capacity choice and water management in hydroelectricity systems this paper proposes a simple two period model that captures the seasonal pattern of water inflows and electricity demand observed in many countries where hydropower is a major source of electricity supply the model characterizes the effects of different inflows pattern on the optimal water management capacity and the associated electricity production and price the first best capacity is a non monotonic function of water inflows which provides a rationale for the observed differences in reservoirs sizes across hydropower systems around the world the monopoly solution is qualitatively similar to the first best outcome and the privatization of hydroelectric power generation systems does not always imply a social welfare loss

how is demand for natural gas determined across european industrial sectors abstract this paper estimates the response of manufacturing sectors natural gas demand to price and output changes the average response to future changes in absolute and relative prices of the manufacturing industry in an oecd country depends on the mix of manufacturing industries particularly with respect to energy intensity and substitution opportunities in production we estimate short and long run demand elasticities using a shrinkage estimator which allows heterogeneous demand responses across industries for each country our results show that price and output elasticities are heterogeneous within the same manufacturing sector across countries furthermore an output contraction due to e g demand shocks will generally have larger negative effects on gas demand than increases in natural gas prices

global warming and energy demand list of tables list of figures list of contributors preface 1 global warming and energy elasticities terry barker paul ekins and nick johnstonepart 1 estimating long term energy elasticities 2 alternative approaches to estimating long run energy demand elasticities an application to asian developing countries ron smith and m hashem pesaran 3 a survey of international energy elasticities neil manning and jago atkinson 4 long run demand elasticities for gasoline thomas sterner and mikael franzen 5 responses of energy demand in uk manufacturing to the energy price increases of 1973 and 1979 80 alan ingham 6 elasticities for oecd aggregate final energy demand lakis vouyoukas 7 modelling uk energy demand derek hodgson and keith millerpart ii energy the economy and greenhouse gas abatement 8 endogenous technological progress in fossil fuel demand laurence boone stephen hall david kemball cook and clare smith 9 uk energy price elasticities and their implications for long term co2 abatement terry barker 10 price elasticity and market structure overcoming obstacles to ensure energy efficiency tim jackson 11 rethinking the use of energy elasticities stefan p schleicher 12 revisiting the costs of co2 abatement paul ekins 13 asymmetrical price elasticities of energy demand michael grubb14 conclusions terry barker paul ekins and nick johnstone bibliography index

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

social cost benefit analysis of electricity interconnector investment a critical appraisal abstract this paper examines the economic analysis social cost benefit analysis underlying two decisions to build an interconnector norned and the east west interconnector in europe the main conclusion is that current interconnector and transmission investment decisions in europe are unlikely to maximize social welfare the arguments are as follows i it is unclear how much demand for transmission capacity and interconnectors actually exists and thus the benefits of investment are unclear ii both analyses underlying the investments studied are incorrect to the point where in one case even the sign may be wrong iii the main criticism concerns the fact that they do not take the resulting changes in generator investment plans into account and ignore the potential benefits of increased competition iv several smaller issues can be improved such as the discount rate used v decisions at the european level are taken very differently and approval may depend on which authority grants approval vi interconnector decisions receive the most attention although most money goes to transmission investments two research recommendations for future improvements are formulated

european economic governance the berlin washington consensus this paper argues that the european union has gone farther than any other country or institution in internalizing the prescriptions of the washington consensus embedding neo liberal principles in the treaties defining its governance the eu has enshrined a peculiar doctrine within its constitution we further argue that this berlin washinghton consensus has serious empirical and theoretical flaws as its reliance on pareto optimality leads to neglect the crucial links between current and potential growth we show by means of a simple model that the call for structural reforms as an engine for growth may be controversial once current and potential output are related we claim that adherence to the consensus may go a long way in explaining the poor growth performance of the european economy in the past two decades because of the constraints that it imposed on fiscal and monetary policies the same constraints have deepened the eurozone crisis that started in 2007 putting unwarranted emphasis on austerity and reform challenging the consensus becomes a precondition for avoiding the implosion of the euro and recovering growth

investor heterogeneity market segmentation leverage and the equity premium puzzle abstract financial economists for the past two decades have attempted to explain why the equity premium is so high now known as the equity premium puzzle epp we model investor heterogeneity market segmentation and optimal leverage using the time separable standard power utility market completeness and ignoring transaction costs to explain the epp we explain both the epp and the related risk free rate puzzle without resorting to preference modification furthermore we show a unique interior equilibrium for the debt ratio contrary to the work by f modigliani m h miller the cost of capital corporation finance and the theory of investment american economic review 48 1958 261 297 corporate income taxes and the cost of capital american economic review 53 1963 433 443 and s c myers presidential address the capital structure puzzle journal of finance 39 1984 575 592 our simulations show the relevance of our models

