Pricing reliability options under different electricity price regimes

Reliability Options are capacity remuneration mechanisms aimed at enhancing security of supply in electricity systems. They can be framed as call options on electricity sold by power producers to System Operators. This paper provides a comprehensive mathematical treatment of Reliability Options. Their value is first derived by means of closed-form pricing formulae, which are obtained under several assumptions about the dynamics of electricity prices and strike prices. Then, the value of the Reliability Option is simulated under a real-market calibration, using data of the Italian power market. We perform sensitivity analyses to highlight the role of the level and volatility of both power and strike price, of the mean reversion speeds and of the correlation coefficient on the Reliability Options' value. Finally, we calculate the parameter model risk to quantify the impact that a model misspecification has on the equilibrium value of the RO.     

Energy security under de-carbonization scenarios: An assessment framework and evaluation under different technology and policy choices

How would a low-carbon energy transformation affect energy security? This paper proposes a framework to evaluate energy security under long-term energy scenarios generated by integrated assessment models. Energy security is defined as low vulnerability of vital energy systems, delineated along geographic and sectoral boundaries. The proposed framework considers vulnerability as a combination of risks associated with inter-regional energy trade and resilience reflected in energy intensity and diversity of energy sources and technologies. We apply this framework to 43 scenarios generated by the MESSAGE model as part of the Global Energy Assessment, including one baseline scenario and 42 ‘low-carbon’ scenarios where the global mean temperature increase is limited to 2°C over the pre-industrial level. By and large, low-carbon scenarios are associated with lower energy trade and higher diversity of energy options, especially in the transport sector. A few risks do emerge under low-carbon scenarios in the latter half of the century. They include potentially high trade in natural gas and hydrogen and low diversity of electricity sources. Trade is typically lower in scenarios which emphasize demand-side policies as well as non-tradable energy sources (nuclear and renewables) while diversity is higher in scenarios which limit the penetration of intermittent renewables.     

Oil price shocks and China's economy: Reactions of the monetary policy to oil price shocks

The paper empirically analyzes the effect of positive oil price shocks on China's economy, having special interest in the response of the Chinese interest rate to those shocks. Using different econometric models, i) a time-varying parameter structural vector autoregression (TVP SVAR) model with short-run identifying restrictions, ii) a structural VAR (SVAR) model with the short-run identifying restrictions, and iii) a VAR model with ordering-free generalized impulse response VAR (GIR VAR), we find that the response of the Chinese interest rate to the oil price shocks is not only time-varying but also showing quite different signs of responses. Specifically, in the earlier sample period (1992:4–2001:10), the interest rate shows a negative response to the oil price shock, while in the latter period (2001:11–2014:5) it shows a positive response to the shock. Given the negative response of the world oil production to an oil price shock in the earlier period, the shock is identified as a negative supply shock or a precautionary demand shock as suggested by Kilian (2009), thereby the negative response of the interest rate to the oil price shock is deemed as economy-boosting. The positive response of the interest rate to the oil price shock in the later period, given that this shock is identified as a positive world oil demand shock, gives evidence that stabilization of inflation is one of the main objectives of China's monetary authority, even though the current main objective of the monetary policy is characterized as “maintaining the stability of the value of the currency and thereby promoting economic growth.” Finally, the variance decomposition results reveal that the oil price shock becomes an increasingly important source in the volatility of China's interest rate.     

OPEC's pricing policy and the international transmission of oil price effects

We endogenize OPEC's pricing policy recognizing that oil price changes affect the real income of oil importers, and that changes in the real income of oil importers affect oil price changes. We determine real income, international trade flows, and prices in a three-region (DCs, OPEC, non-OPEC LDCs) econometric world model. Applying optimal control theory, we derive optimal oil pricing strategies. We find that not allowing for income feedback effects results in an upward bias in the total price elasticity of oil demand and in the optimal oil price path, neither of which is in OPEC's best interests.     

Impact of US biofuel policy on US corn and gasoline price variability

Despite a large number of studies that examine the influence of biofuels and biofuel policy on commodity prices, the impact of biofuel policy on commodity price variability is poorly understood. A good understanding of biofuel policy’s impact on price variability is important for mitigating food insecurity and assisting policy formation. We examine how U.S. ethanol policies such as the Renewable Fuel Standard (RFS) mandates and the blend wall affect the price variability of corn and gasoline. We first present an analytical and graphical framework to identify the effect and then use stochastic partial equilibrium simulation to measure the magnitude of the impacts. We show that RFS mandates and the blend wall both reduce the price elasticity of demand for corn and gasoline and therefore increase the price variability when supply shocks occur to the markets. This has important implications for policy actions with respect to maintaining or changing the current RFS mandates and/or blend wall in the US.     

