Peter Zweifel • Aaron Praktiknjo •
Georg Erdmann
Energy Economics
Theory and Applications
Springer
Contents
1 Introduction 1
1.1 Philosophical and Evolutionary Aspects of Energy 1
1.2 Why Energy Economics? 4
1.2.1 Price Mechanism and Market Coordination 5
1.2.2 Particularities of Energy Markets 7
1.2.3 Energy Policy 9
1.3 History of Energy Economics 12
References 13
2 Energy in Science and Engineering 15
2.1 Energy and the Natural Sciences 16
2.1.1 Physics 16
2.1.2 Chemistry 18
2.1.3 Biology 18
2.2 Engineering and Energy 19
2.2.1 Energy Units 20
2.2.2 Energy Conversion 21
2.3 Energy Balance 23
2.3.1 Gross Energy (Primary Energy) 23
2.3.2 Final Energy Consumption 26
2.3.3 Data Sources 26
2.3.4 Useful Energy (Net Energy) and Energy Services... 27
2.4 Cumulated Energy Requirement 28
2.5 Energy Input-Output Analysis 29
References 34
3 Investment and Profitability Calculation 37
3.1 Basics 38
3.2 Interest Rate and Price of Capital 44
3.3 Inflation-Adjusted Interest Rate 45
3.4 Social Time Preference 47
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viii Contents
3.5 Interest Rate and Risk. .
3.5.1 Capital Asset Pricing Model (CAPM) 50
3.5.2 New Asset Pricing Methods 53
3.6 Real Option Valuation 54
3.6.1 Energy Investments as Real Options 55
3.6.2 Black-Scholes Model 58
3.6.3 Application to Balancing Power Supply 60
References 63
4 Bottom-Up Analysis of Energy Demand 65
4.1 Process Analysis 66
4.2 Stock of Appliances, Buildings, Vehicles, and Machineries... 68
4.3 Energy Efficiency 77
4.3.1 Definitions 77
4.3.2 Determining Energy Efficiency Potential 81
4.3.3 Energy Efficiency: A Gase of Market Failure? 82
4.3.4 Contracting 85
References 87
5 Top-Down Analysis of Energy Demand 89
5.1 Population Growth 90
5.2 Economic Growth 92
5.3 The Price of Energy 94
5.3.1 Short-Term and Long-Term Price Elasticities 95
5.3.2 A Partial Energy Demand Model 96
5.3.3 Substitution Between Energy and Capital 102
5.4 Technological Change 107
References 110
6 Energy Reserves and Sustainability 111
6.1 Resources and Reserves 112
6.1.1 Resources 113
6.1.2 Stade Range of Fossil Energy Reserves 115
6.2 Profit-Maximizing Resource Extraction 117
6.2.1 Hotelling Price Trajectory 117
6.2.2 Role of Backstop Technologies 120
6.2.3 Role of Expectations and Expectation Errors 122
6.3 Optimal Resource Extraction: Social Weifare View 123
6.3.1 The Optimal Consumption Path 126
6.3.2 The Optimal Depletion Path of the Reserve 128
6.3.3 Causes and Implications of Market Failure 129
6.4 Sustainability 131
6.4.1 Potential of Renewable Energy Sources 131
6.4.2 Hartwick Rule for Weak Sustainability 132
6.4.3 Population Growth and Technological Change 137
6.4.4 Is the Hartwick Rule Satisfied? 138
References 140
Contents ix
7 External Costs 143
7.1 The Coase Theorem 144
7.2 Aggregate Emissions 147
7.3 Instruments of Environmental Policy 150
7.3.1 Internalization Approaches 150
7.3.2 Standard-Oriented Approaches 152
7.4 Measuring External Costs of Energy Use 154
References 157
8 Markets for Liquid Fuels 159
8.1 Types of Liquid Fuels and Their Properties 160
8.1.1 Properties of Crude Oil 160
8.1.2 Reserves and Extraction of Conventional Oil 161
