The Entry Cost Shock and the Re‐rating of Power Prices in New South Wales,Australia

Australia has long been the beneficiary of low, stable power prices. A decade‐long state of oversupply underpinned this result and while plant capital costs had been rising, the cost of capital had been declining. These offsetting effects locked the wholesale market into an average cost of $35–$40/MWh. However, from 2007, a simultaneous and sharp rise in new entrant plant capital costs and the cost of capital occurred. The combined effects crept up on the industry while it was in a state of oversupply. This ‘entry cost shock’ disrupted a 7 year long equilibrium price, with average power system cost rising to $60/MWh.     

Evaluating Airline Deregulation in Australia

It has frequently been claimed that the cost of air travel in Australia has fallen by around 20 per cent in real terms since the end of the Two Airline agreement. However, this claim rests on a misinterpretation of price data. In this article, an analysis based on the theory of price indexes is presented. It is concluded that the representative passenger has probably experienced a small reduction in the cost of air travel since deregulation. Some additional benefits have flowed from the expansion of frequent flyer schemes, and from increased frequency of service. The distributional effects of deregulation are unclear, but are probably favourable on balance. The Australian airline industry is a natural duopoly and the market is not contestable. Therre is no evidence of dynamic efficiency gains arising from deregulation. The observed effects of deregulation are consistent with the predictions of neoclassical microeconomic theory.     

The Hidden Costs of Wind Generation in a Thermal Power System: What Cost?

New renewable energy generation in Australia is unambiguously more expensive than thermal plant, at least when comparing direct costs. The federal government claims the 20 per cent renewable energy target will increase electricity tariffs by 4 per cent. Apart from the direct costs, critics of renewables cite additional ‘hidden costs’ arising from the intermittency of wind and the subsequent causation of ‘back‐up plant’ for system security. South Australia, where wind's market share now exceeds 17 per cent, provides a valuable case study to analyse ‘hidden costs’. The evidence is that hidden costs are trivial and the government's claim appears accurate.     

Liberalizing the energy markets of Western Europe – a computable equilibrium model approach

Using a computable equilibrium model, the short-run effects of a radical liberalization of the West European natural gas and electricity markets are examined. In each model country, oil, gas, coal and electricity are produced, traded and consumed. There are world markets for oil and coal, and well-integrated competitive markets for gas and electricity in Western Europe. Gas and electricity are transported and traded across markets under the assumption of ideal third-party access regimes for transportation and limited capacities in the transportation networks. It is found that relative to the data year 1996, radical liberalization reduces the average end-user price of natural gas by around 20%, and the average end-user price of electricity by around 50%. The supply of electricity increases by around 20%, mainly due to increased coal power production. After such liberalization, coal power emerges with the largest market share of electricity production in Western Europe.     

Coal gasification: An economic evaluation

Political interest in developing the capability to produce gaseous fuel from coal in the United States has been cyclical in nature, depending primarily upon the security of the international market for oil and public attitudes toward nuclear power. Interest in coal gasification technology by private investors, however, depends primarily on the economic and technological considerations analyzed in this paper. A cost forecasting model is developed with the capability to take into account future economic and technological uncertainties associated with producing high BTU gas (a substitute for natural gas) from coal. The cost forecasting model incorporates probabilistic information on key economic and technological parameters subject to future uncertainty and simulates, by Monte Carlo methods, the costs which private investors would incur over the life of a commercial size coal gasification plant. The results suggest it is highly unlikely that the coal gasification process could produce high BTU gas more cheaply than the price at which natural gas is likely to be available.The cost forecasting model is also modified to compare the cost per kilowatt–hour of generated electricity when fueling a 1,000 Mw power plant with oil versus high BTU gas from coal. Again, based upon the costs to private investors, the simulation results indicate a very low probability that high BTU gas from coal would prove the least costly fuel for generating electricity.The implied economic infeasibility for private investment in coal gasification does not necessarily provide a basis for public policy to abandon the technology. Public policy recommendations must consider social costs as well as private costs. Possibly the greatest social cost associated with abandoning coal gasification is the risk of a significant energy supply interruption. A diversified national energy policy including coal gasification may in fact be less costly if relevant social costs are included in the calculations. Results from the cost forecasting model indicate the size and type of public subsidies that may be necessary to support a diversified energy industry which would include coal gasification.     

