market for CO₂ emission allowances (EU Directive 2003/87/EC). Depending on the effectiveness of this system, CO₂ emissions may become sufficiently costly to increase the price of coal relative to that of other fuels, triggering its substitution by less harmful alternatives.

The issues addressed in this chapter are:

What are the factors determining the development of the market for hard coal?
What determines its price on the world market?
Is the market for coal competitive?
Is there a trend towards vertical integration as in the oil industry?
What are the perspectives of solid biofuels and in particular wood as a substitute for coal?
What determines the price of emission rights?
How do these prices depend on the design of the market for emissions?

Peter Zweifel, Aaron Praktiknjo, Georg Erdmann

11. Uranium and Nuclear Energy

Abstract

The peaceful use of nuclear energy began in the 1950s with the assumption that it would make electricity abundantly available at low cost. However, mistrust of this energy technology has been salient from its beginnings. After the nuclear catastrophe of 1986 in Chernobyl, Ukraine, public acceptance of nuclear energy plummeted in industrial countries even though the Chernobyl reactor was of a very different design from those common in Western models. The following issues are addressed in this chapter:

What are the risks of accidents in nuclear power plants from a technical perspective?
What are the dimensions of potential damages?
What type of risk assessment does the economic model lead to in the case of nuclear power?
What insurance premiums are to be expected if nuclear risks are to be internalized?
Are the risks of nuclear power plants insurable at all?

If a reassessment of nuclear power is taking place today, it is because greenhouse gas emissions and the need for an active climate protection policy combine with concerns regarding energy supply security. Such a reassessment gives rise to an additional set of questions:

How long are uranium reserves expected to last?
What are the costs of uranium fuels, and what are their major components?
Is the industrial structure of the uranium market competitive or rather monopolistic?

Finally, there are issues such as the secure final disposal of radioactive waste as well the dangers of proliferation of nuclear fuels for military purposes. These aspects are touched on briefly in this chapter, while the comparative efficiency of nuclear power plants in electricity generation will be discussed in Sect. 12.2.

Peter Zweifel, Aaron Praktiknjo, Georg Erdmann

12. Markets for Electricity

Abstract

The electric value chain consists of the following elements: generation, wholesale trade, transmission, distribution, marketing, and metering. In many countries around the world, vertically integrated utilities used to assume all of these functions similar to the vertically integrated companies in other energy sectors (see Sect. 8.2.1). For several reasons, the European Union has mandated the electric industry to unbundle the grid from its other activities along the value chain (see Sect. 13.2.4). Therefore, it seems reasonable to structure the economic analysis of power markets accordingly. In this chapter the economic aspects of electricity generation and sales are discussed, whereas Chap. 13 is devoted to the economics of transmission and distribution.

For the time being, storing electricity is practically impossible in view of its cost. Therefore, electricity generation and electricity consumption must be synchronized continuously. In order to secure the supply of electrical energy for all customers, it is necessary to permanently maintain an amount of capacity in power generation which exceeds the maximum load.

Starting in the 1990s, the electricity industry (especially the generation sector) has been liberalized in many countries. This move, combined with the growing share of electricity from renewable sources and distributed generation, has led to a major transformation that continues to this day. Based on the experience gained from these recent developments, the following issues are addressed in this chapter:

How might electricity markets work in a competitive business environment, although power has to be delivered through a single grid?
What does generation dispatch look like in a competitive market?
What are the particularities and pricing mechanisms of power exchanges?
How can sufficient investment in backup and excess capacities be secured?
How can the abuse of market power in the generation market be prevented?
What are the possibilities to manage the transformation to ‘green’ power generation?

Peter Zweifel, Aaron Praktiknjo, Georg Erdmann

13. Economics of Electrical Grids

Abstract

The electrical grid connects generators and customers. Without it, no electricity market is possible. For enabling competition among generators and retailers, third party access to the electrical grid must be assured on terms that are transparent and nondiscriminatory. From an economic point of view, electrical grids represent both a natural monopoly and an essential facility. This confers a dominant market position upon vertically integrated utilities and power grid operators that may be abused. To prevent this and the concomitant welfare losses, power grids need to be regulated.

Another issue is the network characteristic of the electrical grid. For reasons of economic efficiency, it links many countries on the European continent. The associated grid externalities require grid operators to provide system services according to common rules and standards, among others control power (also called regulation power) to keep demand and supply in continuous balance.

This chapter addresses the following questions:

What are the economic reasons motivating grid integration?
What are economically efficient approaches to the provision of grid services?
What are economically efficient grid tariffs?
What are the economic benefits and costs of unbundling?
How should interconnectors be efficiently managed?

Peter Zweifel, Aaron Praktiknjo, Georg Erdmann

14. Epilogue

Abstract

While Chaps. 1–7 are dedicated to overarching issues and systemic relationships, Chaps. 8–13 of this book turn to the individual markets for energy. Starting from the pertinent constraints imposed by the laws of science and engineering, the discussions revolve around respective costs, supply and demand, forms of competition, and resulting prices, taking account of peculiarities that shape consumer preferences. In an attempt to keep the analysis reasonably simple, the existence of the respective other markets and prices prevailing on them have been taken as given, thus abstracting from the interdependencies between the several energy markets. In addition, the question why politicians want to see certain market outcomes rather than others, e.g. by subsidizing renewables or prohibiting the use of fracking technologies, remains mainly unanswered. In that sense, energy policy is outside the scope of this book.

Peter Zweifel, Aaron Praktiknjo, Georg Erdmann

Backmatter

Titel: Energy Economics
verfasst von: Peter Zweifel
Aaron Praktiknjo
Georg Erdmann
Verlag: Springer Berlin Heidelberg
Electronic ISBN: 978-3-662-53022-1
Print ISBN: 978-3-662-53020-7
DOI: https://doi.org/10.1007/978-3-662-53022-1