8.1.3 Peak Oil Hypothesis 163
8.1.4 Unconventional Oil 166
8.1.5 Refineries and Oil Products 167
8.1.6 Biogenic Liquid Fuels 168
8.2 Crude Oil Market 171
8.2.1 Vertically Integrated Monopoly 171
8.2.2 Global Oligopoly of Vertically Integrated Majors . . . 174
8.2.3 The OPEC Cartel of Oil-Exporting Countries 176
8.2.4 State-Owned Oil Companies 180
8.3 Oil Price Formation 182
8.3.1 Oil Spot Markets and the Efficient Market
Hypothesis 183
8.3.2 Long-Term Oil Price Forecasts and Scenarios 185
8.3.3 Prices of Crude Oil Futures 190
8.3.4 Wholesale Prices of Oil Products 192
References 195
9 Markets for Gaseous Fuels 197
9.1 Gaseous Fuels and Gas Infrastructures 198
9.1.1 Properties of Gaseous Fuels 199
9.1.2 Reserves and Extraction of Natura] Gas 200
9.1.3 Biogas and Renewable Natural Gas 202
9.1.4 Hydrogen 203
9.2 Natural Gas Economy 204
9.2.1 Transport by Pipeline 205
9.2.2 LNG Transport and Trade 211
9.3 Gas Markets and Gas Price Formation 213
9.3.1 Long-Term Take-or-Pay Contracts 214
9.3.2 Natural Gas Spot Trade 216
9.4 Third Party Access to the Gas Infrastructure 221
References 224
Contents
10 Markets for Solid Fuels and CO2 Emissions 227
10.1 Solid Fuels and Their Technologies 228
10.1.1 Biomass 228
10.1.2 Coal Reserves 230
10.1.3 Surface and Underground Coal Mining 231
10.1.4 International Coal Market 232
10.2 The Greenhouse Gas Problem 234
10.3 Markets for Emission Rights 237
10.3.1 Prices for C02 Emission Rights 239
10.3.2 Clean Dark Spread 242
10.3.3 Coal Perspectives 244
References 245
11 Uranium and Nuclear Energy 247
11.1 The Foundations of Nuclear Technology 248
11.1.1 Radioactivity 249
11.1.2 Uranium as the Dominant Fuel for Nuclear Power... 251
11.1.3 Nuclear Waste 252
11.2 Uranium Market 254
11.3 Risk Assessment of Nuclear Energy 256
11.3.1 Probabilistic Safety Analysis of Nuclear
Power Plants 258
11.3.2 Risk Assessment According to the (ß, a1) Criterion. . . 260
11.3.3 Risk Assessment Based on Stated Preferences 264
References 267
12 Markets for Electricity 269
12.1 Features of Electricity Markets 270
12.1.1 The Consumer Surplus of Electricity 271
12.1.2 Non-storability of Electricity 272
12.1.3 Power Market Design Options 273
12.2 Electricity Generation 275
12.2.1 Types of Power Generation Technologies 275
12.2.2 Power Plant Dispatch in Liberalized Markets 278
12.2.3 Properties of Day-Ahead Power Prices 280
12.2.4 Intraday Markets 282
12.2.5 Portfolio Management 283
12.2.6 Market Power 285
12.3 Power Plant Investments 288
12.3.1 Power Plant Investments in Regulated Markets 288
12.3.2 Power Plant Investment in Competitive Markets... . 291
12.3.3 Capacity Markets 293
References 295
Contents xi
13 Economics of Electrical Grids 297
13.1 Grid Properties and System Services 298
13.1.1 Electrotechnical Aspects 298
13.1.2 Services to Be Provided by Electrical Grid
Operators 300
13.1.3 Markets for Control Power 301
13.2 Regulation of Grid Pees 302
13.2.1 The Grid as an Essential Facility 303
13.2.2 Optimal Grid Fees 303
13.2.3 Incentive Regulation 307
13.2.4 Unbundling 309
13.3 Economic Approach to Transmission Bottlenecks 310
References 312
14 Epilogue 315
References 317
Index 319