a complementarity model for the european natural gas market abstract in this paper we present a detailed and comprehensive complementarity model for computing market equilibrium values in the european natural gas system market players include producers and their marketing arms which we call traders pipeline and storage operators marketers lng liquefiers regasifiers tankers and three end use consumption sectors the economic behavior of producers traders pipeline and storage operators liquefiers and regasifiers is modeled via optimization problems whose karush kuhn tucker kkt optimality conditions in combination with market clearing conditions form the complementarity system the lng tankers marketers and consumption sectors are modeled implicitly via appropriate cost functions aggregate demand curves and ex post calculations respectively the model is run on several case studies that highlight its capabilities including a simulation of a disruption of russian supplies via ukraine

decentralizing hydro power production we analyse the production of electricity from n power stations in a dynamic model each power station s production of electricity is constrained by the quantity of water available to it supply constraint as well as limitations on reservoir capacity storage constraint we show that hydro power production can lead to two sources of welfare loss suboptimal management of water resources and the exercise of market power a monopolist minimizes the first source of inefficiency whereas decentralized production in a competitive environment minimizes the second the decision to introduce competition in hydropower production must account for these two opposite effects jel classification l11 q48 decentralisation de la production d hydroelectricite nous analysons la production d hydroelectricite par n centrales dans un modele dynamique la production de chaque centrale est contrainte par la quantite d eau disponible contrainte d approvisionnement et la capacite du reservoir contrainte de stockage nous demontrons que la production hydroelectrique peut donner lieu a deux types d inefficacite la gestion sous optimale des ressources hydrauliques et l exercice de pouvoir de marche l entreprise monopolistique minimise la premiere inefficacite alors que la production decentralisee dans un marche concurrentiel minimise la deuxieme la decision d introduire la concurrence dans la production d hydroelectricite doit tenir compte de ces deux effets opposes

the implications of first order risk aversion for asset market risk premiums abstract in an effort to explain simultaneously the excess return predictability observed in equity bond and foreign exchange markets we incorporate preferences exhibiting first order risk aversion into a general equilibrium two country monetary model when we calibrate the model to us and japanese data we find that first order risk aversion substantially increases excess return predictability however this increased predictability is insufficient to match the data we conclude that the observed patterns of excess return predictability are unlikely to be explained purely by time varying risk premiums generated by highly risk averse agents in a complete markets economy

does increased extraction of natural gas reduce carbon emissions without an international climate agreement extraction of more natural gas could reduce emissions of co2 as more clean natural gas may drive out dirty coal and oil using a computable equilibrium model for the western european electricity and natural gas markets we examine whether increased extraction of natural gas in norway reduces global emissions of co2 we find that both in the short run and in the long run total emissions are reduced if the additional quantity of natural gas is used in gas power production in norway if instead the additional quantity is exported directly total emissions increase both in the short run and in the long run however if modest co2 taxes are imposed increased extraction of natural gas will reduce co2 emissions also when the additional natural gas is exported directed

trade and price variation in an integrated european power market this paper examines the potential gains in terms of increased social surplus from integrating the power markets in europe and assesses the scope for free seasonal and diurnal trade in a setting of third party access tpa we construct an equilibrium model at the level of the wholesale markets taking account of the existing power generating infrastructure of varying flexibility as well as the existing transmission network interconnecting the countries involved the model indicates an overall gain from integrating the power markets electricity prices are substantially reduced for all regions involved thus implying a significant redistribution of income from producers to consumers trade flourishes with regions establishing themselves as either pure exporters pure importers or as intermediaries acting as transit countries

consumer electricity and gas prices across australian capital cities structural breaks effects of policy reforms and interstate differences abstract we detect and analyze the most significant structural changes in the quarterly growth rate of consumer electricity and gas prices in australia and estimate their corresponding seasonal effects to do so we apply the general modelling framework of the bai perron breaking regression to all available quarterly data for capital cities individually and australia as a whole 1989q3 2017q2 retail energy prices in most australian states were deregulated in the 2000s we find that increases in average quarterly growth rates of electricity and gas prices consistently occurred in the third september quarter and find very few instances of increases in any other quarters of the year in the post deregulation period price increases are significantly higher than in the pre deregulation era results for some capital cities are stark in perth third quarter growth in electricity prices has been five times higher after the structural break in australia as a whole third quarter growth in gas prices has been three times higher after the structural break we discuss several possible explanations for energy price rises in the period since deregulation

