Energy prices and CO2 emission allowance prices: A quantile regression approach

We use a quantile regression framework to investigate the impact of changes in crude oil prices, natural gas prices, coal prices, and electricity prices on the distribution of the CO₂ emission allowance prices in the United States. We find that: (i) an increase in the crude oil price generates a substantial drop in the carbon prices when the latter is very high; (ii) changes in the natural gas prices have a negative effect on the carbon prices when they are very low but have a positive effect when they are quite high; (iii) the impact of the changes in the electricity prices on the carbon prices can be positive in the right tail of the distribution; and (iv) the coal prices exert a negative effect on the carbon prices.     

What explain the short-term dynamics of the prices of CO2 emissions?

Using a Bayesian Structural VAR (BSVAR), this paper analyzes the short-term dynamics of the prices of CO₂ emissions in response to changes in the prices of oil, coal, natural gas and electricity. The results show that: (i) a positive shock to the crude oil prices has an initial positive effect on the CO₂ allowance prices, which later becomes negative; (ii) an unexpected increase in the natural gas prices reduces the price of CO₂ emissions; (iii) a positive shock to the prices of the fuel of choice, coal, has virtually no significant impact on the CO₂ prices; (iv) there is a clear positive effect of the coal prices on the CO₂ allowance prices when the electricity prices are excluded from the BSVAR system; and (v) a positive shock to the electricity prices has a negative impact on the price of the CO₂ allowances. We also find that the energy price shocks have a persistent impact on the CO₂ allowance prices, with the largest effect occurring 6 months after a shock strikes. The effect is particularly strong in the case of the shocks to the natural gas and crude oil prices. Finally, the empirical findings suggest an important degree of substitution between the three primary sources of energy (i.e., crude oil, natural gas and coal), particularly when electricity prices are excluded from the BSVAR system.     

Correlation between Chinese and international energy prices based on a HP filter and time difference analysis

To establish a reasonable system and mechanism for Chinese energy prices, we use the Granger causality test, Hodrick–Prescott (HP) filter and time difference analysis to research the pricing relationship between Chinese and international energy prices. We find that Chinese and international crude oil prices changed synchronously while Chinese refined oil prices follow the changes of international oil prices with the time difference being about 1 month to 2 months. Further, Australian coal prices Granger causes Chinese coal prices, and there is a high correlation between them. The U.S. electricity price is influenced by the WTI crude oil price, the U.S. gasoline price and the HenryHub gas price. Due to the unreasonable price-setting mechanism and regulation from the central government, China′s terminal market prices for both electricity and natural gas do not reflect the real supply–demand situation. This paper provides quantitative results on the correlation between Chinese and international energy prices to better predict the impact of international energy price fluctuations on China′s domestic energy supply and guide the design of more efficient energy pricing policies. Moreover, it provides references for developing countries to improve their energy market systems and trading, and to coordinate domestic and international energy markets.     

Oil and natural gas prices and greenhouse gas emission mitigation

The hikes in hydrocarbon prices during the last years have lead to concern about investment choices in the energy system and uncertainty about the costs for mitigation of greenhouse gas emissions. On the one hand, high prices of oil and natural gas increase the use of coal; on the other hand, the cost difference between fossil-based energy and non-carbon energy options decreases. We use the global energy model TIMER to explore the energy system impacts of exogenously forced low, medium and high hydrocarbon price scenarios, with and without climate policy. We find that without climate policy high hydrocarbon prices drive electricity production from natural gas to coal. In the transport sector, high hydrocarbon prices lead to the introduction of alternative fuels, especially biofuels and coal-based hydrogen. This leads to increased emissions of CO₂. With climate policy, high hydrocarbon prices cause a shift in electricity production from a dominant position of natural gas with carbon capture and sequestration (CCS) to coal-with-CCS, nuclear and wind. In the transport sector, the introduction of hydrogen opens up the possibility of CCS, leading to a higher mitigation potential at the same costs. In a more dynamic simulation of carbon price and oil price interaction the effects might be dampened somewhat.     

