The plunge in German electricity futures prices – Analysis using a parsimonious fundamental model

The German market has seen a plunge in wholesale electricity prices from 2007 until 2014, with base futures prices dropping by more than 40%. This is frequently attributed to the unexpected high increase in renewable power generation. Using a parsimonious fundamental model, we determine the respective impact of supply and demand shocks on electricity futures prices. The used methodology is based on a piecewise linear approximation of the supply stack and time-varying price-inelastic demand. This parsimonious model is able to replicate electricity futures prices and discover non-linear dependencies in futures price formation. We show that emission prices have a higher impact on power prices than renewable penetration. Changes in renewables, demand and installed capacities turn out to be similarly important for explaining the decrease in operation margins of conventional power plants. We thus argue for the establishment of an independent authority to stabilize emission prices.     

Dynamic pricing in the spanish gasoline market: A tacit collusion equilibrium

During the last twenty years, the Spanish petrol market has undergone an intensive restructuration process; it has changed from being a state-owned monopoly to total liberalization and privatization. This liberalization process was accompanied by measures that facilitated the creation of a “national champion,” the Repsol Group, which is a huge, vertically integrated company with a high market share in all the industry’s segments. Using a dynamic model, this paper analyses whether the prices established by companies in the Spanish gasoline market, after the restructuration process, fits with a tacit collusion equilibrium. The empirical results show that a strategic behaviour of companies occurs and is compatible with a tacit collusion price strategy. So, the restructuration process does not seem to have introduced effective competition into the Spanish gasoline market.     

Experimental comparison of impact of auction format on carbon allowance market

Carbon allowances auctions are a good way to achieve the carbon allowance allocations under international agreements to address global climate change. Based on an economic experiment, this paper compares three possible carbon allowance auction formats (uniform price auction, discriminatory price auction and English clock auction) with heterogeneous bidders (coal power plants and gas power plants) from four perspectives (carbon price, auction efficiency, demand withholding and fluctuations in power supplies). Possibilities of collusion among bidders and impacts of allowance banking and penalty price on bidders’ behaviors under different auction formats are also examined. The results show that (1) when there are relatively more bidders and there are no obvious communications between them, despite there being some tacit collusion, efficiency of English clock auction is greater than the other two formats; (2) when there are relatively fewer bidders and there are obvious communications between them, explicit collusions are observed under English clock auction. In this case, discriminatory price auction helps prevent collusion to some extents; (3) in the banking scenario, more speculations are observed, while penalty price exacerbates price volatility.     

Market power in renewable portfolio standards

Renewable portfolio standard (RPS), which requires a certain percentage of electricity production from renewables, has received considerable attention. One emerging issue is the possibility of strategic behavior in the renewable energy certificate/credit (REC) market, and its spillover effects on the electricity market. This paper develops dominant firm-competitive fringe models that account for market power. We show that market power could have significant impacts on the REC and power prices. In particular, when a nonrenewable generator is a dominant firm and a renewable generator is a competitive fringe, the nonrenewable firm has a strong incentive to lower the REC price, even to zero for avoiding REC costs. The zero REC price would negate price impacts in the power market, thereby mitigating market power of the dominant firm. However, this could lead to an underinvestment in renewables in the long run as subsidies received by renewables in form of RECs vanish. Therefore, regulatory agencies need to carefully oversee the market performance to ensure a healthy development of renewable industries under the RPS policies.     

Effects of the shale boom on ethylene and propylene prices

This study analyzed the effect of the shale boom on the olefin industries. We investigated the paths by which US natural gas prices are transferred to ethylene and propylene prices and identified the price determinants based on the supply and demand conditions of each commodity’s market. By comparing with the Japanese markets, the understanding of the supply structure of the ethylene and propylene industries is broadened. A path analysis framework was constructed to reflect the supply chains and applied to 2009–2018 data. Results showed that the downward trend in ethane prices provoked by the US shale boom reduced ethylene prices and raised propylene prices. Propane still serves as a determinant of the latter, while naphtha has lost predictive power for both. The comparative data confirmed that the US produces most of its petrochemicals from natural gas and gas-based feedstocks, while Japan relies on crude oil and refined naphtha.     