The asymmetric response of gasoline prices to oil price shocks and policy uncertainty

This study shows that the effect of oil price shocks on the real price of gasoline is interrelated with economic policy uncertainty. Economic policy shocks are linked with increased real price of gasoline and reduced consumption of gasoline. There is evidence that the fluctuation of both real gasoline prices and of gasoline consumption is associated with uncertainty of tax legislation expiration expectation as well as other components of economic policy uncertainty. Positive shocks to economic policy uncertainty have relatively larger effects on gasoline prices than do negative shocks to economic policy uncertainty. Economic policy uncertainty responds asymmetrically to increases and decreases in real oil price. Shocks to economic policy uncertainty account for 16.1% of variation in real gasoline prices and for 4.9% of variation in gasoline consumption in the long-run.     

Coevolution of policy,market and technical price risks in the EU ETS

Within the EU, there have been calls for governments to provide greater certainty over carbon prices, even though it is evident that their price risk is not entirely due to policy uncertainty. We develop a stochastic simulation model of price formation in the EU ETS to analyse the coevolution of policy, market and technology risks under different initiatives. The current situation of a weak (20%) overall abatement target motivates various technology-support interventions, elevating policy uncertainty as the major source of carbon price risk. In contrast, taking a firm decision to move to a more stringent 30% cap would leave the EU–ETS price formation driven much more by market forces than by policy risks. This leads to considerations of how much risk mitigation by governments would be appropriate, and how much should be taken as business risk by the market participants.     

Optimal combination of energy crops under different policy scenarios; The case of Northern Greece

Energy crops production is considered as environmentally benign and socially acceptable, offering ecological benefits over fossil fuels through their contribution to the reduction of greenhouse gases and acidifying emissions. Energy crops are subjected to persistent policy support by the EU, despite their limited or even marginally negative impact on the greenhouse effect. The present study endeavors to optimize the agricultural income generated by energy crops in a remote and disadvantageous region, with the assistance of linear programming. The optimization concerns the income created from soybean, sunflower (proxy for energy crop), and corn. Different policy scenarios imposed restrictions on the value of the subsidies as a proxy for EU policy tools, the value of inputs (costs of capital and labor) and different irrigation conditions. The results indicate that the area and the imports per energy crop remain unchanged, independently of the policy scenario enacted. Furthermore, corn cultivation contributes the most to iFncome maximization, whereas the implemented CAP policy plays an incremental role in uptaking an energy crop. A key implication is that alternative forms of motivation should be provided to the farmers beyond the financial ones in order the extensive use of energy crops to be achieved.     

Investment under market and climate policy uncertainty

Climate change is considered as one of the major systematic risks for global society in the 21st century. Yet, serious efforts to slow the accumulation of emissions are still in their primordial stage and policy makers fail to give proper long-term signals to emitters. These days, investors do not only face uncertainty from volatile prices in the traditional markets, but also from the less conceivable uncertainty of stricter climate change policy. This paper investigates the impact of learning about the commitment of government to a climate policy regime in a real options framework. Two types of uncertainty are distinguished: market-driven price volatility around a mean price and bifurcating price trajectories mimicking uncertainty about changing policy regimes. One of the findings is that the producer facing market uncertainty about CO₂ prices invests into carbon-saving technology earlier than if the actual price path had been known on beforehand. This is not a typical real options outcome, but the result of optimizing under imperfect information, which leads to decisions that are different from the optimal strategies under full information. On the other hand, policy uncertainty induces the producer to wait and see whether the government will further commit to climate policy. This waiting is a real options effect. In other words, if learning about government commitment is more valuable than investing into mitigation technologies immediately, the option value exceeds the value of the technology and investment will be postponed. This might lead to supply shortages and limited diffusion of less carbon-intensive technology.     

Connectedness of economic policy uncertainty and oil price shocks in a time domain perspective

In this paper, we investigate causality and connectedness between economic policy uncertainty and oil price shocks across time scales. By incorporating the wavelet approach into the structural vector autoregression (VAR) framework proposed by Diebold and Yilmaz (2009, 2012, 2014), we find that crude oil prices behave like receivers of information from economic policy uncertainty, regardless of time scale. However, the causality relationship between economic policy uncertainty and oil price shocks intensifies as time scales increase. In addition, the connectedness relationship is robust to time scale changes, whereas the causal relationship intensifies as time scales increase. Notably, the weight of US economic policy uncertainty increases in the VAR system as time scales increase. In particular, we employ the West Texas Intermediate (WTI) crude oil price as an alternative measure to increase the robustness of our results and identify differences in the VAR system. Overall, the total connectedness of the WTI crude oil price is lower than that of the Brent crude oil price, regardless of time scale. Our results provide meaningful information for both investors and policymakers.     