基于谱分析的国内外能源价格周期关系研究

为了更好地应对经济全球化背景下的能源价格问题,基于谱分析方法对国内外典型市场的石油、煤炭、电力、天然气四种主要能源价格的周期互动关系进行了初步研究与探讨,考虑到我国天然气与电力市场的发展现状,借鉴发展相对成熟的美国市场进行分析。结果表明,煤炭、电力、天然气三种能源市场价格均滞后于国际原油价格波动,其中煤炭价格波动略滞后于石油,而根据美国市场经验,天然气和电力价格波动周期均滞后于煤炭和石油市场价格。     

Joint price and volumetric risk in wind power trading: A copula approach

This paper examines the dependence between wind power production and electricity prices and discusses its implications for the pricing and the risk distributions associated with contracts that are exposed to joint price and volumetric risk. We propose a copula model for the joint behavior of prices and wind power production, which is estimated to data from the Danish power market. We find that the marginal behavior of the individual variables is best described by ARMA–GARCH models with non-Gaussian error distributions, and the preferred copula model is a time-varying Gaussian copula. As an application of our joint model, we consider the case of an energy trading company entering into longer-term agreements with wind power producers, where the fluctuating future wind power production is bought at a predetermined fixed price. We find that assuming independence between prices and wind power production leads to an underestimation of risk, as the profit distribution becomes left-skewed when the negative dependence that we find in the data is accounted for. By performing a simple static hedge in the forward market, we show that the risk can be significantly reduced. Furthermore, an out-of-sample study shows that the choice of copula influences the price of correlation risk, and that time-varying copulas are superior to the constant ones when comparing actual profits generated with different models.     

The impacts of energy prices on energy intensity: Evidence from China

In this paper, we present a review of the deregulation of energy prices in China between 1985 and 2004 and assess the impacts of changes in energy prices on aggregate energy intensity and coal/oil/electricity intensity. We used time series data to provide estimates of energy price elasticities. Empirical results showed that: (1) The own-price elasticities of coal, oil, and aggregate energy were negative in periods both before and after 1995, implying that higher relative prices of different energy types lead to the decrease in coal, oil, and aggregate energy intensities. However, the positive own-price elasticity of electricity after 1995 probably indicates that the price effect was weaker than other factors such as income effect and population effect. (2) The impacts of energy prices were asymmetric over time. (3) Sectoral adjustment also drove the decrease in aggregate energy intensity. Although raising energy prices to boost efficiency of energy use seems to be an effective policy tool, other policy implications concerned with energy prices, such as energy supply security and fuel poverty, must also be considered.     

Linking the gas and oil markets with the stock market: Investigating the U.S. relationship

Energy markets can represent a strategic advantage when they are supporting each other, and specifically when energy segments are complementary enough to support economic development and growth. In this light, a high and strategic interest relies on the possible interactions between energy market segments as well as their impact on a given country’s financial market. The proposed research focuses on the interaction between the U.S. natural gas and U.S. crude oil markets on one side and their dependencies with the U.S. stock market on the other side. After controlling for structural changes or breaks, we characterize previous dependencies with the multivariate copula methodology. First, we assess the joint link prevailing between the natural gas and crude oil markets. Then, we characterize the joint risk structure prevailing between previous energy markets and the U.S. stock market. Finally, we assess the joint dependence structure between the natural gas, crude oil and stock markets.     

Electricity prices and fuel costs: Long-run relations and short-run dynamics

The paper examines the long-run relation and short-run dynamics between electricity prices and three fossil fuel prices – coal, natural gas and crude oil – using annual data for the U.S. for 1960–2007. The results suggest (1) a stable long-run relation between real prices for electricity and coal (2) Bi-directional long-run causality between coal and electricity prices. (3) Insignificant long-run relations between electricity and crude oil and/or natural gas prices. And (4) no evidence of asymmetries in the adjustment of electricity prices to deviations from equilibrium. A number of implications are addressed.     

Causal modeling and inference for electricity markets

How does dynamic price information flow among Northern European electricity spot prices and prices of major electricity generation fuel sources? We use time series models combined with new advances in causal inference to answer these questions. Applying our methods to weekly Nordic and German electricity prices, and oil, gas and coal prices, with German wind power and Nordic water reservoir levels as exogenous variables, we estimate a causal model for the price dynamics, both for contemporaneous and lagged relationships. In contemporaneous time, Nordic and German electricity prices are interlinked through gas prices. In the long run, electricity prices and British gas prices adjust themselves to establish the equilibrium price level, since oil, coal, continental gas and EUR/USD are found to be weakly exogenous.     

When will fossil fuel reserves be diminished?

Crude oil, coal and gas are the main resources for world energy supply. The size of fossil fuel reserves and the dilemma that “when non-renewable energy will be diminished” is a fundamental and doubtful question that needs to be answered. This paper presents a new formula for calculating when fossil fuel reserves are likely to be depleted and develops an econometrics model to demonstrate the relationship between fossil fuel reserves and some main variables. The new formula is modified from the Klass model and thus assumes a continuous compound rate and computes fossil fuel reserve depletion times for oil, coal and gas of approximately 35, 107 and 37 years, respectively. This means that coal reserves are available up to 2112, and will be the only fossil fuel remaining after 2042. In the Econometrics model, the main exogenous variables affecting oil, coal and gas reserve trends are their consumption and respective prices between 1980 and 2006. The models for oil and gas reserves unexpectedly show a positive and significant relationship with consumption, while presenting a negative and significant relationship with price. The econometrics model for coal reserves, however, expectedly illustrates a negative and significant relationship with consumption and a positive and significant relationship with price. Consequently, huge reserves of coal and low-level coal prices in comparison to oil and gas make coal one of the main energy substitutions for oil and gas in the future, under the assumption of coal as a clean energy source.     

