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.     

Price determination in the EU ETS market: Theory and econometric analysis with market fundamentals

We investigate the price determination of the European Union emission allowance (EUA) of the European Union emissions trading scheme (EU ETS). We postulate an uncertain permit price and risk-averse firms which have the possibility to hedge in the forward market. The firms produce final goods, abate their emissions and trade permits in the permit market. The dependence of the equilibrium permit price on exogenous variables is studied in a permit market model. We test our theoretical findings with empirical data from 2005 to 2010 in the EU ETS market. We use daily forward prices of EUA as our dependent variable. We use several econometric models with multiple stationary time series to discover that there is a strong relationship between the fundamentals, such as German electricity prices and gas and coal prices, with the price of EUA. We find that the EUA forward price depends on fundamentals, especially on the price of electricity as well as on the gas–coal difference, in a statistically significant way.     

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。     

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.     

Price interactions and discovery among natural gas spot markets in North America

Recent advances in modeling causal flows with time series analysis are used to study relationships among eight North American natural gas spot market prices. Results indicate that the Canadian and US natural gas market is a single highly integrated market. Further results indicate that price discovery tends to reflect both regions of excess demand and supply. Across North America, Malin Hub in Oregon, Chicago Hub, Illinois, Waha, Texas, and Henry Hub, Louisiana region, are the most important markets for price discovery. Opal Hub in Wyoming is an information sink in contemporaneous time, receiving price information but passing on no price information. AECO Hub in Alberta, Canada, receives price signals from several markets and passes on information to Opal and the Oklahoma region.     

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.     

A conditional dependence approach to CO2-energy price relationships

This paper uses the conditional vine copula approach to model the dependence structure between European-based carbon allowances and major energy prices. It makes two central contributions to the related literature. First, we extend the previous works of Reboredo (2013, 2014) by allowing for complete coverage of energy markets including natural gas, coal, and electricity, beyond the carbon-oil dependencies. Second, we simultaneously investigate the multivariate dependence among all variables in the system so that each of them can interact with the others based on a rich variety of bivariate copula functions. The consideration of the electricity market in this context offers the possibility to gauge its influences through the computation of the fuel-switching mechanism. We mainly find that there is a reliable and positive link between coal and gas prices, and between coal and oil prices, with or without the presence of electricity prices, while a weak and positive link is detected between Brent and gas prices. Carbon prices co-move only weakly with energy prices, and their link to oil and gas prices is negative. Moreover, the switch from coal to gas does not occur when the relative price of fuels taking into account carbon costs is assessed. This happens because the fuel-switching mechanism is still more costly than carbon abatement. Our findings remain intact when alternative electricity prices are used.     

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.     

A stochastic fuel switching model for electricity prices

This paper develops and applies a novel electricity price model. We reproduce the merit order of a thermal-dominated electricity system by establishing a non-linear dependency of wholesale electricity prices on the prices of fuels (coal and natural gas) and of CO₂ emission allowances. The coefficients are estimated using a Markov Switching Regression.This approach might prove valuable for cross-hedging positions in the fuel, electricity and emission spot markets. It is also of use for studying the degree to which electricity prices in different countries reflect fuel and emission cost. Applying the model to the electricity markets of the UK and Germany, we find that British electricity prices are quite well-explained by short-run cost factors while the German ones are less well-explained.     

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.     

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.     

Hard coal for energetic purposes: price–quality relationships; international coal market observations and Polish practice

Coal is the most abundant and commonly used energy carrier in the world. In coal-producing countries, coal is often the cheapest fuel for electricity and heat production. Prices of steam coals offered by exporters on international markets reflect current economic and market conditions and are also related to the prices of other fossil fuels like crude oil and natural gas. International coal-market observations and analyses lead to the conclusion that steam-coal prices depend only on heating value. In Polish practice, steam-coal prices are calculated using a price formula in which coal price is a function of three quality parameters: net calorific value, ash content and sulphur content, and a price of ‘basic’ or ‘reference’ coal (which means: coal of defined quality). This paper presents the results of international coal-market analyses of relationships between coal price and quality and describes the Polish coal-pricing system. A new solution, relevant to domestic coal mines and power plants, is presented to improve and simplify the conditions of bilateral settlements of coal deliveries.     

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.     

