Sustainability, Volatility, and the Evolution of Energy Markets

Paper Session

Saturday, Jan. 7, 2017 5:30 PM – 7:15 PM

Swissotel Chicago, Vevey 2
Hosted By: International Association for Energy Economics
  • Chair: Alberto J. Lamadrid, Lehigh University

Analyzing the Risk of Transporting Crude Oil by Rail

Charles F. Mason
University of Wyoming


In this paper, I conduct a careful empirical assessment of the risk associated with shipping a given amount of crude by rail. To this end, I have collected detailed information on rail shipments for each year between 2009 and 2015. These records describe every shipment sent by rail in the US; from this master dataset I ex- tract information on rail shipments of crude oil. Focusing on shipments out of North Dakota, I then match these shipments with information on the route traveled so as to assess the degree to which shipments were concentrated on specific pathways. Finally, this information is combined with data from the US Pipeline and Hazardous Materials Safety Administration that describes all rail incidents during this time period. I find a significant positive relation between rail shipments and safety incidents. Moreover, there is an indication that incidents were more concentrated on routes that became more heavily used as rail shipments increased. A secondary focus is to assess the likely future stream of oil shipments, by esti- mating the likely future path of tight oil production; with this estimate I will be in a position to estimate the number of “draws” associated with the random variables describing the probabilities of rail accidents or pipeline accidents.

Capacity and Utilization: The Effect of Returns in Electricity Markets

Jeffrey C. Peters
Stanford University


I argue that a significant part of this gap can be explained by a failure to account for capital returns to electricity generating capacity. Changes in electricity generation from different technologies are driven by longer-term capacity growth as well as short-term utilization adjustment – a function of dispatchability and technological substitution between existing plants.
I create a straightforward economic model that captures dispatchability, technological substitution, capacity expansion, and their interdependency. The model introduces “missing links” in both economic and engineering analyses of electricity generation and capacity, which can be used to explain systematic error in projections and add value to the ongoing regulation versus deregulation debate.
I review several important studies designed to project electricity generation in response to technological change or policy intervention. I find that ignoring returns by missing the linkage between capacity and utilization leads to systematic error, which helps explain a significant part of the departure between projections and historical observations and advances the science of electric power economics. Turning to the regulation versus deregulation debate, I explore differences in capacity expansion outcomes in a market driven by maximizing returns versus minimizing costs with different regulatory costs (i.e. a deregulated and regulated market, respectively). I explore under what conditions one market may be preferred for reducing electricity prices as well as what is the impact of market type on policies designed for increasing penetration of renewable technologies – a policy relevant in the context of the recent US Clean Power Plan. Thus, this paper builds a theory for capacity, utilization, and returns in the electricity sector that can be practically applied to timely electricity issues.

Utility Pricing in the Prosumer Era: An Empirical Analysis of Residential Electricity Pricing in California

Felipe Castro
University of California-Berkeley


Advanced metering infrastructure (AMI) as well as home energy management systems (HEMS) are enabling residential consumers, or "prosumers", to actively interact with electricity systems. In regulated retail sectors, residential rate structures greatly influence this interaction. Despite its important role, no consensus exists with respect to the ideal design of rates. Among the many factors that keep the debate open, the limited empirical literature turns the focus of the discussion around theoretical prescriptions. This study contributes with an empirical analysis of residential rate structures, in the context of California's electricity sector. We focus on a scenario in which AMI and HEMS are widely adopted. To measure welfare changes under different pricing regimes, we embed a detailed model of household behavior into a framework that combines elements from peak-load pricing and capacity expansion. This approach allows us to capture a wide variety of temporal and spatial demand substitution patterns without the need of estimating a large number of parameters. We calibrate the model using data of appliance ownership, census household counts, weather patterns, and a model of California's electricity network. Our analysis compares four tariffs, including real-time pricing and three variants of a time-of-use program, and uses a flat rate structure as a reference case. We find that the increase in consumer surplus for the average household is not greater than 2 dollars per month. However, depending on the appliance stock, weather patterns and the specific rate structure some households may benefit up to ten times more than others. Overall our results suggests that targeting different rates to household with different characteristics is a superior strategy than defaulting all customers into any variant of a time-of-program.

Build Wind Capacities at Windy Locations? Assessment of System Optimal Wind Locations under Feed-in Tariffs

Frank Obermuller
University of Cologne


In recent years, wind power capacities have increased in many countries, mainly due to subsidy schemes. One subsidy scheme is the fixed feed-in tariff which reimburses a fixed rate for every produced kWh wind energy. This gives incentives to build wind capacities at windy locations independent of grid congestions or market price incentives.
In this paper, I investigate the discrepancy between profit optimal wind locations under a fixed feed-in tariff in contrast to system optimal wind locations.
The results point to structural differences between optimal locations from a profit and a system perspective. Furthermore, the analysis shows that a uniform pricing (as it is common in Europe) has significant disadvantages in incentivizing system optimal wind locations. Overall, subsidy schemes should internalize market prices as well as the transmission situation.
Jesse Jenkins
Massachusetts Institute of Technology
Julia Frayer
London Economics International LLC
Lucy Yueming Qiu
Arizona State University
JEL Classifications
  • Q4 - Energy