A study on the future of unconventional oil development under different oil price scenarios: A system dynamics approach

Fluctuations in the oil global market has been a critical topic for the world economy so that analyzing and forecasting the conventional oil production rate has been examined by many researchers thoroughly. However, the dynamics of the market has not been studied systematically with regard to the new emerging competitors, namely unconventional oil. In this paper, the future trend of conventional and unconventional oil production and capacity expansion rates are analyzed using system dynamics approach. To do so, a supply-side modeling approach is utilized while main effective loops are modeled mathematically as follows: technological learning and progress, long and short-term profitability of oil capacity expansion and production, and oil proved reserve limitations. The proposed model is used to analyze conventional and unconventional oil production shares, up to 2025, under different oil price scenarios. The results show that conventional oil production rate ranges from 79.995 to 87.044 MB/day, which is 75–80 percent of total oil production rate, while unconventional oil production rate ranges from 19.615 to 28.584 MB/day. Simulation results reveal that unconventional oil can gain a considerable market share in the short run, although conventional oil will remain as the major source for the market in the long run.     

Experimental study and optimization of flow field structures in proton exchange membrane fuel cell under different anode modes

As one of the critical components in the proton exchange membrane fuel cell (PEMFC), the flow field is crucial to the improvement of cell performance. However, the current research on flow field structure lacks consideration of the influence of different anode modes, which makes the existing flow field structure rules have limitations in the practical application of PEMFC. In this paper, the PEMFC characteristics of parallel flow field, S-shaped flow field, multi-serpentine flow field and single-serpentine flow field at the cathode side are compared experimentally in the dead-end anode (DEA) mode and hydrogen circulation anode (HCA) mode, respectively. Especially, the spatial current density distribution and parasitic power of different flow field structures are measured. The results show that the performance trends of different flow field structures change with the DEA and HCA anode modes. In DEA mode, the PEMFC is prone to flooding, and the flow field with high gas velocity in the channel has better drainage ability, which can obtain higher cell performance. The HCA mode is helpful for the discharge of water in the PEMFC, which effectively alleviates the adverse impact of water accumulation on the overall performance, and the mass transport ability of the flow field structure plays a leading role in the cell performance improvement. In addition, although the high gas flow velocity has better drainage ability in the flow field, it may lead to a decrease in the current density distribution uniformity and PEMFC net output power density. Based on the comprehensive consideration of the experimental results, the multi-serpentine flow field is more suitable for DEA mode, and the S-shaped flow field is more suitable for HCA mode.     

The effects of oil price on regional economies with different production structures: A case study from Korea using a structural VAR model

This study analyzes the effects of oil price fluctuations on regional macroeconomic variables with a structural VAR model. We classified fifteen metropolitan cities and provinces of Korea into four major regions (Capital, Central, Honam, and Gyeongsang) and examined the effects of oil price fluctuations on the economy of these regions. The results in the short- and long-term lag structures show a negative response to industrial production and price. The Capital region is less affected by oil price fluctuations than the other three provincial regions. We concluded that the government should focus on creating an industrial environment to accumulate production factors and technologies in oil price-sensitive regions.     

Energy policy,the energy price fallacy and the role of nuclear energy in the UK

There is a widespread belief that the world energy problem will be solved by rising prices — closing the ‘gap’ by reducing demand and bringing in new, large, previously overcostly energy sources. The author rejects this view — high prices are the problem not the solution. Supply and demand will be brought into balance at some price, and the objective of energy policy should be to make it as low as we can, by concentrating on the exploitation of large, low-cost energy sources. New energy-saving technologies and new energy sources are more likely to be pursued in such an expensive climate than in the alternative world of high-priced energy.     

Oil price shocks and policy uncertainty: New evidence on the effects of US and non-US oil production

Important interaction has been established for US economic policy uncertainty with a number of economic and financial variables including oil prices. This paper examines the dynamic effects of US and non-US oil production shocks on economic policy uncertainty using a structural VAR model. Such an examination is motivated by the substantial increases in US oil production in recent years with implications for US political and economic security. Positive innovations in US oil production are associated with decreases in US economic policy uncertainty. The economic forecast interquartile ranges about the US CPI and about federal/state/local government expenditures are particularly sensitive to innovations in US oil supply shocks. Shocks to US oil supply disruption causes rises in the CPI forecast uncertainty and accounts for 21% of the overall variation of the CPI forecaster disagreement. Dis-aggregation of oil production shocks into US and non-US oil production yields novel results. Oil supply shocks identified by US and non-US origins explain as much of the variation in economic policy uncertainty as structural shocks on the demand side of the oil market.     

