Energy Economics: Concepts, Issues, Markets and Governance

673 Pages·2011·3.64 MB·English

by  Subhes C. Bhattacharyya

Energy Economics
Subhes C. Bhattacharyya
Energy Economics
Concepts, Issues, Markets and Governance
123
Dr. SubhesC.Bhattacharyya
Centre forEnergy,Petroleum and Mineral
Lawand Policy
Universityof Dundee, UK
e-mail: [email protected];
[email protected]
ISBN 978-0-85729-267-4 e-ISBN978-0-85729-268-1
DOI 10.1007/978-0-85729-268-1
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Preface
The idea for this book came about 4 years ago when I attended a workshop in
OxfordonenergyeconomicsteachingintheU.K.organisedundertheauspicesof
theUKEnergyResearchCentre(UKERC).Thatwasatimewhenoilpricesstarted
its upward journey and concerns about the security of energy supply were
becomingacommonmanissue.Itoccurredtomethatdespitethisgreatinterestin
understanding the common energy problems around us, there is a lack of critical
appreciation of the problem and its inter-linkages with other issues. While the
interest in the field of energy studies has seen a tremendous growth over the past
decade, there is a serious gap in terms of a holistic understanding of the energy
problems around us. That workshop clearly demonstrated that the economic
concepts that are relevant to the energy industry are poorly understood by
researchersofinter-disciplinarybackground.Themain reason behindthisstateof
affairs is the lack of a good, accessible reference book in energy economics that
anyone interested in the subject can hold onto.
Luckily for me, this revelation came as a good opportunity to deliver such a
book. Last year, 2010, marked the completion of 25 years of my continuous
involvement with the energy field of study. I have been teaching the subject to
students of inter-disciplinary backgrounds for quite sometime now. I have taught
various aspects of energy economics and policies, and have provided training to
senior staff. Moreover, having worked in the industry and in high level profes-
sional consulting, I understand the need for a balanced approach for such a book.
In addition, my current research focuses on practical, applied problems where
technology, engineering, economics, finance, regulation and the environment all
feature in different proportions. This came handy while preparing for this book.
My desire to put a holistic picture by including various dimensions of the
problem in the book has meant that the size has gone up. The feedback from my
studentshas influenced theoutlineandthe content ofthe book.While allofthem
wanttogainsomeanalyticalskillsandconceptssothattheycananalyseanygiven
problem using simple economic logic, they have also shown great interests in
understanding the environmental aspects related to energy use and the regulation
and governance of the industry. I have complied with their desires and hope that
v
vi Preface
this volume helps any reader to gain a wider and balanced understanding of the
energy issues.
Most of the content of the book is accessible to persons of non-mathematical
background. The economic concepts have also been explained in simple terms,
often using graphical presentations. However, for those who cannot imagine an
energy economics book without mathematics, I have added some materials and
have provided references for further reading. Essentially, mathematics has been
used as an aid and not for the sake of it.
Iam gratefultomystudentswho provided valuablefeedback andencouraging
comments on most of the materials of this book that have been tested in various
classes.Theirquestionsandreflections/criticismshavealwayshavehelpedmein
improving my work. Although I have included additional materials based on my
personal research activities or to reflect the changes taking place in the energy
sector,Iamveryconfidentthatotherreaderswouldfindthecontentusefultothem.
I am also thankful to my colleagues with whom I have co-authored some of my
academic publications that are included in this book under various chapters.
However,Iamonlyresponsibleforanyerrorsandomissionsthatmaystillremain.
A book of this size always takes special personal efforts. Although I thought
I would be able complete the work in a short period of time given the state of
preparedness of the initial manuscripts, it proved too optimistic in the end. I am
thankfultoMsClaireProtheroughandMrAnthonyDoylefortheirunderstanding
and flexibility. Above all, I could not have realised this work without the support
andsacrificeofmyfamilymembers—myspouseDebjaniandmydaughterSaloni.
The order in which your names appear in the print does not matter—you are
always special and priceless to me.
Contents
1 Introduction to Energy Economics . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Energy and Multidimensional Interactions. . . . . . . . . . . . . . . 2
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Part I Energy Demand Analysis and Forecasting
2 Energy Data and Energy Balance. . . . . . . . . . . . . . . . . . . . . . . . 9
2.1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.2 Energy Basics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.2.1 Energy Defined . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.2.2 Alternative Classifications of Energy. . . . . . . . . . . . . 10
2.3 Introduction to the Energy System . . . . . . . . . . . . . . . . . . . . 11
2.4 Energy Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.5 Energy Accounting Framework . . . . . . . . . . . . . . . . . . . . . . 15
2.5.1 Components of the Energy Account . . . . . . . . . . . . . 16
2.5.2 Commodity Accounts and Overall
Energy Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2.5.3 Units, Conversion Factors and Aggregation of
Energy Flows. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
2.6 Accounting of Traditional Energies . . . . . . . . . . . . . . . . . . . 24
2.6.1 Features of TEs . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
