cross hedging and forward contract pricing of electricity we consider the problem of an electric power marketer offering a fixed price forward contract to provide electricity that it purchases from a potentially volatile and unpredictable fledgling spot energy market one option for the risk averse marketer who wants to hedge against the spot price volatility is to engage in cross hedging to reduce the contract s profit variance and to determine the forward contract price as a risk adjusted price the sum of a baseline price and a risk premium we show how the marketer can estimate the spot price relationship between two wholesale energy markets for the purpose of cross hedging as well as the optimal hedge and the forward contract s baseline price and risk premium

the new electricity market of singapore regulatory framework market power and competition abstract this study examines whether the new electricity market of singapore nems is functioning at a workable level of competition the generation market of the nems appears highly concentrated by a four firm concentration ratio or the herfindahl hirschman index however other measures of market power present that the nems is working at close to a competitive market first there seems to be a number of effective competitors in the market second supply margin assessment and residual supply index support that the market is competitive though there are some possibilities in which the largest generator or a few large generators jointly could still have market power third the lerner index of the nems shows that the generation market is fairly competitive and the lerner index adjusted with an industry level price elasticity of demand implies that there has not been much exercise of market power finally vesting contracts a contractual obligation of a specified quantity of electricity supply to the market have appeared to be a strong and effective tool to mitigate market power in the nems the vesting contracts are considered the force behind the lowering in the average uniform singapore electricity price and the lerner index in 2004

efficiency and deregulation of the electricity market in singapore this study examines production efficiency of electricity generation in the new electricity market of singapore nems where deregulation is currently proceeding singapore is reliant on foreign direct investments and exports so competition from countries with lower costs such as china and india is exerting pressure on the government to reduce the costs of doing business here electricity cost is one of these deregulation is believed to be able to bring about lower electricity costs due to the various efficiency gains possible this study concerns itself mainly with production efficiency and attempts to calculate possible production efficiency gains by using linear programming model production efficiency gains are quantified by the base case scenario of continued regulation versus four counterfactual deregulation scenarios the results indicate that cost gains could be about eight per cent of current production cost and this is possibly a lower bound estimate however whether the purported efficiency gains are realized is to be seen as the deregulation proceeds

the role of market forces in assuring contractual performance the conditions under which transactors can use the market repeat purchase mechanism of contract enforcement are examined increased price is shown to be a means of assuring contractual performance a necessary and sufficient condition for performance is the existence of price sufficiently above salvageable production costs so that the nonperforming firm loses a discounted steam of rents on future sales which is greater than the wealth increase from nonperformance this will generally imply a market price greater than the perfectly competitive price and rationalize investments in firm specific assets advertising investments thereby become a positive indicator of likely performance

four theories of public policy making and fast breeder reactor development the recent revival of the discipline of political economy challenges purely economic explanations of economic growth technological innovation and sectoral change this approach recognizes that political actors institutions and strategies to organize the economic process together shape the economic development of industrial societies whereas economists have emphasized determinants of growth such as savings and investment rates degrees of domestic and international competition in an industry or the supply of labor the new political economists view the political definition of property rights the nature of state intervention in the economy the resources of politically mobilized groups and political actors belief systems as critical determinants of economic transformations both economists and political economists however share the assumption that actors are rational they pursue their interests in a calculated manner within a given system of institutional constraints

energy security and renewable energy deployment in the eu liaisons dangereuses or virtuous circle abstract a large body of literature estimates the effect of energy security drivers on renewable energy deployment using import dependence as a proxy for energy security which is an approach that ignores the potential effect of other energy security strategies such as the diversification of energy sources using panel data for the energy sector across 21 eu member states we investigate the effect of different energy security concepts on the development of renewable energies we compare the results of applying different energy security indicators including the ones used in eu energy policymaking unlike previous studies this study reports a long term relationship between energy security and renewable deployment our findings suggest that the relationship between energy security policies and renewable energy sources res deployment is far from straightforward and depends on the chosen energy security strategy which is usually linked to different energy security conceptualizations our primary findings confirm i that res deployment is a consequence of a combination of energy security strategies including environmental concerns rather than being solely caused by a shift towards more sustainable energy policies and ii that among the different energy security strategies the diversification of energy sources through renewable energy deployment is a more coherent strategy than using res to reduce dependency

reputation and imperfect information abstract a common observation in the informal literature of economics and elsewhere is that is multistage games players may seek early in the game to acquire a reputation for being tough or benevolent or something else but this phenomenon is not observed in some formal game theoretic analyses of finite games such as selten s finitely repeated chain store game or in the finitely repeated prisoners dilemma we reexamine selten s model adding to it a small amount of imperfect or incomplete information about players payoffs and we find that this addition is sufficient to give rise to the reputation effect that one intuitively expects