Determinants of the premium in forward contracts

Whilst the benefits of forward contracting for goods and services have been extensively researched in terms of mitigating market power effects in spot markets, we analyse how the risk in spot price formation induces a counteracting premium in the contract prices. We consider and test a wide-ranging set of propositions, involving fundamental, behavioural, dynamic, market conduct and shock components, on a long data set from the most liquid of European electricity forward markets, the EEX. We show that part of what is conventionally regarded as the market price of risk in electricity is actually that of its underlying fuel commodity, gas; that market power has a double effect on prices, insofar as it increases spot prices and induces a forward premium; that oil price sentiment spills over and that the premium reacts to scarcity and the higher moments of spot price uncertainty. We observe that considerations of the scale and determinants of the forward premium are at least as important as the market power effects in spot market price formation when evaluating the efficiency of wholesale power trading.     

Rethinking real-time electricity pricing

Most US consumers are charged a near-constant retail price for electricity, despite substantial hourly variation in the wholesale market price. This paper evaluates the first program to expose residential consumers to hourly real-time pricing (RTP). I find that enrolled households are statistically significantly price elastic and that consumers responded by conserving energy during peak hours, but remarkably did not increase average consumption during off-peak times. The program increased consumer surplus by $10 per household per year. While this is only one to two percent of electricity costs, it illustrates a potential additional benefit from investment in retail Smart Grid applications, including the advanced electricity meters required to observe a household’s hourly consumption.     

The Dynamics of Public Housing Tenure in Australia

The analysis in this paper presents evidence on the behaviour of tenants in public housing in Australia. Using a unique administrative dataset for West Australia, we identify the nature of spells in public housing and the determinants of the length of those spells. Our results indicate that lone parents and single individuals experience longer spells in public housing compared with couple households. We find that an increase in the market rent of a property in the order of $100 per month reduces the hazard out of public housing by between 17 per cent (lone parents) and 10 per cent (couples).     

Market Power with Interdependent Demand: Sale of Emission Permits and Natural Gas from Russia

With implementation of the Kyoto Protocol, Russia will most likely be able to exert market power in the emission permit market. But, as Russia is also a big exporter of fossil fuels, the incentives to boost the permit price may be weak. However, a significant share of Russia’s fossil fuel exports is natural gas. If a high permit price boosts the demand for natural gas through substitution from more polluting fuels and thus increase gas profits, this may increase the incentives to exert monopoly power in the permit market. Moreover, a large fossil fuel exporter may use its market position to influence the effective demand for permits. Hence, the relationship between permit income and fossil fuels exports runs in both directions. In this article, we explore the interdependence between the revenues from permit and fossil fuel exports both theoretically and numerically. A computable general equilibrium model suggests the fact that Russia as a big gas exporter has small effect on the incentives to exert monopoly power in the permit market. Moreover, Russia’s monopoly power in the permit market has a small, but non-negligible impact on the optimal level of Russian gas exports.     

FOUR REVOLUTIONS IN ELECTRIC EFFICIENCY

Demand prospects for electricity are being altered profoundly by four synergistic types of revolutionary change: new technologies for improved end-use efficiency, new ways to finance and deliver those technologies to customers, cultural change within utilities, and regulatory reforms to reward efficient behavior. Dramatic energy savings achieved so far have been largely in direct fuels and not in electricity, mainly due to price distortions and unique market failures. Resulting inefficient use of electricity is misallocating some $60 billion a year to unnecessary expansions of U.S. electric supply. Yet the best technologies now on the market could save about 92 percent of U.S. lighting energy, about half of motor energy, and much of the electricity used for other purposes. Complete retrofit could deliver equal or better services with only a fourth of the electricity now used. The levelized cost of that quadrupled end-use efficiency averages about 0.6 cents/kWh– well below short-run marginal cost. Analogous oil-saving potential from the best demonstrated technologies is about 80 percent of present oil consumption at an average cost below $3/bbl, partly because two of the 9–10 prototype cars already tested at 67–138 miles per gallon are said to cost nothing extra to make. Many utilities already save large amounts of electricity very quickly and cheaply by financing customers' efficiency improvements through loans, gifts, rebates, or leases. Even more promising is an emerging “negawatt market” making saved electricity a fungible commodity subject to competitive bidding, arbitrage, derivative instruments, secondary markets, etc. Utilities can make more money selling less electricity and more efficiency. They can earn a spread on the difference in discount rates between themselves and their customers. They can save operating and capital costs while avoiding the associated risks and, under emerging regulatory reforms, can even keep as extra profit part of what they save. They also can generate tradeable emissions rights under the new Clean Air Act. Some utilities now properly ignore sunk costs and seek to minimize marginal variable costs. These utilities, driven by economic– not accounting–principles, find this approach both profitable and operationally advantageous.     