Statistical analysis of negative prices in European balancing markets

The presence of renewable power generation technologies increases the need for system flexibility due to their variable nature. The increasing share of variable renewables in European power systems create a downward adequacy problem, which deals with the ability of power systems to cope with periods of excess generation. The occurrence of negative prices on Central Western European electricity markets confirms the relevance of this issue, which is referred to as “incompressibility of power systems” and is assessed as a barrier for further renewable power integration. The objective of this article is to identify the main drivers of negative price periods in European balancing markets, by means of both an empirical and regression analysis. Results confirm a positive relation with the scheduled generation of renewables and inflexible base load, as well as a negative relation with the scheduled system load. Furthermore, the occurrence of negative prices is related to the positive and negative forecast error of renewable generation and demand, respectively. It is concluded that negative balancing market prices provide a market signal for investments in flexibility sources such as flexible generation, demand response, electricity storage, and interconnector capacity.     

Physical market determinants of the price of crude oil and the market premium

We analyze the determinants of the real price of crude oil by means of an equilibrium correction model over the last two decades where we focus on the aspects of the physical market that impact on the clearing price. We find that two cointegrating relations affect the changes in prices: one refers to OPEC's behavior, attempting to control prices using its market power and quotas; the other to the coverage rate of OECD expected future demand using inventory behaviors. We derive a forecasting equation for the change in oil prices which we use to assess the speculative elements of the price increases of the period 2000–05. We show that worries alien to the physical markets were the causes of the increase in oil prices and we quantify their overall impact.     

Carbon mitigation in the electric power sector under cap-and-trade and renewables policies

In Europe, CO₂ emissions from the electric power sector and energy intensive industries are capped under a cap-and-trade system (i.e., the EU ETS). When other indirect measures are taken to impact emissions in a specific sector under the cap (such as a push for renewables in the electric power sector), this has implications on the overall allowance price, and on CO₂ emissions both from this specific sector and the other sectors under the cap. The central contribution of this paper is the derivation of impact curves, which describe these interactions, i.e., the impact on allowance price and the shift of emissions across sectors. From a set of detailed simulations of the electric power system operation, a so-called “emission plane” is obtained, from which impact curves can be derived. Focus is on interactions between CO₂ abatement through fuel switching and measures affecting the residual electricity demand (such as deployment of renewables) in the electric power sector, as well as on interactions with other sectors, both in a short-term framework. A case study for Central-Western Europe is presented. The analysis reveals a substantial impact of renewables on CO₂ emissions, and hence on emissions shifts across sectors and/or on the CO₂ price.     

A ‘simple’ hybrid model for power derivatives

This paper presents a method for valuing power derivatives using a supply–demand approach. Our method extends work in the field by incorporating randomness into the base load portion of the supply stack function and equating it with a noisy demand process. We obtain closed form solutions for European option prices written on average spot prices considering two different supply models: a mean-reverting model and a Markov chain model. The results are extensions of the classic Black–Scholes equation. The model provides a relatively simple approach to describe the complicated price behaviour observed in electricity spot markets and also allows for computationally efficient derivatives pricing.     

Threshold effect of the economic growth rate on the renewable energy development from a change in energy price: Evidence from OECD countries

This paper uses a panel threshold regression (PTR) model to investigate the influence that energy prices have on renewable energy development under different economic growth rate regimes. The empirical data are obtained from each of the OECD member-countries over the period from 1997 to 2006. We show that there is one threshold in the regression relationship, which is 4.13% of a one-period lag in the annual gross domestic product (GDP) growth rate. The consumer price index (CPI), in so far as it relates to variations in energy, is significantly positively correlated with the contribution of renewables to energy supply in the regime with higher-economic growth, but there is no relationship in the regime with lower economic growth. Therefore, countries characterized by high-economic growth are able to respond to high energy prices with increases in renewable energy use, while countries characterized by low-economic growth countries tend to be unresponsive to energy price changes when they come to their level of renewable energy.     

Investment in wind power and pumped storage in a real options model

Promoting renewable energy has been a key ingredient in energy policy seeking to de-carbonize the energy mix and will continue to do so in the future given the European Union's high ambitions to further curb carbon emissions. A wide range of instruments has been suggested and implemented in various countries of the EU. A prominent policy promoting investment in renewable technologies is the use of feed-in tariffs, which has worked well at large scale in, e.g. Germany, but which has only been implemented in a very limited way in countries such as the UK.Being subject to environmental uncertainties, however, renewables cannot be seen in isolation: while renewables-based technologies such as wind and solar energy, for example, suffer from uncertain loads depending on environmental conditions, hydropower allows for the storage of water for release at peak prices, which can be treated as a premium (partially) offsetting higher upfront investment costs. In addition, electricity prices will respond to changes in electric capacity in the market, which is often neglected in standard investment models of the electricity sector.This paper contributes to the existing literature in two ways: it provides a review of a renewables-based technology in a specific policy context and provides additional insight by employing a real options approach to investigate the specific characteristics of renewables and their associated uncertainties in a stylized setting taking explicitly into account market effects of investment decisions. The prices of the model are determined endogenously by the supply of electricity in the market and by exogenous electricity price uncertainty. The inclusion of market effects allows us to capture the full impact of public incentives for companies to invest into wind power and hydro pumped storage installations.     