cost benefit analysis of reforming israel s electricity industry abstract in june 2003 the israeli government decided to reform the israeli electricity industry which is currently dominated by israel electric corporation iec a government owned vertically integrated electric utility the first step of the planned reform will be taken in 2006 when iec will be functionally separated into generation transmission local distribution and customer services immediately thereafter will be the second step which by 2012 will result in the deregulation and privatization of the wholesale generation and customer services transmission and distribution t and d services will remain regulated but will be available to all t and d users under mandatory open access this paper summarizes a cost benefit analysis of the government s reform plan relative to a regulated regime the government s plan even if carried out flawlessly may only yield a small net benefit however it entails a large increase in electricity producer profit and government tax receipt at the expense of electricity consumers a less than perfect transition to competition can easily wipe out the potential gain of the government plan market reform experience to date shows that electricity market reform can easily fail and the factors for success do not exist in israel since the outcome of a failing reform can be disastrous it will be imprudent to implement the government s plan in 2006 when the current electricity law expires hence we recommend performance based regulation for the period of 2006 2010 subject to an updated cost benefit analysis possible decentralization privatization and competition may follow

a combined sustainability index for electricity efficiency measures abstract one of the most substantial tools that serve decision makers in their efforts to reduce greenhouse gas emissions includes energy efficiency measures that in most cases benefit from governmental assistance for achieving electricity consumption reduction goals this paper examines five energy efficiency measures defining a combined sustainability index a multi criteria analysis of five predefined indices was developed economic environmental technology social and political providing a combined index for each measure and a tool for identifying the preferred measure within a specific situation based on its total sustainability score in this research a case study was conducted and the preferred measure was found to be municipal street lighting systems based on its high political and social scores and its relatively high installation potential the second choice would be replacement of chillers in the industrial sector and the least favorable measure is the replacement of water pumps in the water sector the methodology described brings into account the technological specifications of the measure implemented and the specific national conditions under which it is implemented

adam smith and the prisoners dilemma in ordinary life we engage in many transactions with other people in which there is potential profit for both parties from some kind of cheating normally we do not see much of this cheating i have no doubt that the merchant will put in the package the merchandise which i buy or which i ordered even though if he put in something else cheaper it is quite dubious that i would be able to win a lawsuit on my part if i decide i did not like the product and returned it with the remark that it was defective having first damaged it so that it is indeed defective i could get a gain neither i nor the merchant worries particularly about this kind of behavior although the merchant worries more than i do for reasons that will become plain below if we worried about it we would both take precautions with the result that socially we would be worse off by the cost of these precautions we have here what appears to be a prisoners dilemma matrix but the two parties are behaving cooperatively what adam smith called the discipline of continuous dealings takes care of the matter the point of this article is to work out adam smith s insight in the terminology of a modern game theory we shall see that smith was right and there are some cases indeed practically very important cases where what appears to be a prisoners dilemma in fact leads to cooperative behavior consider the prisoners dilemma game shown in figure i it is orthodox that if a and b are playing a single turn of this particular game they will end up in the lower right hand corner with a net loss of one dollar each if we go from a single game to a long series of games played by the same players however there is no agreed upon solution experimental evidence seems to indicate that the players play a mixed strategy with some cooperative plays and some noncooperative plays and the mixture can be modified by changing the payoffs 2 all of these situations are simplifications of the real world and it is a point of this article to suggest that if we make the game more like many real world

political preferences for the pork barrel a generalization this paper provides a rational explanation for the observation of oversized coalitions often approaching unanimous size in the realm of distributive policies distributive policies are those which concentrate benefits in specific geographic areas states congressional districts while spreading costs through general taxation the explanation offered here that legislators may rationally prefer universalism to hard ball coalition politics generalizes earlier work of weingast and fiorina in particular it extends their results to pork barrel politics i e projects that are economically inefficient and demonstrates how packages of economically inefficient projects can nevertheless be politically popular the main theoretical feature that induces preferences for universalism is uncertainty over the composition of winning coalitions and consequently the desire for the political insurance that universalism provides

a framework to evaluate security of supply in the electricity sector security of electricity supply soes has become a major concern for regulators and policymakers over the last decade however most work focusses either more generally on energy security or on a single fuel we develop a comprehensive but flexible framework to assess the soes for a single jurisdiction taking into the account the specificities of electricity this framework has two aims i provide a snapshot of the situation to understand current weaknesses and determine what actions are required ii capture the evolution over time to evaluate progress and identify potential problems before they materialise the framework based on an extensive literature review consists of twelve dimensions that are critical for soes we develop metrics that capture the state and evolution of each dimension this framework is intended to be a management information tool for all stakeholders aimed at organising data and structuring its analysis to enable monitoring the evolution of the soes while also functioning as an early warning system by flagging potential future problems