Market power in the Spanish electricity auction

Hourly data from the Spanish day-ahead electricity auction is used to obtain a lower bound measure of generators’ market power. Our method is not based on cost estimates but rather on the behavioral differences between strategic generators and more competitive producers. The results indicate that, despite the price cap effect of regulation in this market, the larger operators in the day-ahead market are able to increase significantly prices above the competitive benchmark. We also show that the two large generators do not exploit the full potential of their market power.     

Discriminatory Price Auctions in Electricity Markets: Low Volatility at the Expense of High Price Levels

A pay-as-offered or discriminatory price auction (DPA) has been proposed to solve the problem of inflated and volatile wholesale electricity prices. Using the experimental method we compare the DPA with a uniform price auction (UPA), strictly controlling for unilateral market power. We find that a DPA indeed substantially reduces price volatility. However, in a no market power design, prices in a DPA converge to the high prices of a uniform price auction with structural market power. That is, the DPA in a no market power environment is as anti-competitive as a UPA with structurally introduced market power.     

Cogeneration and electric power industry restructuring

In 1978, Congress passed the Public Utilities Regulatory Policies Act (PURPA) in response to the energy crisis of the early 1970s. One of the unintended results of PURPA has been to show that electric generation was not a natural monopoly and could be opened to competition. Both the theoretical and empirical determinants of cogeneration and how they may be affected by future electric power industry restructuring are important for future industrial generation decisions. This paper explores these determinants and identifies differences between industrial cogenerators which sell power back into the electricity grid (commercial generators) and those which keep all of their electricity generation for internal purposes (self generators). The empirical results indicate that increases in industrial firm technical capabilities tends to increase their probabilities of both commercial and self generating. In addition, the models indicate that increases in retail electricity prices and industrial output increases industrial generation probabilities. The ability to switch fuels enhances industrial generation probabilities, as does a decrease in the price of natural gas. The results also imply that under electric restructuring a number of industrial generators may find that they face a stranded cost problem much like the one faced by their electric utility counterparts.     

Market Size and Investment Performance of Defaulted Bonds and Bank Loans: 1987–2001

The defaulted and distressed, public and private debt markets in the United States swelled to a record $680 billion (face value) at the end of 2001. The market value of this 'niche' segment was approximately $400 billion.
Defaulted security investors enjoyed an excellent year on average, as returns in 2001 were 17.5 per cent on bonds, 13.9 per cent on bank loans, and 15.6 per cent combined defaulted public bonds and private bank loans.
The Altman–New York University Salomon Center Index of Defaulted Bonds grew to over 200 individual issues and a face value of $56.2 billion; the market value was only $11.8 billion. The market–to–face value ratio of the Bond Index grew somewhat to 0.21 from 0.15 one year ago, but remained at a relatively low figure. The face value of our Defaulted Bank Loan Index also grew to $44.7 billion and the market–to–face value ratio remained quite low at 0.53.
The recovery rate on defaulted bonds (price just after default) was very low at 25 cents on the dollar; likewise, the bank loan recovery rate in 2001 was also relatively low at 55 cents on the dollar. With new defaulted bonds rising in 2001 to a record $63.6 billion (default rate of 9.80 per cent) and the default outlook for 2002 high investment opportunities should abound in the distressed debt market.
Indications are that distressed investors (both old and new) are successfully raising funds because investor expectations are buoyant.
(J.E.L.: G21, G33).     

Infrastructure regulation and reallocations within industry: Theory and evidence from Indian firms

Many firms in developing countries adopt captive power generators to deal with expensive and unreliable supply of electricity. I present a model that combines upstream regulation with downstream heterogeneous firms in a monopolistic competition framework, where firms can pay a fixed cost to adopt this marginal cost-reducing device. The presence of captive power affects the market equilibrium by increasing the level of idiosyncratic productivity a firm needs to survive in the market and by re-allocating sales and profits towards the more productive, adopting firms. Additionally, the rate of adoption is shown to increase with the price of electricity, industries' electricity–intensity and with higher barriers to firm entry. The mechanisms I propose are present for a cross-section of Indian firms.     