Energy‐cost‐aware flow shop scheduling considering intermittent renewables,energy storage,and real‐time electricity pricing

The industrial sector is one of the major energy consumers that contribute to global climate change. Demand response programs and on‐site renewable energy provide great opportunities for the industrial sector to both go green and lower production costs. In this paper, a 2‐stage stochastic flow shop scheduling problem is proposed to minimize the total electricity purchase cost. The energy demand of the designed manufacturing system is met by on‐site renewables, energy storage, as well as the supply from the power grid. The volatile price, such as day‐ahead and real‐time pricing, applies to the portion supplied by the power grid. The first stage of the formulated model determines optimal job schedules and minimizes day‐ahead purchase commitment cost that considers forecasted renewable generation. The volatility of the real‐time electricity price and the variability of renewable generation are considered in the second stage of the model to compensate for errors of the forecasted renewable supply; the model will also minimize the total cost of real‐time electricity supplied by the real‐time pricing market and maximize the total profit of renewable fed into the grid. Case study results show that cost savings because of on‐site renewables are significant. Seasonal cost saving differences are also observed. The cost saving in summer is higher than that in winter with solar and wind supply in the system. Although the battery system also contributes to the cost saving, its effect is not as significant as the renewables.     

Retail fuel price adjustment in Germany: A threshold cointegration approach

Consumers in Germany often complain that retail fuel prices usually adjust quickly to crude oil price increases than decreases and characterize this pricing pattern as market power exploitation. In this paper, we use both weekly national and daily city-specific (Berlin, Hamburg, Munich and Cologne) data to investigate the extent to which retail fuel prices in Germany adjust to changes in the international crude oil price. At the national level with weekly prices, we find positive asymmetries for both gasoline and diesel within the period 2003–2007, reflecting that retail prices react more swiftly to crude oil price increases than decreases. In contrast, for 2009–2013, we observe symmetric adjustment and negative asymmetry for retail diesel and gasoline prices, respectively. The city level analysis supports our findings in the latter time period. Thus, regulatory measures aimed at the retail fuel market over recent years seem to have been effective, and, contrary to consumers' perception, we find no evidence for excessive market power or collusion.     

Econometric analysis of 15-minute intraday electricity prices

The trading activity in the German intraday electricity market has increased significantly over the last years. This is partially due to an increasing share of renewable energy, wind and photovoltaic, which requires power generators to balance out the forecasting errors in their production. We investigate the bidding behaviour in the intraday market by looking at both last prices and continuous bidding, in the context of a reduced-form econometric analysis. A unique data set of 15-minute intraday prices and intraday-updated forecasts of wind and photovoltaic has been employed. Price bids are explained by prior information on renewables forecasts and demand/supply market-specific exogenous variables. We show that intraday prices adjust asymmetrically to both forecasting errors in renewables and to the volume of trades dependent on the threshold variable demand quote, which reflects the expected demand covered by the planned traditional capacity in the day-ahead market. The location of the threshold can be used by market participants to adjust their bids accordingly, given the latest updates in the wind and photovoltaic forecasting errors and the forecasts of the control area balances.     

The potential for renewable energy in industrial applications

To date, insufficient attention has been paid to the potential of renewable energy resources in industrial applications. Our analysis suggests that up to 21% of final energy demand and feedstock-use in the manufacturing industry sector could be of renewable origin by 2050, a five-fold increase over current levels in absolute terms. This estimate is considerably higher than other recent global scenario studies. In addition, if a 50% share of renewables in power generation is assumed, the share of direct and indirect renewable energy use rises to 31% in 2050. Our analysis further suggests that bioenergy and biofeedstocks can constitute three-quarters of the direct renewables use in this sector by 2050. The remainder is roughly evenly divided between solar heating and heat pumps. The potential for solar cooling is considered to be limited.While low-temperature solar process heat can reach cost-effectiveness today in locations with good insolation, some bioenergy applications will require a CO₂ price even on the longer term. Biomass feedstock for synthetic organic materials will require a CO₂ price up to USD 100/t CO₂, or even more if embodied carbon is not considered properly in CO₂ accounts. Future fossil fuel prices and bioenergy prices in addition to the development of feedstock commodity markets for biomass will be critical. Decision makers are recommended to pay more attention to the potential for renewables in industry. Finally, we propose the development of a detailed technology roadmap to explore this potential further and discuss key issues that need to be elaborated in such a framework.     