power sector reform in developing countries mismatched agendas power sector reform is rapidly spreading across all corners of the developing world at an alarmingly rapid pace while the rationales for reform seem to have gained acceptance among the stakeholders the reform model and process are contested this paper examines the impacts of reform using the promised outcomes as a basis for analysis the ability of reform to meet the developmental challenges facing the reformers is explored it concludes that reform has had some achievements if conventional performance indicators are used but also questions the validity of some of these indicators reform has however not fulfilled many of its goals and the prevailing recipes are likely to leave developing countries socially and economically worse off than in the pre reform period progressive government intervention is needed to shift reform process towards a more responsible development path

the new economics of organization over the last ten years or so an important new approach to the study of organizations has emerged within economics it is perhaps best characterized by three elements a contractual perspective on organizational relationships a theoretical focus on hierarchical control and formal analysis via principal agent models this paper provides political scientists with an overview of the new economics of organization and explores its implications for the study of public bureaucracy so far positive political theory has not contributed much to our understanding of public bureaucracy in part this is due to the unsympathetic treatment that rational modeling and most other modes of quantitative analysis have long received from students of public administration the other side of the coin however is that positive theorists have not made much of an effort to develop theories of bureaucracy their concerns have centered around two basic mechanisms of social choice voting and markets and they have devoted little systematic attention to a third mechanism that is clearly important for understanding how societies and other aggregates make collective decisions this third and relatively unexplored mechanism is hierarchy movement toward a positive theory of hierarchies would fill a serious gap in the social choice literature while at the same time making a theoretical contribution that strikes to the essence of public bureaucracy indeed of all organizations in fact significant steps toward a positive theory of hierarchies have very recently been taken but by economists not political scientists in small numbers of course economists made contributions to the study of public bureaucracy some time ago with the pioneering works of downs 1967 tullock 1965 and niskanen 1971 but this new wave of theoretical work is different it is already a large complex body of literature that is the focus of innovation and excitement among a growing number of economists and it reflects an unusual degree of theoretical coherence and cumulative effort work in this tradition tends to receive orientation from a distinctive economic approach to the analysis of organizations an approach perhaps best characterized by three elements a contractual perspective on organizational relationships a focus on hierarchical control and formal analysis via principal agent models this approach has emerged from recent attempts to move beyond the neoclassical theory of the firm which assumes away all organizational considerations to a theory of economic organizations that can explain why firms corporations and other enterprises behave as they do propo

a real options evaluation model for the diffusion prospects of new renewable power generation technologies this study presents a policy planning model that integrates learning curve information on renewable power generation technologies into a dynamic programming formulation featuring real options analysis the model recursively evaluates a set of investment alternatives on a year by year basis thereby taking into account that the flexibility to delay an irreversible investment expenditure can profoundly affect the diffusion prospects of renewable power generation technologies price uncertainty is introduced through stochastic processes for the average wholesale price of electricity and for input fuel prices demand for electricity is assumed to be increasingly price sensitive as the electricity market deregulation proceeds reflecting new options of consumers to react to electricity price changes such as time of use pricing unbundled electricity services and choice of supplier the empirical analysis is based on data for the turkish electricity supply industry apart from general implications for policy making it provides some interesting insights about the impact of uncertainty and technical change on the diffusion of various emerging renewable energy technologies

optimal production with uncertain interruptions in the supply of electricity abstract in this paper we develop a model to measure expected electricity outage costs in the industrial and commercial sectors four sources contribute to the costs of outage in these sectors foregone profits output possible reduction in productivity due to the outage damage to materials and payments to labor during the outage the beginning and duration of the electricity outage are random variables with known distribution functions thus the business customer maximizes his expected profits taking into account his ability or lack of ability to respond to the random electricity outage the model is applied assuming a quadratic production function to eleven industrial branches in israel the estimates indicate a large variation in customer preferences for reliability

demographic variables in demand analysis in this paper the authors discuss five procedures for incorporating demographic variables into theoretically plausible demand systems translating scaling and the gorman reverse gorman and implicit prais houthakker procedures these five procedures are used to incorporate a single demographic variable the number of children in a household into the generalized ces demand system using household budget data for the united kingdom for the period 1966 1972 excerpt