Market integration among electricity markets and their major fuel source markets

Dynamic price information flows among U.S. electricity wholesale spot prices and the prices of the major electricity generation fuel sources, natural gas, uranium, coal, and crude oil, are studied. Multivariate time series methods applied to weekly price data show that in contemporaneous time peak electricity prices move natural gas prices, which in turn influence crude oil. In the long run, price is discovered in the fuel sources market (except uranium), as these prices are weakly exogenous in a reduced rank regression representation of these energy prices.     

How competitive are EU electricity markets? An assessment of ETS Phase II

This paper studies the interactions between electricity and carbon allowance prices in the year-ahead energy markets of France, Germany, United Kingdom and the Nordic countries, during Phase II of the EU ETS. VAR and Granger-causality methods are used to analyze causal interfaces, whereas the volatility of electricity prices is studied with basic and asymmetric AR-GARCH models. Among the main results, the marginal rate at which carbon prices feed into electricity prices is shown to be ca. 135% in the EEX and Nord Pool markets, where electricity and carbon prices display bidirectional causality, and 109% in the UK. Therefore, generators in these markets internalized the cost of freely allotted emission allowances into their electricity prices considerably more than the proportionate increase in costs justified by effective carbon intensity. Moreover, electricity prices in France are found to Granger-cause the carbon price. This study also shows how European electricity prices are deeply linked to coal prices among other factors, both in terms of levels and volatility, regardless of the underlying fuel mix, and that coal was marginally more profitable than gas for electricity generation. EU policies aimed at increasing the carbon price are likely to be crucial in limiting the externalities involved in the transition to a low-carbon system.     

Revisiting long-run relations in power markets with high RES penetration

Electricity generation from renewable energy resources (RES) has become increasingly significant to reach EU and emissions reduction targets. At the same time, one of the main EU policy goals has been the creation of a common internal energy market for Europe. In this paper, we focus on these two issues previously studied separately, considering their possible interactions. We first analyze the long-run relationship between day-ahead electricity prices and fuel prices (natural gas and coal) looking at two samples of years characterized by low and high RES penetration, then we explore the integration of EU markets.We show that the electricity–fuel nexus found over 2006–2008 changed dramatically over 2010–2014 for the majority of countries considered. In particular, the long-run dependence of electricity from gas and coal prices is much lower in recent years. Furthermore, our results confirm that the considered EU countries are becoming less integrated as RES-E increases. Our findings suggest that nationally implemented policies to support renewables are successful in increasing RES penetration, but they have lessened the linkage among EU markets, then making integration more difficult to obtain.     

Prospects for coal gasification in Pakistan

Pakistan is currently facing serious energy supply problems. Energy demand has been increasing by about 8% per year during the last 12yr and this trend is likely to continue. Since 1980–1981 the oil import bill has been consuming more than 50% of yearly export earning. As there is not much scope for a sizeable increase in the domestic supply of gas, oil, or hydroelectric power, increasing the use of domestic coal is necessary to avoid excessive dependence on imported energy. Coal gasification to produce substitute natural gas (SNG) is not economical at present coal production costs, due to the low cost of indigenous gas and subsidized furnace oil and kerosene and the high SNG production costs from the technology available at present. If domestic prices of gas and liquid fuels are increased to the level of current international oil prices and developments in coal gasification technologies can bring about expected reductions in capital costs and improvements in efficiency, coal gasification may become economical in Pakistan. It is estimated that indigenous coal resources can potentially supply 3–6 million TCE/yr of SNG by 2000—about 10–20% of the substitutable fossil fuels demand for that year—along with meeting about 9% of the electricity demand.     