Simulation of current pricing-tendencies in the German electricity market for private consumption

The German electricity market for private consumption is characterized by increasing prices and low participation of the consumers. This prompts us to investigate the interdependencies between the customers’ engagement in the market and the suppliers’ pricing strategies. Based on an analysis of the German retail market, an agent-based simulation model is developed. Whereas the behaviour of private customers is calibrated on field data, the suppliers learn to maximize profits with a feedback-learning heuristic. The simulation results show a tendency of rising prices, which are created without the assumption of tacit collusion among suppliers. We conclude that in Germany the current market pressure of private customers may not be a sufficient incentive for suppliers to lower electricity prices.     

On the efficient market diffusion of intermittent renewable energies

Capacity costs of renewable energies have been decreasing dramatically and are expected to fall further, making them more competitive with fossils. Building on an analytically tractable peak-load pricing model, we analyze how intermittency of renewable energies affects the market diffusion that results from these lower costs. In particular, once renewables have become competitive by attaining the same levelized cost of electricity (LCOE) as fossils, the marginal increase in efficient capacities due to a further cost reduction varies substantially. Initially it is small, then it rises, but it falls again once renewable capacities are large enough to satisfy the whole electricity demand at times of high availability. If external costs of fossils are internalized by a Pigouvian tax, then perfect competition leads to efficient investments in renewable and fossil capacities; even though we assume that only a subgroup of consumers can adapt their demand to price fluctuations that are caused by the intermittency of renewables. Moreover, fossils receive a capacity payment through the market for their reliability in serving demand of non-reactive consumers. Maximum electricity prices rise with the share of renewables. If regulators impose a price cap, this initially raises investments in renewables, but the effect may reverse if the share of renewables is large.     

Renewable electric energy integration: Quantifying the value of design of markets for international transmission capacity

Integrating large quantities of variable renewable electricity generation remains a political and operational challenge. One of the main obstacles in Europe to installing at least 200 GWs of power from variable renewable sources is how to deal with the insufficient network capacity and the congestion that will result from new flow patterns. We model the current methodology for controlling congestion at international borders and compare its results, under varying penetrations of wind power, with models that simulate an integrated European network using nodal/localised marginal pricing. The nodal pricing simulations illustrate that congestion and price patterns vary considerably between wind scenarios and within countries, and that a nodal price regime could make better use of existing network capacity, introducing substantial operational cost savings and reducing marginal power prices in the majority of European countries.     

The case for renewables apart from global warming

The outcome of COP15, the conference on climate change in Copenhagen, was the Copenhagen Accord which was recognised by the 193 countries that attended. The Accord set no compulsory limits on carbon emissions, and none of the countries that introduced it – USA, China, India [with Brazil and South Africa] – has signed the Annexe to the Kyoto Agreement, committing them to limit their emissions. Climate change is only of secondary importance to them compared with eradicating poverty. Nevertheless three of these countries are in the lead currently for installing renewables, far ahead of most of those [only 37 out of 187 countries world-wide] who are committed to limiting their emissions. This paper explains why. The main function of renewable energy is to save fuel, thereby reducing energy imports and maintaining security of energy supplies without the need to fight world wars over them. Also, being capital intensive with all the money paid up-front, renewables avoid the price fluctuations that bedevil the oil and other fossil fuel industries. As capacity is doubling every 3 years, renewables prices will come down with savings of scale, so wind power in particular will soon be the cheapest form of power.     

Cost-effectiveness of renewable electricity policies

We analyze policies to promote renewable sources of electricity. A portfolio standard (RPS) raises electricity prices and primarily reduces gas-fired generation. A knee of the cost curve exists between 15% and 20% goals for 2020 in our central case, and higher natural gas prices lower the cost of greater reliance on renewables. A renewable energy production tax credit lowers electricity price at the expense of taxpayers, which limits its effectiveness in reducing carbon emissions, and it is less cost-effective at increasing renewables than a portfolio standard. Neither policy is as cost-effective as a cap-and-trade policy for achieving carbon emission reductions.