AØKK08318U Seminar: Energy Economics

Energy is a vital component for any society. The access to cheap, clean, and secure energy is high on the agenda of any country and region. Thus, energy has received much notice from both politicians and from economists.

The energy market is heavily influenced by nature. On the supply side we have windmills that only produce when it is windy, and hydro plants that can only use the water available in the reservoirs. On the demand side, we use more energy in cold winters than in warm ones. As implied, the demand for energy is very seasonal. This leaves room for storage of energy (oil tanks, gas storages), financial price hedging, and possibly arbitration. Countries and regions prepare for extreme weather conditions and cold spells in dry years, as the unavailability of energy under these circumstances means casualties. However, this ‘insurance’ has the characteristics of a public good – so how do societies ensure that sufficient security of supply is provided?

Energy commodities on the exchange are as easy to trade as stocks and bonds, but not as easy to transport. Commodities have physical constraints that must be taken account of when priced in the financial market. The constraints include transportation capacity (e.g. tankers, gas pipelines), transportation time, political instability, storage capacity (gas storages, oil storages), transportation tariffs, production capacities and production fallouts. Thus, physical constraints like these will affect prices, trade, and availability.

Yet, these commodities are traded in vast volumes, globally. This leaves room for much financial analysis – a particular question of interest is how the market pricing corresponds to the monopolistic/oligopolistic domination of the supply of commodities. Further, energy has experience huge price fluctuations.

Looking at the supply side of energy, there are many examples of monopoly and oligopoly. The most obvious example is OPEC, which is a prime example of a cartel that dictates price. However the market power is not isolated to oil – there are only few major coal producers in the world, and Russian Gazprom has a huge influence on the European natural gas market. But even within Europe, large monopolies exists.

Energy is a topic very much influenced by politics – climate politics, trade politics, and even social politics in some countries. Topics of interest here include security of supply, ‘energy independence’, the market liberalization in EU of first the electricity and since the gas market, and finally how auctioning of capacity constrained infrastructure can be implemented.

Infrastructure is a key element when talking energy in a European perspective. Market integration as well as enhancement of the security of supply are key elements behind the European energy strategy, e.g. in that new infrastructure projects can obtain status as a ‘Project of Common Interest’ (PCI).

Finally, this seminar is on energy. In particular on issues related to power and natural gas. Although the relationship to environmental issues is close (emissions, CO2 quota, efficiency), environmental issues are not the aim of the seminar.

List of topics include (non-comprehensive):

• Energy Policy and analysis hereof
• Tariff on transportation of energy (power, gas)
• Security of Supply – modeling the dependence on import of energy
• Analysis of Levelized Cost of Electricity from different supply sources
• Financial analysis of market prices, volatility and price responses to chocks
• Sustainability and the extraction of natural resources
• Cartels and monopoly theory
• Cold winter, hot and dry summer? – impact on power prices in the winter
• Geopolitics, international trade of energy commodities
• Liberalization of energy- and gas markets
• Privatization of state monopolies, including EU's Third Energy Package (ownership unbundling)
• Hotelling’s rule and extraction of natural resources
• Cross-border trade and taxation of goods
• Energy as a means of social policy (i.e. subsidies)
• Mechanism/auction design of capacity at constrained infrastructure connections

Please note, this seminar is NOT a seminar on environmental economics.