Combustion of forest litters under slope conditions: Burning rate,heat release rate,convective and radiant fractions for different loads

A set of experiments at laboratory scale was conducted to study the combustion of forest fuel beds in order to quantify the contribution of radiant and convective heat transfer under slope condition. To proceed, a Large Scale Heat Release apparatus was used to measure the heat release rate and fire properties such as the mass loss rate, the geometry of the fire front and the heat transfer were assessed. Because of the slope and the size of the fuel bed, the mass loss rate and the heat release rate do not reach a quasi-steady state when the propagation takes place under slope condition. This is due to a V-shape distortion of the fire front, which leads to an increase of the burnt surface rate by the fire over time. The study of this quantity has shown that the heat release over time can be estimated with the fuel load and the time derivative of the burnt surface. The fractions of radiation and convection released by the fire in its environment were calculated. Under a slope of 20°, the convective fraction decreases from 74.9% to 61.1% whereas the overall radiant fraction ranges between 25.1% and 38.9% and increases with increasing fuel loads.     

Energy productivity investments under differing economic conditions and tax structures

In this paper, the effect of uncertainty in internal rate of return calculations caused by imperfect predictions of prices, costs, and business conditions are modeled. Comparing the calculated results shows that the effects of uncontrollable parameters such as recession, price competition, and unexpected repair costs have a greater influence on return on investment than tax credits or depreciation rates. In addition, even if a project overcomes some designated hurdle rate, it must then compete with other highly-rated projects, energy-saving or not, on the basis of intangible factors that comprise the art known as business judgment. Thus tax credits and accelerated depreciation will often not have as large an effect on promoting energy efficiency investments as anticipated.     

Strategic design and investment capacity planning of the ethanol supply chain under price uncertainty

Fossil fuel depletion and the increase of greenhouse gases emissions has been pushing the search for alternative fuels for automotive transport. The European Union has identified biofuel technology as one option for reducing its dependence on imported energy. Ethanol is a promising biofuel, but great uncertainty on the business profitability has recently determined a slowdown in the industry expansion. In particular, geographical plant location, biomass price fluctuation and fuel demand variability severely constrain the economic viability of new ethanol facilities. In this work a dynamic, spatially explicit and multi-echelon Mixed Integer Linear Program (MILP) modeling framework is presented to help decision-makers and potential investors assessing economic performances and risk on investment of the entire biomass-based ethanol supply chain. A case study concerning the corn-to-ethanol production supply chain in Northern Italy is used to demonstrate the effectiveness of the proposed modeling approach. The mathematical pattern addresses the issue of optimizing the ethanol supply network over a ten years’ time period under uncertainty on biomass production cost and product selling price. The model allows optimizing economic performances and minimize financial risk on investment by identifying the best network topology in terms of biomass cultivation site locations, ethanol production plant capacities, location and transport logistics.     

Oil price shocks,economic policy uncertainty and industry stock returns in China: Asymmetric effects with quantile regression

This paper investigates the impact of crude oil shocks and China's economic policy uncertainty on stock returns at different locations on the return distributions. Based on monthly data from 1995:1 to 2016:3, we address this issue by employing the quantile regression technique. This approach enables a more detailed investigation in different market circumstances, namely, bearish, normal and bullish markets. Empirical results indicate that the effects of oil price shocks and economic policy uncertainty are asymmetric and highly related to stock market conditions. Moreover, both the nexus of oil- and economic policy uncertainty-stock are changed at the onset of a crisis. Specially, rising oil prices have greater negative effects on stock returns when stock markets are bullish (extreme higher quantiles) before a crisis, whereas the effects are significantly positive under different market conditions after the onset of the crisis. Falling oil prices lower stock returns when stock markets are bullish and normal before the crisis, whereas lower stock returns under different market conditions except extreme bullish after the onset of the crisis. These findings might be related to the optimistic or pessimistic investor sentiments and investors might become more frightened after the crisis.     

Energy planning under uncertainty Implications for coal processing and oil stocking policy

This study presents a method for quantifying the benefits of various ways of anticipating energy shortages. The method is applied to coal liquefaction and oil stocking. The study concludes that uncertainty about future energy supplies can improve the prospects for coal processing. The results for oil stocking are consistent with actions already taken by government, indicating that the assumption and methodology of the study are consistent with revealed preferences.