Energy Economics: Theory and Applications

333 Pages·2017·6.74 MB·english

by  Peter Zweifel

Springer Texts in Business and Economics
Peter Zweifel
Aaron Praktiknjo
Georg Erdmann
Energy
Economics
Theory and Applications
Springer Texts in Business and Economics
Moreinformationaboutthisseriesathttp://www.springer.com/series/10099
Peter Zweifel (cid:129) Aaron Praktiknjo (cid:129)
Georg Erdmann
Energy Economics
Theory and Applications
PeterZweifel AaronPraktiknjo
BadBleiberg,Austria E.ONEnergyResearchCenter
RWTHAachenUniversity
Aachen,Germany
GeorgErdmann
DepartmentofEnergySystems
BerlinUniversityofTechnology
Berlin,Germany
ISSN2192-4333 ISSN2192-4341 (electronic)
SpringerTextsinBusinessandEconomics
ISBN978-3-662-53020-7 ISBN978-3-662-53022-1 (eBook)
DOI10.1007/978-3-662-53022-1
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Preface
Access to energy resources, energy supply security, high and increasing prices of
energy, lack of competition, slow market entry of renewables, insufficient invest-
ment in energy efficiency, and sluggish progress in reducing greenhouse gas
emissions are all well-known issues and concerns characterizing energy markets.
Yet, what are the possibilities of finding effective, efficient, and sustainable
solutions to these problems? The fundamental claim of this book is that solutions
cannotbefoundwithoutanin-depthanalysisofenergymarketsthatacknowledges
not only their physical and technological constraints but also their structural
idiosyncrasiesandthebehaviorofmarketparticipants.
This text is the result of 30 years of teaching and research performed by the
authors at both German- and English-speaking universities in Europe. It therefore
adoptsadistinctlyEuropeanapproach,yetwithoutneglectingdevelopmentsworld-
wide. While firmly anchored in economic theory, it also presents empirical evi-
dence enabling readers to assess the relevance of predicted relationships. For
instance,itiscertainlyofinteresttoknowthattheso-calledelasticityofsubstitution
is a crucial parameter for answering the question whether man-made capital can
replace energyquicklyenoughtoassuresustainabilityintermsofconsumptionin
spiteofthefactthatenergyconstitutesanultimatelylimitedresource.Inaddition,it
is also important to see whether the estimated elasticities of substitution are
typicallybelowone(makingsustainabilityquestionable)oraboveone(suggesting
sustainabilitycanbeattained).
Debates about energy policy tend to be short-lived, reflecting the interests of
governments who wish to demonstrate to their electorate that they are “on top of
things.” By way of contrast, this text focuses on the basic conditions and
mechanismsthat allpublic interventions intheenergysector have todeal with. It
provides readers with the tools enabling them to assess the chance of these
interventionsreachingtheirobjectives.Turningtotheprivatesector,onecondition
isthatmanagementdecisionsconcerningenergyareeconomicallyviable,lestthey
failtocontributetotheeconomicsurvivalofthecompany.Thisbookistherefore
alsoofinteresttobusinesspractitionerswhomaybeconfrontedwiththequestion
whetherinvestmentinanenergy-savingtechnologyhasasufficientlyhighreturnto
be worthwhile. Analysts of the energy industry, energy traders, and other
professionals acting in and on behalf of the energy sector will benefit from this
v
vi Preface
textaswell.Likethemakersofpublicpolicy,theyareconfrontedwithshocksofall
sortsimpingingonenergymarketswithunprecedentedfrequency,exposingthemto
increasingbusinessrisks.
Finally,thisworkalsotargetsfutureresearcherswithaninterestinenergy.The
distinctpropertiesofenergysources(rangingfromcoaltosolar)needtobetaken
into account when modeling the behavior of businesses and consumers. The
correspondingmarketsaredistincttoasufficientdegreetowarrantapartial(rather
thangeneral-equilibrium)approachfortheiranalysis,atleastasafirstapproxima-
tion. The statistical documentation of energy is excellent both at the national and
internationallevel,pavingthewayforempiricalresearch.Moreover,animportant
motivationmaybethatresearchrevolvingaroundtheeconomicsofenergyismet
withconsiderableinterestbysocietyandpublicpolicy.
StudentsattheSwissFederalInstituteofTechnologyETHZurich(Switzerland),
theUniversityoftheArmedForcesinMunich(Germany),theTechnicalUniversity
of Berlin (Germany), the RWTH Aachen University (Germany), and the Diplo-
matic Academy of Vienna (Austria), as well as participants in international
conferences, have all contributed to this volume through their suggestions and
criticisms.ItsoriginalGermanversionhasbeenwellreceivedbybothEngineering
and Economics students (future leaders and decision-makers in energy markets),
thus motivating our attempt to make this work accessible to English-speaking
readers.
