31 research outputs found
Risk spillovers and hedging: why do firms invest too much in systemic risk?
No full textIn this paper we show that free entry decisions may be socially inefficient, even in a perfectly competitive homogeneous goods market with non-lumpy investments. In our model, inefficient entry decisions are the result of risk-aversion of incumbent producers and consumers, combined with incomplete financial markets which limit risk-sharing between market actors. Investments in productive assets affect the distribution of equilibrium prices and quantities, and create risk spillovers. From a societal perspective, entrants underinvest in technologies that would reduce systemic sector risk, and may overinvest in risk-increasing technologies. The inefficiency is shown to disappear when a complete financial market of tradable risk-sharing instruments is available, although the introduction of any individual tradable instrument may actually decrease efficiency. We therefore believe that sectors without well-developed financial markets will benefit from sector-specific regulation of investment decisions.
Risk spillovers and hedging: why do firms invest too much in systemic risk?.
No full textAbstract In this paper we show that free entry decisions may be socially inefficient, even in a perfectly competitive homogeneous goods market with non-lumpy investments. In our model, inefficient entry decisions are the result of risk-aversion of incumbent producers and consumers, combined with incomplete financial markets which limit risk-sharing between market actors. Investments in productive assets affect the distribution of equilibrium prices and quantities, and create risk spillovers. From a societal perspective, entrants underinvest in technologies that would reduce systemic sector risk, and may overinvest in risk-increasing technologies. The inefficiency is shown to disappear when a complete financial market of tradable risk-sharing instruments is available, although the introduction of any individual tradable instrument may actually decrease efficiency. We therefore believe that sectors without well-developed financial markets will benefit from sector-specific regulation of investment decisions.
International transport of captured CO2: Who can gain and how much?
No full textIf Carbon Capture and Storage (CCS) is to become a viable option for lowcarbon
power generation, its deployment will require the construction of dedicated
CO2 transport infrastructure. In a scenario of large-scale deployment of CCS in
Europe by 2050, the optimal (cost-minimising) CO2 transport network would
consist of large international bulk pipelines from the main CO2 source regions to
the CO2 sinks in hydrocarbon elds and aquifers, which are mostly located in
the North Sea. In this paper, we use a Shapley value approach to analyse the
multilateral negotiation process that would be required to develop such jointly
optimised CO2 infrastructure. Using the InfraCCS CO2 pipeline network optimisation
tool, we perform numerical simulations on the cost burden allocation of a
28 billion euro CO2 pipeline network, which would be required to reach the EU's
2050 climate goals in the PRIMES-based Power Choices scenario. We analyse
two EU pipeline policy cases: one with national pipeline monopolies and one with
liberalised pipeline construction. We nd that countries with excess storage capacity
capture 38% to 45% of the benets of multilateral coordination, with the
higher number corresponding to the case with liberalised pipeline construction.
Countries with a strategic transit location capture 19% of the rent in the case of
national pipeline monopolies. Finally, liberalisation of CO2 pipeline construction
reduces by two-thirds the dierences between countries in terms of cost per tonne
of CO2 exported. As a side result of the analysis, we nd that the resource rent of
a depleted hydrocarbon eld (when used for CO2 storage) is roughly $1 per barrel
of original recoverable oil reserves, or 1 euro per MWh of original recoverable gas
reserves. This adds 25-600% to current estimates of CO2 storage cost.JRC.F.6 - Energy systems evaluatio
Analysis of energy saving potentials in energy generation: Final results
No full textThe introduction of best available technologies in the current fleet of fossil-fuel power generation could generate primary energy savings of 14-18% by 2030, compared to primary energy consumption in 2010.
A gradual replacement of power plants at the end of their lifetime, by the best available technology could lead to around 750 Mtoe of total primary energy savings over the period 2011-2030. Total CO2 emissions over the period would be reduced by 2.7 Gt. The largest potential is in Member States with large coal-fired power plant fleets.
These potentials are slightly higher than the PRIMES Reference scenario. In addition, around half of the potential in the PRIMES Reference scenario is due to a shift away from fossil fuels, rather than efficiency improvements. The potential is also much higher than the PRIMES Efficiency scenario. In the latter scenario, the shift away from fossil fuels is much less pronounced than in the PRIMES Reference scenario.
The results are strongly dependent on the assumptions made, hence care should be taken when interpreting them.JRC.F.6 - Energy systems evaluatio
Essays on Risk in Energy Economics
No full textEnergy markets are characterized by large uncertainties and risks. The annual volatility of the Brent oil price is 28%, meaning that there is a 1-in-3 chance that next year's oil price will be more than 28% higher or lower than this year's price. Similarly, the annual volatility of gas prices for domestic consumers in Belgium/Brussels is 14%. The uncertainty is much larger than in many other goods and services, such as cars, housing, or travel, to name but a few household spending categories. This phenomenon is all the more important since energy is an essential input to many production processes and consumption patterns.
The risk in energy markets has several underlying causes: technical, such as the recent application of new techniques that allow for the extraction of ‘shale gas’, which has depressed gas prices in the US; macroeconomic, such as the drop in oil demand following the 2008/2009 global economic crisis, which roughly halved oil prices; and political, such as the Russian-Ukrainian gas crisis in 2006 and 2009, or the first oil shock in the 1970s.