Stationarity changes in long-run energy commodity prices

Situated at the intersection of the literatures on speculative storage and non-renewable commodity scarcity, this paper considers whether changes in persistence have occurred in long-run U.S. prices of the energy commodities crude oil, natural gas and bituminous coal. We allow for a structural break when testing for a break in persistence to avoid a change in the stochastic properties of prices being confounded by an unaccounted-for deterministic shift in the price series. We find that coal prices are trend stationary throughout their evolution and that oil prices change from stationarity to non-stationarity in the decade between the late 1960s to late 1970s. The result on gas prices is ambiguous. Our results demonstrate the importance of accounting for a possible structural shift when testing for breaks in persistence, while being robust to the exact date of the structural break. Based on our analysis we caution against viewing long-run energy commodity prices as being non-stationary and conclude in favor of modeling commodity market fundamentals as stationary, meaning that speculative storage will tend to have a dampening effect on prices. We also cannot reject that long-run prices of coal and, with some hesitation, gas follow a Hotelling-type rule. In contrast, we reject the Hotelling rule for oil prices since the late 1960s/early 1970s.     

Forecasting the joint distribution of Australian electricity prices using dynamic vine copulae

We consider the problem of modelling and forecasting the distribution of a vector of prices from interconnected electricity markets using a flexible class of drawable vine copula models, where we allow the dependence parameters of the constituting bivariate copulae to be time-varying. We undertake in-sample and out-of-sample tests using daily electricity prices, and evidence that our model provides accurate forecasts of the underlying distribution and outperforms a set of competing models in their abilities to forecast one-day-ahead conditional quantiles of a portfolio of electricity prices. Our study is conducted in the Australian National Electricity Market (NEM), which is the most efficient power auction in the world. Electricity prices exhibit highly stylised features such as extreme price spikes, price dependency between regional markets, correlation asymmetry and non-linear dependency. The developed approach can be used as a risk management tool in the electricity retail industry, which plays an integral role in the apparatus of modern energy markets. Electricity retailers are responsible for the efficient distribution of electricity, while being exposed to market risk with extreme magnitudes.     

Environmental degradation,economic growth and energy consumption: Evidence of the environmental Kuznets curve in Malaysia

This paper tests for the short and long-run relationship between economic growth, carbon dioxide (CO₂) emissions and energy consumption, using the Environmental Kuznets Curve (EKC) by employing both the aggregated and disaggregated energy consumption data in Malaysia for the period 1980–2009. The Autoregressive Distributed Lag (ARDL) methodology and Johansen–Juselius maximum likelihood approach were used to test the cointegration relationship; and the Granger causality test, based on the vector error correction model (VECM), to test for causality. The study does not support an inverted U-shaped relationship (EKC) when aggregated energy consumption data was used. When data was disaggregated based on different energy sources such as oil, coal, gas and electricity, the study does show evidences of the EKC hypothesis. The long-run Granger causality test shows that there is bi-directional causality between economic growth and CO₂ emissions, with coal, gas, electricity and oil consumption. This suggests that decreasing energy consumption such as coal, gas, electricity and oil appears to be an effective way to control CO₂ emissions but simultaneously will hinder economic growth. Thus suitable policies related to the efficient consumption of energy resources and consumption of renewable sources are required.     

High gas dependence for power generation in Thailand: The vulnerability analysis

Thailand uses 74% of its natural gas supply for power generation and 70% of its power comes from gas-based technology. High dependence on natural gas in power generation raises concerns about security of electricity supply that could affect competitiveness of Thai manufacturing and other industries at the global level. The effect of fuel dependence on security of electricity supply has received less emphasis in the literature. Given this gap, this research examines the economic impact of high dependence on natural gas for power generation in Thailand by analyzing the effect of changes in fuel prices (including fuel oil and natural gas) on electricity tariff in Thailand. At the same time, the research quantifies the vulnerability of the Thai economy due to high gas dependence in power generation. Our research shows that for every 10% change in natural gas price, electricity tariff in Thailand would change by 3.5%. In addition, we found that the gas bill for power generation consumed between 1.94% and 3.05% of gross domestic product (GDP) between 2000 and 2004 and in terms of GDP share per unit of energy, gas dependence in power generation is almost similar to that of crude oil import dependence. We also found that the basic metal industry, being an electricity intensive industry, is the most affected industry. Additionally, we find that volatility of gas price is the main factor behind the vulnerability concern. The research accordingly simulates two mitigation options of the problem, namely reducing gas dependence and increasing efficiency of gas-fired power plants, where the results show that these methods can reduce the vulnerability of the country from high gas dependence in power generation.     

How do crude oil prices co-move?: A copula approach

This paper examines the dependence structure between crude oil benchmark prices using copulas. By considering several copula models with different conditional dependence structures and time-varying dependence parameters, we find evidence of significant symmetric upper and lower tail dependence between crude oil prices. These findings suggest that crude oil prices are linked with the same intensity during bull and bear markets, thus supporting the hypothesis that the oil market is ‘one great pool’—in contrast with the hypothesis that states that the oil market is regionalized. Our findings on crude oil price co-movements also have implications for risk management, hedging strategies and asset pricing.