This text is somewhat voluminous because in addition to expounding the
theoretical groundwork, it also addresses each of the several energy sources.
However, individual chapters are self-contained, with cross-references to other
topics. This broad approach has theadvantage ofprovidingareference especially
forbusinesspractitionerswhoneedtoobtaininsightintoaparticularmarket.Atthe
same time, readers never lose sight of the consequences of public regulation and
liberalization,whichfrequentlycutacrosssectors(notleastcausedbysubstitution
processesthatdependontheelasticityofsubstitutionalludedtoabove).Atatime
whenenergymarketschangeanddevelopatanunprecedentedpace,thisguidance
through the maze is particularly valuable, and when new market developments
challenge received wisdom, new economic insights develop. We will therefore
provide on our website www.energy-economics.eu additional material reflecting
newdatasourcesandthescientificprogressinthefield.
This joint effort would not have been possible without the support of many
colleagues and collaborators, which is sincerely acknowledged. Of course, the
authorsremainresponsibleforallremainingerrors.
BadBleiberg,Austria PeterZweifel
Aachen,Germany AaronPraktiknjo
Berlin,Germany GeorgErdmann
October2016
Contents
1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 PhilosophicalandEvolutionaryAspectsofEnergy. . . . . . . . . 1
1.2 WhyEnergyEconomics?. . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.2.1 PriceMechanismandMarketCoordination. . . . . . . . 5
1.2.2 ParticularitiesofEnergyMarkets. . . . . . . . . . . . . . . 7
1.2.3 EnergyPolicy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
1.3 HistoryofEnergyEconomics. . . . . . . . . . . . . . . . . . . . . . . . 12
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2 EnergyinScienceandEngineering. .. . . . . . . . .. . . . . . . .. . . . . 15
2.1 EnergyandtheNaturalSciences. . . . . . . . . . . . . . . . . . . . . . 16
2.1.1 Physics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2.1.2 Chemistry. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2.1.3 Biology. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2.2 EngineeringandEnergy. . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
2.2.1 EnergyUnits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
2.2.2 EnergyConversion. . . . . . . . . . . . . . . . . . . . . . . . . 21
2.3 EnergyBalance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
2.3.1 GrossEnergy(PrimaryEnergy). . . . . . . . . . . . . . . . 23
2.3.2 FinalEnergyConsumption. . . . . . . . . . . . . . . . . . . . 26
2.3.3 DataSources. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
2.3.4 UsefulEnergy(NetEnergy)andEnergyServices. . . 27
2.4 CumulatedEnergyRequirement. . . . . . . . . . . . . . . . . . . . . . 28
2.5 EnergyInput-OutputAnalysis. . . . . . . . . . . . . . . . . . . . . . . . 29
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
3 InvestmentandProfitabilityCalculation. . . . . . . . . . . . . . . . . . . 37
3.1 Basics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
3.2 InterestRateandPriceofCapital. . . . . . . . . . . . . . . . . . . . . 44
3.3 Inflation-AdjustedInterestRate. . . . . . . . . . . . . . . . . . . . . . . 45
3.4 SocialTimePreference. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
vii
viii Contents
3.5 InterestRateandRisk. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
3.5.1 CapitalAssetPricingModel(CAPM). . . . . . . . . . . . 50
3.5.2 NewAssetPricingMethods. . . . . . . . . . . . . . . . . . . 53
3.6 RealOptionValuation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
3.6.1 EnergyInvestmentsasRealOptions. . . . . . . . . . . . . 55
3.6.2 Black-ScholesModel. . . . . . . . . . . . . . . . . . . . . . . . 58
3.6.3 ApplicationtoBalancingPowerSupply. . . . . . . . . . 60
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
4 Bottom-UpAnalysisofEnergyDemand. . . . . . . . . . . . . . . . . . . . 65
4.1 ProcessAnalysis. . . .. . . . . . .. . . . . .. . . . . .. . . . . .. . . . . 66
4.2 StockofAppliances,Buildings,Vehicles,andMachineries. . . 68
4.3 EnergyEfficiency. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
4.3.1 Definitions.. . . .. . . .. . . .. . . .. . . .. . . .. . . .. . . 77
4.3.2 DeterminingEnergyEfficiencyPotential. . . . . . . . . . 81
4.3.3 EnergyEfficiency:ACaseofMarketFailure?. . . . . . 82
4.3.4 Contracting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
5 Top-DownAnalysisofEnergyDemand. . . . . . . . . . . . . . . . . . . . 89
5.1 PopulationGrowth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