Part I of this thesis deals with political risk, and analyzes decisions of resource-rich countries that affect the allocation of energy-related rents. Chapter 2 studies the Russian-Ukrainian gas crisis and how it impacts European import strategies. Chapter 3 investigates the taxation of resource extraction in petroleum-producing countries. Chapter 4 also studies taxation, but focuses on a resource that is mostly exploited in Western countries, namely nuclear power. Chapter 5 also deals with Western countries and explores the possible outcome of potential international negotiations on the distribution of rents arising from a trans-European CO2 pipeline network for Carbon Capture and Storage (CCS).
Part II of this thesis investigates how firms can protect themselves against the risks in energy supply, by hedging their exposure. The main challenge in hedging is that energy markets are typically very incomplete, in that not enough different contracts (such as options) exist to enable firms to hedge their exposure completely. Chapter 6 analyzes the effect of market incompleteness on welfare and investment incentives in the specific case of an electricity market with demand uncertainty. Chapter 7 provides a generalization of the theory for a generic market structure with non-specified uncertainty.JRC.F.6 - Energy systems evaluatio
Market completeness: How options affect hedging and investments in the electricity sector
No full textThe high volatility of electricity markets gives producers and retailers an incentive to hedge their exposure to electricity prices by buying and selling derivatives. This paper studies how welfare and investment incentives are affected when an increasing number of derivatives are introduced. It develops an equilibrium model of the electricity market with risk averse firms and a set of traded financial products, more specifically: a forward contract and an increasing number of options. We first show that aggregate welfare (the sum of individual firms' utility) increases with the number of derivatives offered, although most of the benefits are captured with one to three options. Secondly, power plant investments typically increase because additional derivatives enable better hedging of investments. However, the availability of derivatives sometimes leads to 'crowding-out' of physical investments because firms' limited risk-taking capabilities are being used to speculate on financial markets. Finally, we illustrate that players basing their investment decisions on risk-free probabilities inferred from market prices, may significantly overinvest when markets are not sufficiently complete.Electricity markets Financial markets Market completeness Hedging Investments Options
Market Completeness - How Options Affect Hedging and Investments in the Electricity Sector
No full textThe high volatility of electricity markets gives producers and retailers an incentive to hedge their exposure to electricity prices by buying and selling derivatives. This paper studies how welfare and investment incentives are affected when an increasing number of derivatives are introduced. It develops an equilibrium model of the electricity market with risk averse firms and a set of traded financial products, more specifically: a forward contract and an increasing number of options. We first show that aggregate welfare (the sum of individual firms' utility) increases with the number of derivatives offered, although most of the benefits are captured with one to three options. Secondly, power plant investments typically increase because additional derivatives enable better hedging of investments. However, the availability of derivatives sometimes leads to "crowding-out" of physical investments because capital is being used more profitably to speculate on financial markets. Finally, we illustrate that players basing their investment decisions on risk-free probabilities inferred from market prices, may significantly overinvest when markets are not sufficiently complete.JRC.F.6 - Energy systems evaluatio
Market completeness: How options affect hedging and investments in the electricity sector
No full textThe high volatility of electricity markets gives producers and retailers an incentive to hedge their exposure to electricity prices by buying and selling derivatives. This paper studies how welfare and investment incentives are affected when an increasing number of derivatives are introduced. It develops an equilibrium model of the electricity market with risk averse firms and a set of traded financial products, more specifically: a forward contract and an increasing number of options. We first show that aggregate welfare (the sum of individual firms' utility) increases with the number of derivatives offered, although most of the benefits are captured with one to three options. Secondly, power plant investments typically increase because additional derivatives enable better hedging of investments. However, the availability of derivatives sometimes leads to ‘crowding-out’ of physical investments because firms’ limited risk-taking capabilities are being used to speculate on financial markets. Finally, we illustrate that players basing their investment decisions on risk-free probabilities inferred from market prices, may significantly overinvest when markets are not sufficiently complete
Risk management in electricity markets: hedging and market incompleteness
No full textThe high volatility of electricity markets gives producers and retailers an incentive to hedge their exposure to electricity prices by buying and selling derivatives. This paper studies how welfare and investment incentives are affected when markets for derivatives are introduced, and to what extent this depends on market completeness. We develop an equilibrium model of the electricity market with risk-averse firms and a set of traded financial products, more specifically: forwards and an increasing number of options. Using this model, we first show that aggregate welfare in the market increases with the number of derivatives offered. If firms are concerned with large negative shocks to their profitability due to liquidity constraints, option markets are particularly attractive from a welfare point of view. Secondly, we demonstrate that increasing the number of derivatives improves investment decisions of small firms (especially when firms are risk-averse), because the additional financial markets signal to firms how they can reduce the overall sector risk. Also the information content of prices increases: the quality of investment decisions based on risk-free probabilities, inferred from market prices, improves as markets become more complete Finally, we show that government intervention may be needed, because private investors may not have the right incentives to create the optimal number of markets.