Cross-border effects in interconnected electricity markets - an analysis of the Swiss electricity prices

Electricity markets in Europe become increasingly interconnected due to new grid connections and market coupling regulations. This paper examines the interdependencies between the Swiss electricity market and those of neighbouring countries. The Swiss market serves as a good example for a smaller electricity market which is increasingly affected by developments in the large neighbouring countries. To study these cross-border effects, especially those on Swiss electricity prices, we apply two different methodologies, an econometric and a Nash-Cournot equilibrium model.The analyses show that the Swiss electricity price correlates strongly with the German electricity price in the summer, but tends to follow the French electricity price in the winter. Another finding is that gas prices and the electricity load of neighbouring countries have a significant influence on prices. In particular, the load of France and Italy is driving up Swiss prices in the winter, while the German electricity demand and renewable energy generation have a larger influence on Swiss prices in the summer.     

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.     

Abuse of dominance and antitrust enforcement in the German electricity market

In 2008, the European Commission investigated E.ON, a large and vertically integrated electricity company, for the alleged abuse of a joint dominant position by strategically withholding generation capacity in the German wholesale electricity market. The case was settled after E.ON agreed to divest 5 GW generation capacity as well as its extra-high voltage network. We analyze the effect of these divestitures on wholesale electricity prices. Our identification strategy is based on the observation that energy suppliers have more market power during peak periods when demand is high. Therefore, a decrease in market power should lead to convergence between peak and off-peak prices, after controlling for different demand and supply conditions as well as the change in generation mix due to the expansion of renewable technologies. Using daily electricity prices for the 2006–2012 period, we find economically and statistically significant convergence effects after the settlement of the case. In a richer specification, we show that the price reductions appear to be mostly due to the divestiture of gas and coal plants, which is consistent with merit-order considerations. Additional cross-country analyses support our results.     

A long-term view of worldwide fossil fuel prices

This paper reviews a long-term trend of worldwide fossil fuel prices in the future by introducing a new method to forecast oil, natural gas and coal prices. The first section of this study analyses the global fossil fuel market and the historical trend of real and nominal fossil fuel prices from 1950 to 2008. Historical fossil fuel price analysis shows that coal prices are decreasing, while natural gas prices are increasing. The second section reviews previously available price modelling techniques and proposes a new comprehensive version of the long-term trend reverting jump and dip diffusion model. The third section uses the new model to forecast fossil fuel prices in nominal and real terms from 2009 to 2018. The new model follows the extrapolation of the historical sinusoidal trend of nominal and real fossil fuel prices. The historical trends show an increase in nominal/real oil and natural gas prices plus nominal coal prices, as well as a decrease in real coal prices. Furthermore, the new model forecasts that oil, natural gas and coal will stay in jump for the next couple of years and after that they will revert back to the long-term trend until 2018.     

Volatility in electricity derivative markets: The Samuelson effect revisited

This article proposes an empirical study of the Samuelson effect in electricity markets. Our motivations are twofold. First, although the literature largely assesses the decreasing pattern in the volatilities along the price curve in commodity markets, it has not extensively tested the presence of such a dynamic feature in electricity prices. Second, the analysis of a non-storable commodity enriches the literature on the behavior of commodity prices. Indeed, it has been sometimes asserted that the Samuelson effect results from the presence of inventories. We examine the four most important electricity futures markets worldwide for the period from 2008 to 2014: the German, Nordic, Australian, and US markets. We also use the American crude oil market as a benchmark for a storable commodity negotiated on a mature futures market. Our analysis has two steps: i) in addition to the traditional tests, we propose and test a new empirical implication of the Samuelson effect: price shocks should spread from the physical market to the paper market, and not the reverse; ii) based on the concept of “indirect storability”, we investigate the link between the Samuelson effect and the storability of the commodity. We find evidence of a Samuelson effect in all of the electricity markets and show that storage is not a necessary condition for such an effect to appear. These results should be taken into account for the understanding of the dynamic behavior of commodity prices, for the valuation of electricity assets, and for hedging operations.     

A multiscale analysis for carbon price drivers

This study proposes a multiscale analysis model to explore and identify the carbon price drivers at different timescales. By introducing the latest multivariate empirical mode decomposition, carbon price and its potential drivers are decomposed into several groups of simple modes with specific economic meanings. The cointegration techniques, error correction model and Newey–West estimator are combined to capture the carbon price drivers at similar timescales. Illustrated by the samples of the European Union Emissions Trading System from 2009 to 2016, a few interesting results can be found that at the original data level, among the three most important drivers of carbon price, electricity price and stock index show positive impacts, while coal price shows a negative impact. At different timescales, the effects of electricity and stock index appear comparatively earlier, which drive carbon price from the short timescales and continue to strengthen. However, the impacts of coal, oil and gas prices are lagging behind, which respectively drive the carbon price at the medium and long timescales.