5.2 EconomicGrowth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
5.3 ThePriceofEnergy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
5.3.1 Short-TermandLong-TermPriceElasticities. . . . . . 95
5.3.2 APartialEnergyDemandModel. . . . . . . . . . . . . . . 96
5.3.3 SubstitutionBetweenEnergyandCapital. . . . . . . . . 102
5.4 TechnologicalChange. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
6 EnergyReservesandSustainability. . . . . . . . . . . . . . . . . . . . . . . 111
6.1 ResourcesandReserves. . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
6.1.1 Resources. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
6.1.2 StaticRangeofFossilEnergyReserves. . . . . .. . . . . 115
6.2 Profit-MaximizingResourceExtraction. . . . . . . . . . . . . . . . . 117
6.2.1 HotellingPriceTrajectory. . . . . . . . . . . . . . . . . . . . 117
6.2.2 RoleofBackstopTechnologies. . . . . . . . . . . . . . . . 120
6.2.3 RoleofExpectationsandExpectationErrors. . . . . . . 122
6.3 OptimalResourceExtraction:SocialWelfareView. . . . . . . . 123
6.3.1 TheOptimalConsumptionPath. . . . . . . . . . . . . . . . 126
6.3.2 TheOptimalDepletionPathoftheReserve. . . . . . . . 128
6.3.3 CausesandImplicationsofMarketFailure. . . . . . . . 129
6.4 Sustainability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131
6.4.1 PotentialofRenewableEnergySources. . . . . . . . . . 131
6.4.2 HartwickRuleforWeakSustainability. . . . . . . . . . . 132
6.4.3 PopulationGrowthandTechnologicalChange. . . . . 137
6.4.4 IstheHartwickRuleSatisfied?. . . . . . . . . . . . . . . . . 138
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140
Contents ix
7 ExternalCosts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143
7.1 TheCoaseTheorem. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144
7.2 AggregateEmissions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147
7.3 InstrumentsofEnvironmentalPolicy. . . . . . . . . . . . . . . . . . . 150
7.3.1 InternalizationApproaches. . . . . . . . . . . . . . . . . . . . 150
7.3.2 Standard-OrientedApproaches. . . . . . . . . . . . . . . . . 152
7.4 MeasuringExternalCostsofEnergyUse. . . . . . . . . . . . . . . . 154
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157
8 MarketsforLiquidFuels. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159
8.1 TypesofLiquidFuelsandTheirProperties. . . . . . . . . . . . . . 160
8.1.1 PropertiesofCrudeOil. . . . . . . . . . . . . . . . . . . . . . 160
8.1.2 ReservesandExtractionofConventionalOil. . . . . . . 161
8.1.3 PeakOilHypothesis.. . . . .. . . . . .. . . . .. . . . .. . . 163
8.1.4 UnconventionalOil. . . . . . . . . . . . . . . . . . . . . . . . . 166
8.1.5 RefineriesandOilProducts. . . . . . . . . . . . . . . . . . . 167
8.1.6 BiogenicLiquidFuels. . . . . . . . . . . . . . . . . . . . . . . 168
8.2 CrudeOilMarket. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171
8.2.1 VerticallyIntegratedMonopoly. . . . . . . . . . . . . . . . 171
8.2.2 GlobalOligopolyofVerticallyIntegratedMajors. . . 174
8.2.3 TheOPECCartelofOil-ExportingCountries. . . . . . 176
8.2.4 State-OwnedOilCompanies. . . . . .. . . . . . . .. . . . . 180
8.3 OilPriceFormation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182
8.3.1 OilSpotMarketsandtheEfficientMarket
Hypothesis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183
8.3.2 Long-TermOilPriceForecastsandScenarios. . . . . . 185
8.3.3 PricesofCrudeOilFutures. . . . . . . . . . . . . . . . . . . 190
8.3.4 WholesalePricesofOilProducts. . . . . . . . . . . . . . . 192
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195
9 MarketsforGaseousFuels. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197
9.1 GaseousFuelsandGasInfrastructures. . . . . . . . . . . . . . . . . . 198
9.1.1 PropertiesofGaseousFuels. . . . . . . . . . . . . . . . . . . 199
9.1.2 ReservesandExtractionofNaturalGas. . . . . . . . . . 200
9.1.3 BiogasandRenewableNaturalGas. . . . . . . . . . . . . 202
9.1.4 Hydrogen. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203
9.2 NaturalGasEconomy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204
9.2.1 TransportbyPipeline. . . . . . . . . . . . . . . . . . . . . . . . 205
9.2.2 LNGTransportandTrade. . . . . . . . . . . . . . . . . . . . 211
9.3 GasMarketsandGasPriceFormation. . . . . . . . . . . . . . . . . . 213
9.3.1 Long-TermTake-or-PayContracts. . . . . . . . . . . . . . 214
9.3.2 NaturalGasSpotTrade. . . . . . . . . . . . . . . . . . . . . . 216
9.4 ThirdPartyAccesstotheGasInfrastructure. . . . . . . . . . . . . 221
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 224