Measuring market power and the efficiency of Alberta's restructured electricity market: An energy‐only market design

We measure the degree of market power execution and inefficiencies in Alberta's restructured electricity market. Using hourly wholesale market data from 2008 to 2014, we find that firms exercise substantial market power in the highest demand hours with limited excess production capacity. The degree of market power execution in all other hours is low. Market inefficiencies are larger in the high demand hours and elevate production costs by 6.7%–19% above the competitive benchmark, with an average of 13%. This reflects 2.1% of the average market price across all hours. A recent regulatory policy clarifies that certain types of unilateral market power execution is permitted in Alberta. We find evidence that suggests that strategic behaviour changed after this announcement. Market power execution increased. We illustrate that the observed earnings are often sufficient to promote investment in natural gas based technologies. The rents from market power execution can exceed the estimated capacity costs for certain generation technologies. However, we demonstrate that the energy market profits in the presence of no market power execution are generally insufficient to promote investment in new generation capacity. This stresses the importance of considering both short‐run and long‐run electricity market performance measures.     

CONSERVED ENERGY SUPPLY CURVES FOR U.S. BUILDINGS

Comparison of nine conservation supply curves for electricity shows that fully implementing a series of energy efficiency measures will result in annual saving of 734 billion kWh (BkWh). This is 45 percent of 1989 U.S. building sector electricity use of 1627 BkWh and represents a $29 billion saving. When translated to units of conserved carbon dioxide (CC CO₂), this annual saving is 514 megatonnes, which is 10 percent of the total 1989 U.S. carbon dioxide (CO₂) emissions from all sources. Implementing additional fuel efficiency measures would result in further potential saving of 5·2 quads of fuel (natural gas and oil) per year, or another 300 megatonnes of CO₂, at a net savings of $20 billion. Fuel switching (replacing electric resistance heat with on-site natural gas combustion) would produce annual saving of another 74 megatonnes of CO₂ at a net saving of $6·8 billion. Thus, total CO₂ saving from these combined efficiency measures are 890 megatonnes at a net saving of $56 billion per year.     

Forecasting technological substitution: The logistic model of energy systems revisited

A simple logistic model of market substitution has been applied to situations where price and cost parameters vary in time. In such cases the market share does not necessarily evolve as a monotonous function of time. Although this particular feature of the model has not been validated against data from past experience, it can be applied heuristically to studying future trends in market penetration. As an example, possible competition patterns of coal and nuclear power as primary fuels for electricity production have been examined under various combinations of economical parameters. The illustrative results involve both cases where the nuclear contribution would be phased out as well as those where nuclear power could still maintain a strong position a few more decades to come.     

The Dynamic Efficiency Gains from Introducing Capacity Payments in the National Electricity Market

Australia's National Electricity Market (NEM) has been a beacon for governments around the world considering power industry reform. However, while the energy‐only NEM has served Australia well since 1998, deep structural supply‐side faults exist. Competitive energy‐only markets do not have a stable equilibrium solution unless reliability constraints are violated, market power is exercised, or scarcity pricing operates unabated. But the political economy of electricity means none of this is likely. This research finds that by reducing the NEM price cap and introducing a ‘capacity payments pool’, a tractable and politically acceptable equilibrium can be established to facilitate timely plant entry.     

Non-storables, Simultaneity and Price Determination: The Australian (Finished) Live Cattle Market

Empirical studies of simultaneous rational expectations (RE) models of spot and futures markets for non-storable commodities, such as finished live cattle, are rare. Indeed, only two countries, the US and Australia, have produced data sets for the study of such markets. This paper develops, and presents estimates of a simultaneous RE model of the live cattle market in Australia, the world's leading beef exporting country. The model contains functional relationships for short hedgers and short speculators, long hedgers and long speculators, and consumers, and is completed with a spot price equation and market clearing identity. Augmented Dickey-Fuller and Phillips-Perron tests for unit roots are executed, and Johansen cointegration tests are employed to investigate whether the I(1) variables are cointegrated. Structural equations are estimated by maximum likelihood when ARCH effects are present, by instrumental variables in the absence of serial correlation, and by non-linear least squares when a correction for autocorrelation is required. The estimates of all structural parameters are significant at the five per cent level. Post-sample, the model forecasts spot and futures prices with per cent RMSE's of 4.4 per cent and 2.5 per cent, respectively. In forecasting the spot price, the model outperforms but not significantly, a random walk, an ARIMA model, and a lagged futures price as a predictor of the spot price. The outcome of this last comparison implies that the efficient markets hypothesis cannot be rejected.