01 Introduction Václav Šebek Course Overview • The minimum of 60 points (out of 100 points) is required to pass this course. • The points are awarded based on the following criteria: – Active attendance (up to 2 pts per lecture, max 10) – Written exam (May/June) based on readings and lectures (max 45 pts) – Paper (max 45 pts) • The written exam will contain both multiple choice and open questions. The date of exam is TBA (you will be notified by e-mail about the changes). • If you have any questions, do not hesitate to contact the lecturers. Course Overview • Paper topic: – either a literature review of the topic of your choosing (in the field of energy economics) or – essay on specific case regarding major energy corporation (e.g. court rulings in competition cases, energy public access or its financial position) • Recommended length is around 10 pages of A4 format (in any case, total length should not exceed 15 pages) including all tables, charts, figures and bibliography. • Due May 18th, reviewed in a week Energy Economics Energy Economics • Branch of applied economics – e.i. economics of energy – Sources – Consumption – Trade – Regulation – Anything included in TPES Today’s Contents • Energy market specifics • Demand • (Supply) • Bhattacharyya (2008) chaps. 3 & 12 • Case study Energy Economics • Energy sector (research, analysis…) is complex – Energy consumption ubiquitous – importance of the issues – political and social stress – Highly technology-determined and -dependable – Influenced by interactions at various levels – global to local – Interdisciplinarity – From oil to wooden litter, from wind turbines to diesel engine Energy Market • Microeconomic market model (remember previous course) – Supply, demand, price, quantity, equilibrium • Basic competitive market variant – Free entry and information flows – Agents are price takers – P = MC in short run and P = MC = AC in long run Energy Market Q P SD1 P1 Q P S1 D D2 P2 Q1 Q2 S2 P2 P1 Q1Q2 • Standard S&D competitive market Capital Indivisibility • Supply increments discreet, not smooth • Inherent price instability • Difficult to plan investment Q P S Q P S D D D’ D” D’ D” D’’’ Boom and bust cycleq q’ q” p p” Capital Indivisibility • This may lead to: – Horizontal integration (oil industry) – Regulation (electricity) – Because of better managing the assets • Decentralization production lessen capital indivisibility problem eg: – Renewables electricity production – Shale gas and oil in US Capital Specificity • The more an asset is specific, the less it may be used elswhere • In energy industry assets are usually very capital intensive (ei expensive) and specific • Coupled with economies of scale VC usually much lower than AC  firms maximizing production to make up their capital costs Market Failures • Monopoly problem • Natural monopoly and its solutions • Rents • Externalities Monopoly Problem • Monopolies quite common in energy industry – Economies of scale – Capital intensiveness – Large projects, often international – Network industries • Problems: – Deadweight loss – Inefficient capital allocation (not minimal AC) – Rentseeking (rent competition) – Price discrimination Monopoly Market AR (≈D) MC (≈S) Q $/Q MR ACπ DWL QM PM Peff. Qeff. Q* Natural Monopoly • Production by one firm least costly • EG average cost falls with rising production Q P AC MC AR MR Profit Deadweight loss p* q* Natural Monopoly Fix • When NM is unavoidable, how to avoid its monopolists pricing? (above MC, with rent) 1. Marginal cost pricing – Imply financial loss – no firm interesed – State may subsidize the loss – ambiguous solution Q P AC MC AR MR Loss p* q* Natural Monopoly Fix • Probable solution somewhere in between – Loss compensated – Price subsidized or above MC Natural Monopoly Fix 2. Two-part tariff – Fixed and variable parts (eg fixed for plug and variable for real consumption) – Fixed part may be diversified 3. Ramsey pricing – Maximizing – Higher price with lower elasticity 4. Public ownership – Behave very much like Ramsey pricing Other Market Failures • Rents – Non-renewables rent – Monopolists rent – Distorts market • Externalities – Environmental – Public goods Energy Demand Energy Demand • Different views – Personal (cooking, heating, electricity) – Scientific (energy needed for chemical reaction) – Managerial (eg fuel needed in a power plant) – Planning – policy making (regional/country level) • Primary x final • Demand x Consumption – D – economic ex ante concept, willingness to pay – C – realized transactions (Demand revealed) Demand analysis • Since 1970’s • Trends: – Longer term models/predictions reaching 50-100 years ahead – global warming & energy consumption relation – sustainable development – Extremely short term models – operational issues with liberalized markets – Future security of energy supplies globally – Computation advances Demand decomposition • Buying decision (Y/N) • Appliance selection – Fuel (coal, oil, gas, biomass, mix…) – Appliance (technology) • Capacity utilisation (economy of operation) Demand – Descriptive Analysis • Growth – Values, indices – Eg TPES in physical units (toe, btu…) • Elasticities – Output, price, income (ratio to energy change) – e > 1 elastic, e < 1 inelastic, e = 1 unitary elastic • Intensities – GDP to energy consumption ratio Factor analysis • Further understanding of energy consumption changes • Demand determined by GDP, relative size of the economy, energy intensity etc. • Change in overall demand (∆E) between two years decomposed into separate effects of those • E.g. GDP effect – What would be the ∆E had only GDP changed? • Similarly Intensity and Structure change • Together 𝑄 𝑒𝑓𝑓 + 𝐼𝑒𝑓𝑓 + 𝑆 𝑒𝑓𝑓 + 𝜀 = ∆𝐸 • When 𝜀 is too big then we should find other explanatory variables Energy Supply • ES economics explained in the third lecture about investment • Basically – Value chains supplying energy products – electricity, heat, fuel – Sources: • Non-renewable • Renewable Demand Decomposition Case Demand Decomposition Case • Coal burning heating power plant – 5 blocks (engines): 3 coal base, 2 fuel oil peak – Built between 1960’s and 1980’s – Fuel oil engines not used anymore – 2 of 3 coal engines need $40m investment • Coal demand comprise: – Outputs: Heat demand and its sustainability – Inputs: ETS price, coal price and availability • Demand decomposition – Y/N shall we buy another engine? – What would it fire? (fuel question) – How often would it fire? (seasons, fuel price, regulation) Demand Decomposition Case • Heat demand? – Weather dependent – Technology dependent (consumers may unplug) – Heating price regulated – regulation body behavior?