reforming israel s electricity sector abstract this paper analyzes the regulatory structure of the electricity sector in israel which is currently dominated by the government owned integrated utility israel electric corporation iec the current structure of a price cap with a mandatory rate reduction of 2 per year and a target return on equity roe of 6 5 is not sustainable because of iec s deteriorating financial health caused by the substantial investments it made to meet the 7 2 per year electricity demand growth in the past decade which has led to an exceptionally low realized roe of 3 4 for that period the investment trend will continue thanks to the 4 5 per year gdp growth projected for the next 10 20 years part of our proposed remedy is performance based regulation pbr implemented via a a price cap formula that will restore iec s financial health and offer iec downward pricing flexibility b changes in how iec compensates its workers and c a sliding scale plan that provides incentives for iec to become more efficient and to share risk with its customers we augment the pbr proposal by recommending changes in iec s tariffs and resource procurement procedures that aim to promote the development of a competitive power industry in the next 10 15 years

the development of renewable energies and supply security a trade off analysis this paper analyzes the effects of the green transformation on the german electricity sector with respect to the energy political triangle it focuses on how the development of renewable energies will affect security of electricity supply in a cost benefit analysis the value of supply security is compared with its costs of provision more specifically the benefits of maintaining the present quality of electricity supply are the avoided social damages from electricity outages and are compared with the respective investment costs in the low and medium voltage distribution grid it is shown that the transformation process towards a green and decentralized production structure will be costly for society even though the costs can be reduced by different measures

the political economy of benefits and costs a neoclassical approach to distributive politics this essay offers a rational political explanation for the notorious inefficiency of pork barrel projects with an optimization model of legislative behavior and legislative institutions the model emphasizes the economically arbitrary from a welfare point of view importance of the geographic incidence of benefits and costs owing to the geographic basis for political representation we explore the implications of a legislator s objective function and derive conditions under which a representative legislature will select an omnibus of projects each of which exceeds the efficient scale

electricity market reform failures uk norway alberta and california an analysis of electricity market reforms already taken place in the uk norway alberta canada and california usa leads to our overall conclusion that the introduction of a competitive generation market of itself has failed to deliver reliable service at low and stable prices the market reform failures are attributed to market power abuse by few dominant sellers especially at times of transmission congestion poor market design that invites strategic bidding by suppliers the lack of customer response to price spikes capacity shortage caused by demand growth not matched by new capacity and thin trading of forward and futures contracts that are critical for price discovery and risk management the paper then explains why an electricity market reform can easily fail to deliver the promised gains of better service at lower and more stable prices the policy implication is that an electric market reform can be extremely risky and may lead to a disastrous outcome thus it is imprudent to implement such a reform in countries with limited sites for newgeneration and no indigenous fuels e g israel and hong kong these countries should therefore consider introducing performance based regulation that can immediately benefit electricity consumers in terms of lower prices more stable prices improved reliability more choices while encouraging the electric sector to pursue efficient operation and investment r 2003 elsevier science ltd all rights reserved

a theory of white elephants asymmetric information in government support for technology abstract information advantages of firms over government are an important cause of policy failures in government financed technology using a game theory model such failures can be reconstructed as a situation analogous to the prisoner s dilemma in which rational individual action results in an outcome that is suboptimal for both industry and government by logic of economic theory any pareto deficient information asymmetry between industry and government qualifies as market failure the resulting policy failure therefore represents a case of government failure joined with market failure cost sharing between government and industry can solve the problem and a way to calculate the optimal level of cost sharing is shown however in many cases cost sharing is unfeasible or undesirable empirical evidence is adduced from the west german fast breeder reactor programme

did a local distribution company procure prudently during the california electricity crisis abstract to manage cost risk prudent procurement of electric power requires that some portion of a buyer s energy demand be met through long term contracting under cost of service regulation or performance based regulation a local distribution company ldc should be allowed to fully recover all prudently incurred power procurement costs however the regulatory test of prudence is an ex post review with the threat of disallowance this paper presents an economic analysis of procurement prudence involving a small ldc bear valley electric service bves which serves a resort area in southern california the key findings are a high and volatile prices and rolling blackouts characterized the market environment faced by the owner of bves southern california water company scwc at its signing of a 5 year fixed price contract b scwc was a price taker with no incentive to act imprudently c the contract was obtained via a competitive bidding process d the contract price was comparable to the benchmark price of contemporaneous contracts e the fixed price contract was economic when compared to available alternatives and f despite a e a negotiated settlement with the state regulator and a large user resulted in substantial disallowance the policy implication is that a regulator should approve a prudent procurement plan proposed by an ldc to remove the unreasonable risk of an ex post review if the ldc strictly adheres to the plan the resulting electricity purchases are per se prudent and should entitle the ldc to full cost recovery