water on fire gains from electricity trade in light of the ongoing liberalization of electricity trade in the nordic countries and perhaps in northern europe we argue that gains from electricity trade may be different from those traditionally associated with comparative advantages and economies of scale in particular we consider gains arising from the exploitation of technological complementarities between hydro and thermal systems our theoretical framework highlights essential features of the two systems and allows for an analysis of effects of trade we study three trading regimes which may arise either endogenously or because of trade regulations day night power exchange seasonal energy banking and unbalanced trade the analysis suggests that gradual trade liberalization may be costly

the limits of independence and the policy of the ecb it is argued that the european central bank s independence is not as secure as it seems and that as a result it has appreciable institutional incentives to protect and enhance its position it follows that its behaviour should not be understood as being solely determined by the pursuit of price stability one consequence is that certain points on which it has been criticised on the basis that its approach makes for ineffective monetary policy might be better understood as often effective attempts to protect its position another is that making a central bank or any other institution completely independent may be much harder than it seems and failed attempts which come close are not necessarily to be preferred even by the advocates of independence to less ambitious designs

the effects on competitiveness of coordinated versus unilateral fiscal policies reducing ghg emissions in the eu an assessment of a 10 reduction by 2010 using the e3me model abstract international competitiveness effects from coordinated and uncoordinated multilateral policies to reduce co 2 emissions from 11 member states of the eu by 2010 are compared with those from unilateral policies to achieve a 10 cut in each member state alone the paper presents the results from four projections using a large scale integrated regionalised e3 model of the eu estimated on time series cross section data 1968 93 with international trade treated as between each member state and a european transport and distribution network the 10 reduction is achieved by additional excise duties incremented every year 1999 to 2010 according to the carbon contents of fuels with special with special treatment of electricity taxed on outputs not inputs with revenues recycled via reductions in employers social security contributions multilateral coordinated policies require a common tax rate of 156 ecu per tonne carbon 1999 prices which rises to an average of 165 ecu per tonne with a wide range between regions when policies are uncoordinated all the tax shift projections show double dividends for emission reduction and employment gain for all member states unilateral policies do not show much carbon leakage but they show smaller gains for output and employment effects for price competitiveness appear to be small and mixed with serious losses appearing only for the netherlands and for metals and chemicals especially for unilateral action

revisiting emu s stability pact a pragmatic way forward the stability and growth pact is under fire some countries are meeting major problems in sticking to the rules proposals to reform the pact or ditch it altogether abound the alleged weaknesses of the pact tend to reflect trade offs typical of supra national arrangements this aspect has to be factored in when considering reforms of the current fiscal rules there is no miracle solution emu without rules would be an interesting experiment but a risky policy option given the existing degree of political integration in emu internal adjustment rather than attempting to redesign the rules from scratch appears a more suitable way forward redefining the medium term budgetary target improving transparency tackling the pro cyclical fiscal bias in good times moving towards non partisan application of the rules and improving transparency in the data can achieve both stronger discipline and higher flexibility copyright 2003 oxford university press

communicating the value of dispatchability for non utility generation projects electric utilities seeking to purchase power from nonutility generators nugs need to provide information to nug developers on the value to the utility power system of various attributes in order that the developers can design projects that maximize net benefits dispatchability is one key attribute this paper outlines three previous approaches to communicating to developers the value of dispatchability and describes a fourth approach the fourth approach presents a table of numbers representing the value of dispatchability as a function of the energy bid price and escalation rate it has the advantage of simplicity from the perspective of the developer while still providing a meaningful signal to the developer

the design of reform packages under uncertainty the authors present a model of large scale economic reforms modeled on the transition process in eastern europe with aggregate and individual uncertainty concerning the outcome of reforms the government is assumed to choose the speed and sequencing of reforms the authors compare big bang strategies with gradualist reform packages they show that gradualist reform packages may be easier to get started optimal sequencing of reforms should aim at creating constituencies for further reforms and gradualism may generate a higher investment response because of a lower option value of waiting than would a big bang approach copyright 1995 by american economic association

asset pricing puzzles and incomplete markets the representative agent theory of asset pricing is modified to incorporate heterogeneous agents and incomplete markets the model features two types of agents who differ up to a nontradable idiosyncratic component in their endowment processes numerical solutions indicate that individuals are able to diversify a substantial portion of their idiosyncratic income risk through riskless borrowing and lending alone restrictions on the variability of intertemporal marginal rates of substitution hansen and jagannathan 1991 are used to argue that incomplete markets as modeled here cannot account for the properties of asset returns that are anomalous from the perspective of representative agent theory a large literature in financial economics has investigated the extent to which variants of the lucas 1978 general equilibrium theory of asset pricing can account for the joint behavior of aggregate u s consumption and asset returns by and large this literature has concluded that a theory based upon frictionless arrow debreu markets and or a representative agent makes strongly counterfactual predictions regarding even the simple unconditional properties of this relationship mehra and prescott 1985 for instance show that the theory drastically underpredicts the average excess rate of return on u s stocks the so called equity premium puzzle weil 1989 points out as did mehra and prescott that the magnitude of the average risk free rate is far below that predicted by the theory this has been dubbed the risk free rate puzzle numerous authors including grossman melino and shiller 1987 and backus gregory and zin 1989 show that the theory cannot account for term premia inherent in the yield curve hodrick 1987 surveys a large literature which documents the theory s shortcomings in accounting for excess expected returns in foreign exchange markets the notion that the representative agent model cannot account for excess returns across a wide array of asset markets can be made more precise by using tools developed by hansen and jagannathan 1991 and shiller 1982