2.6.2 Data Availability, Data Collection and Reporting. . . . 26
2.7 Special Treatments of Some Entries in the
Energy Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
2.7.1 Treatment of Primary Electricity Production . . . . . . . 27
2.7.2 Treatment of Electricity in Final Consumption. . . . . . 28
2.7.3 Self Generation. . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
2.8 Analysis of Energy Balance Information. . . . . . . . . . . . . . . . 29
2.9 AlternativePresentationofEnergyAccountingInformation . . . . 31
vii
viii Contents
2.9.1 Energy Flow Diagrams . . . . . . . . . . . . . . . . . . . . . . 31
2.9.2 Reference Energy Systems (RES). . . . . . . . . . . . . . . 32
2.9.3 Common Energy Data Issues. . . . . . . . . . . . . . . . . . 34
2.10 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
3 Understanding and Analysing Energy Demand . . . . . . . . . . . . . . 41
3.1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
3.2 Evolution of Demand Analysis. . . . . . . . . . . . . . . . . . . . . . . 42
3.3 Overview of Energy Demand Decisions . . . . . . . . . . . . . . . . 44
3.4 Economic Foundations of Energy Demand . . . . . . . . . . . . . . 46
3.4.1 Consumer Demand for Energy: Utility
Maximization Problem . . . . . . . . . . . . . . . . . . . . . . 47
3.4.2 Cost Minimization Problem of the Producer. . . . . . . . 50
3.5 Alternative Approaches for Energy Demand Analysis. . . . . . . 51
3.5.1 Descriptive Analysis. . . . . . . . . . . . . . . . . . . . . . . . 51
3.6 Factor (or Decomposition) Analysis . . . . . . . . . . . . . . . . . . . 57
3.6.1 Analysis of Change in Total Energy Demand. . . . . . . 58
3.6.2 Analysis of Changes in Energy Intensity. . . . . . . . . . 61
3.7 Analysis Using Physical Indicators. . . . . . . . . . . . . . . . . . . . 64
3.8 Energy Demand Analysis Using the
Econometric Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
3.9 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
4 Energy Demand Analysis at a Disaggregated Level . . . . . . . . . . . 77
4.1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
4.2 Disaggregation of Demand . . . . . . . . . . . . . . . . . . . . . . . . . 77
4.3 Sectoral Energy Accounting. . . . . . . . . . . . . . . . . . . . . . . . . 79
4.4 Analysis at the Sectoral Level . . . . . . . . . . . . . . . . . . . . . . . 81
4.4.1 Industrial Energy Demand Analysis . . . . . . . . . . . . . 81
4.4.2 Energy Demand Analysis in the Transport Sector. . . . 93
4.4.3 Energy of Energy Demand in the Residential
and Commercial Sectors . . . . . . . . . . . . . . . . . . . . . 101
4.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105
5 Energy Demand Forecasting. . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
5.1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
5.1.1 Simple Approaches. . . . . . . . . . . . . . . . . . . . . . . . . 107
5.1.2 Advanced or Sophisticated Techniques . . . . . . . . . . . 112
5.1.3 Econometric Approach to Energy
Demand Forecasting . . . . . . . . . . . . . . . . . . . . . . . . 113
5.1.4 End-Use Method of Forecasting. . . . . . . . . . . . . . . . 115
Contents ix
5.1.5 Input–Output Model . . . . . . . . . . . . . . . . . . . . . . . . 116
5.1.6 Scenario Approach . . . . . . . . . . . . . . . . . . . . . . . . . 119
5.1.7 Artificial Neural Networks. . . . . . . . . . . . . . . . . . . . 120
5.1.8 Hybrid Approach . . . . . . . . . . . . . . . . . . . . . . . . . . 121
5.2 Review of Some Common Energy Demand
Analysis Models. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122
5.2.1 MAED Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123
5.2.2 LEAP Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
5.2.3 Demand Module in NEMS (National Energy
Modeling System). . . . . . . . . . . . . . . . . . . . . . . . . . 125
5.2.4 Demand Modelling in WEM
(World Energy Model) . . . . . . . . . . . . . . . . . . . . . . 127
5.3 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132
6 Energy Demand Management. . . . . . . . . . . . . . . . . . . . . . . . . . . 135
6.1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135
6.2 Energy Demand Management . . . . . . . . . . . . . . . . . . . . . . . 136
6.2.1 Definition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136
6.2.2 Evolution of DSM . . . . . . . . . . . . . . . . . . . . . . . . . 137
6.2.3 Justification for DSM . . . . . . . . . . . . . . . . . . . . . . . 138
6.3 Load Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139
6.3.1 Direct Load Control Method . . . . . . . . . . . . . . . . . . 140
6.3.2 Indirect Load Control . . . . . . . . . . . . . . . . . . . . . . . 141
6.4 EnergyEfficiencyImprovementsandEnergyConservation . . . . 142
6.4.1 What is Energy Efficiency?. . . . . . . . . . . . . . . . . . . 142
6.4.2 Opportunities for Energy Saving. . . . . . . . . . . . . . . . 144
6.4.3 Economics of Energy Efficiency Improvements . . . . . 146
6.5 Analysing Cost Effectiveness of DSM Options . . . . . . . . . . . 148
6.5.1 Participant Test. . . . . . . . . . . . . . . . . . . . . . . . . . . . 149
6.5.2 Ratepayer Impact Measure (RIM). . . . . . . . . . . . . . . 149
6.5.3 Total Resource Cost Test. . . . . . . . . . . . . . . . . . . . . 150
6.5.4 Programme Administrator Cost or Utility
Cost Test. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150
6.6 Energy Efficiency Debate . . . . . . . . . . . . . . . . . . . . . . . . . . 151
6.6.1 Market Barriers and Intervention Debate. . . . . . . . . . 151
6.6.2 What are the Market Barriers to
Energy Efficiency? . . . . . . . . . . . . . . . . . . . . . . . . . 152
6.6.3 Government Intervention and Its Nature . . . . . . . . . . 155
6.6.4 Energy Efficiency Versus Economic
Efficiency Debate. . . . . . . . . . . . . . . . . . . . . . . . . . 156
6.6.5 Rebound Effect. . . . . . . . . . . . . . . . . . . . . . . . . . . . 158
6.6.6 Use of Market-Based Incentives for
Energy Efficiency. . . . . . . . . . . . . . . . . . . . . . . . . . 159