an international review of the implications of regulatory and electricity market structures on the emergence of grid scale electricity storage abstract energy storage systems ess have the potential to make a significant contribution to planning and operation practises in power systems while ess can be used to provide multiple benefits in the power sector widespread use has been restricted by high technology costs lack of deployment experience and the barriers and uncertainties caused by the present electricity market and regulatory structures that were designed for conventional electricity systems this paper reviews countries with high renewable targets and with significant current or planned ess deployments to ascertain the common problems affecting the use of ess on the grid and to establish where changes have been made or proposed to the electricity market and regulatory frameworks three major problems were identified as the undetermined asset class for ess and unbundled electricity system limiting stakeholders from determining and realising multiple ess benefits low electricity market liquidity and changing market conditions and a lack of common standards and procedures for evaluating connecting operating and maintaining ess based on the established barriers recommendations to update or create policies regulation and market arrangements to increase the viability and wider use of grid level ess are discussed the three key regulatory and policy recommendations were identified as an alignment of renewable policies to that of ess creating a separate asset class for ess and associated rules for regulated and competitive operations and standardising assessment frameworks connection and operational procedures for the use of ess finally three main electricity market recommendations include updating rules to support simultaneous ess operation across wholesale ancillary services and capacity markets updating market rules to allow compensation for flexible and highly accurate responsive demand and generation technologies such as ess and updating market ancillary services energy requirements

a critical assessment of the hong kong government s proposed post 2008 regulatory regime for local electricity utilities abstract in december 2005 the hong kong government issued a consultation paper on future development of the electricity markets in hong kong stage ii consultation proposing a post 2008 regulatory regime upon the expiration of the existing regulatory contract between the hong kong government and each of the two local electricity utilities we assess the proposal using the criteria of safe reliable and environmentally friendly service at the lowest rates that will allow the utilities reasonable returns on their investments we caution that if fully adopted the highly risky proposal may lead to less reliable service without the compensating benefits to the environment

the impact of standards and regulation on innovation in uncertain markets abstract this study analyses the impact of formal standards and regulation on firms innovation efficiency considering different levels of market uncertainty we argue that formal standards and regulation have different effects depending on the extent of market uncertainty derived from theoretical considerations about information asymmetry and regulatory capture our empirical analysis is based on the german community innovation survey cis the results show that formal standards lead to lower innovation efficiency in markets with low uncertainty while regulations have the opposite effect in cases of high market uncertainty we observe that regulation leads to lower innovation efficiency while formal standards have the reverse effect our results have important implications for the future application of both instruments showing that their benefits heavily depend on the market environment

china s electricity market oriented reform from an absolute to a relative monopoly abstract the market oriented reform in electricity industry has become a global trend since 1980s although china s electricity industry has been reformed since 1978 the substantial reform has not been conducted until 1985 before 1985 china s power industry had been absolutely monopolized by the central state owned companies the absolute monopoly has been broken since 1985 when the chinese government opened doors for non central state owned investment entities and foreign investors in power supplies in order to solve the chronic power shortage in 2002 the comprehensive electricity reform plan entitled scheme of the reform for power industry was enacted however implementation of this plan was delayed due to electricity supply shortages even worse a new kind of monopoly has been developed under the background the state advances the private sector retreats in late years in some sense the former absolute monopoly has transformed the current relative monopoly we contend that the relative monopoly has reversed the market oriented reform in china s electric industry if the relative monopoly remains unchanged it will be harmful to public welfare

does california s co2 price affect wholesale electricity prices in the western u s a abstract using a sample of daily market data we quantify the effect of california s co 2 cap and trade program on the wholesale electricity prices of four interconnected market hubs in the western u s a north of path 15 np15 and south of path 15 sp15 in california mid columbia mid c in the pacific northwest and palo verde pv in the desert southwest a 1 metric ton increase in california s co 2 price is estimated to have increased the electricity prices by 0 41 mwh p value p value p value 0 0056 for mid c and 0 15 mwh p value 0 0925 for pv these estimates reflect a the np15 and sp15 sellers pricing behavior of fully including the co 2 price in their intra state transactions b the mid c price s 100 pass through of the co 2 price in the pacific northwest s hydro export to california and c the statutory obligation of paying the co 2 emissions cost by california s buyers of the electricity imported from the desert southwest the policy implication is that internalization of co 2 s externality in the western u s a requires a cap and trade program with a regional scope that encompasses all four hubs thereby remedying the california program s limited geographic coverage which introduces distortions in neighboring markets