a bid solicitation and selection method for developing a competitive spot priced electric market the electric utility industry is in the beginning throes of a transformation from a cost based regulated structure to a more market based less regulated system traditional unit commitment and economic dispatch methodologies can continue to provide reliable least cost solutions providing they are modified to accommodate a larger sphere of market participants this paper offers a method for an entity such as an independent system operator iso to solicit and evaluate bids for developing a spot priced electric market by replicating existing utility practices that are effective and efficient while creating an open and equitable competitive marketplace for electricity

statistical estimation and moment evaluation of a stochastic growth model with asset market restrictions abstract this paper estimates the parameters of a stochastic growth model with asset market and contrasts the model s moments with moments of the actual data we solve the model through log linearization along the line of campbell 1994 journal of monetary economics 33 3 463 and estimate the model without and with asset pricing restrictions as asset pricing restrictions we employ the riskfree interest rate and the sharpe ratio to estimate the parameters we employ as in semmler and gong 1996a journal of economics behavior and organization 30 301 a ml estimation the estimation is conducted through the simulated annealing we introduce a diagnostic procedure which is closely related to watson 1993 journal of political economy 101 6 1011 and diebold et al 1995 technical working paper no 174 national burea of economic research to test whether the second moments of the actual macroeconomic time series data are matched by the model s time series several models are explored the overall results are that sensible parameter estimates may be obtained when the actual and computed riskfree rate is included in the moments to be matched the attempt however to include the sharpe ratio as restriction in the estimation does not produce sensible estimates the paper thus shows by employing statistical estimation techniques that the baseline real business cycle rbc model is not likely to give correct predictions on asset market pricing when parameters are estimated from actual time series data

leverage time preference and the equity premium puzzle abstract we re examine the mehra and prescott 1985 model a combination of the time preference factor greater than one and reasonable leverage ratios in the equity market resolve the equity premium puzzle such parameter values can be consistent with finite expected utility and a positive risk free rate of interest rate the model performs better for the mp target values than for economically reasonable variations around those values

evaluating dispatchability features in competitive bidding in power systems competitive bidding for electric generating capacity is beginning to emphasize dispatchability the authors examine various aspects of the evaluation problem facing electric utilities recent private power contracts are used to illustrate the range and limits upon flexibility that are being offered only detailed production simulation models can capture the cost implications of the features being offered the value of the dispatchability was found to increase with the variable cost of operation the most important cost found was associated with projects offering only limited curtailment procedures for incorporating subtle dispatch effects in a broader evaluation framework are identified

beyond kyoto backstop technologies and endogenous prices on co2 permits and fossil fuels this paper analyses the markets for fossil fuels given that the limits the kyoto protocol sets on co2 emissions from annex b countries extend beyond 2008 2012 a forward looking model with endogenous prices for fossil fuels is applied under different assumptions concerning the technological progress for a carbon free backstop technology both the time profile of the international permit price needed for the kyoto forever targets as well as the implications through reduced demand and lower producer prices for fossil fuels are calculated the permit price has to rise at least up to 2030 in order to fulfil the emission targets from then on the necessary permit price shows different future developments dependent on when the backstop technology starts to replace oil since changes in the availability of the backstop technology shift the time profile of the permit price the loss of petroleum wealth for oil and gas producers varies between the scenarios but is never more than 20 findings indicate that the

fiscal policy and the mehra prescott puzzle on the welfare implications of budget deficits when real interest rates are low historically average real returns on u s government debt have been far below the rate of economic growth allowing the u s government to roll over its debt at a rather low cost at the same time the rate of return on capital has generally been above the growth rate suggesting that the u s economy is dynamically efficient the paper shows that the welfare implications of budget deficits in this scenario depend critically on why interest rates have been so low if the government can offer low returns on its debt because of some unique ability to create default free claims persistent primary budget deficits may be unproblematic but if low interest rates are due to high risk aversion policies that exploit the low cost of government debt to run frequent budget deficits will impose significant risks on future taxpayers in essence safe government debt is safe for the debt holders but it is very risky for the taxpayers who are implicitly taking a short position in the safe security