The Econometrics of Energy Systems PDF

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The Econometrics of Energy Systems Edited by Jan Horst Keppler, Régis Bourbonnais and Jacques Girod The Econometrics of Energy Systems This page intentionally left blank The Econometrics of Energy Systems Edited by Jan Horst Keppler Régis Bourbonnais and Jacques Girod With an Introduction by Jean-Ma...

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The Econometrics of Energy Systems Edited by

Jan Horst Keppler, Régis Bourbonnais and Jacques Girod

The Econometrics of Energy Systems

This page intentionally left blank

The Econometrics of Energy Systems Edited by

Jan Horst Keppler Régis Bourbonnais and

Jacques Girod With an Introduction by

Jean-Marie Chevalier

Selection and editorial matter © Régis Bourbonnais, Jacques Girod and Jan Horst Keppler 2007 Introduction © Jean-Marie Chevalier 2007 Individual chapters © contributors 2007 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London W1T 4LP. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The authors have asserted their rights to be identified as the authors of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2007 by PALGRAVE MACMILLAN Houndmills, Basingstoke, Hampshire RG21 6XS and 175 Fifth Avenue, New York, N.Y. 10010 Companies and representatives throughout the world. PALGRAVE MACMILLAN is the global academic imprint of the Palgrave Macmillan division of St. Martin’s Press, LLC and of Palgrave Macmillan Ltd. Macmillan® is a registered trademark in the United States, United Kingdom and other countries. Palgrave is a registered trademark in the European Union and other countries. ISBN-13: 978–1–4039–8748–8 ISBN-10: 1–4039–8748–3 This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data The econometrics of energy systems / edited by Jan Horst Keppler, Régis Bourbonnais and Jacques Girod. p. cm. Includes bibliographical references and index. ISBN 1–4039–8748–3 1. Energy industries. 2. Energy policy. 3. Econometrics. I. Keppler, Jan Horst, 1961 – II. Bourbonnais, Régis. III. Girod, Jacques. HD9502.A2E248 2007 2006048296 333.7901′ 5195—dc22 10 9 8 7 6 5 4 3 2 1 16 15 14 13 12 11 10 09 08 07 Printed and bound in Great Britain by Antony Rowe Ltd, Chippenham and Eastbourne

Contents List of Tables

vii

List of Figures

ix

Notes on the Contributors

xi

Introduction: Energy Economics and Energy Econometrics Jean-Marie Chevalier

xiii

1

Energy Quantity and Price Data: Collection, Processing and Methods of Analysis Nathalie Desbrosses and Jacques Girod

1

2

Dynamic Demand Analysis and the Process of Adjustment Jacques Girod

27

3

Electricity Spot Price Modelling: Univariate Time Series Approach Régis Bourbonnais and Sophie Méritet

51

4

Causality and Cointegration between Energy Consumption and Economic Growth in Developing Countries Jan Horst Keppler

75

5

Economic Development and Energy Intensity: A Panel Data Analysis Ghislaine Destais, Julien Fouquau and Christophe Hurlin

98

6

The Causality Link between Energy Prices, Technology and Energy Intensity Marie Bessec and Sophie Méritet

121

7

Energy Substitution Modelling Patricia Renou-Maissant

146

8

Delineation of Energy Markets with Cointegration Techniques Régis Bourbonnais and Patrice Geoffron

168

v

vi Contents

9

The Relationship between Spot and Forward Prices in Electricity Markets Carlo Pozzi

186

10 The Price of Oil over the Very Long Term Sophie Chardon

207

11 The Impact of Vertical Integration and Horizontal Diversification on the Value of Energy Firms Carlo Pozzi and Philippe Vassilopoulos

225

Index

255

List of Tables 1.1 1.2 1.3 3.1 3.2 4.1 4.2

Industrial energy consumption in France: 1978–2004 Quantity and price indices Decomposition of energy intensity changes The different types of stochastic processes Data sources Key indicators for selected developing countries Comparison of empirical results from causality tests for developing countries 4.3 Testing for non-stationarity 4.4 Testing for non-stationarity – first differences 4.5 Results of Granger causality tests 4.6 Unrestricted cointegration rank test 4.7 Estimating the error correction model 5.1 LMf tests for remaining nonlinearity 5.2 Determination of the number of location parameters 5.3 Parameter estimates for the final PSTR models 5.4 Individual estimated income elasticities 5.5 Quadratic energy demand function, fixed effects model 6.1 Measured rebound effect on various devices 6.2 Part of road transport in the total consumption of oil products in 2002 6.3A ADF unit root tests – oil intensity 6.3B ADF unit root tests – oil price 6.3C ADF unit root tests – fuel rate 6.4A Unit root tests with a structural break in 1973 – oil intensity 6.4B Unit root tests with a structural break in 1973 – oil price 6.4C Unit root tests with a structural break in 1973 – fuel rate 6.5 Cointegration tests based on the Johansen ML procedure 6.6 Results of the causality tests 7.1 Market shares of fuels in France and the United Kingdom 7.2 Long-run mean price elasticities for a four-fuels model for the period 1978–2002 7.3 Long run mean price elasticities for a three-fuels model for the period 1978–2002 7.4 Long-run mean price elasticities for a four-fuels model for the period 1960–88 8.1 Dickey–Fuller and Phillips–Perron unit root tests (model with constant) vii

11 18 22 57 69 76 82 86 87 89 91 92 111 112 112 113 118 126 128 130 131 131 132 133 134 135 138 152 159 160 161 177

viii List of Tables

8.2 8.3 8.4 8.5 8.6 9.1 9.2 9.3 9.4 9.5 10.1 10.2 10.3 10.4 10.5 10.6 11.1 11.2 11.3 11.4 11.5 11.6

Synthesis of Johansen–Juselius cointegration test results Synthesis of the Johansen–Juselius cointegration tests (period 1991–8) Synthesis of Johansen–Juselius cointegration tests (period 1999–2005) Number of VAR lags Estimation of the France–Germany VECM (1992–2005) OLS statistics for single business day estimations ARMA estimation statistics GMM estimation statistics EGARCH estimation statistics Residual distribution statistics Quadratic trend estimated on the sample (1865; 2004) Results of unit root tests Perron test’s equation Critical values of the asymptotic distribution of tα when λ = 0.4 − 0.6 according to Perron’s simulations OLS initialization of the Kalman filter Kalman filter estimation Basic portfolios Basic and integrated portfolios Equation (11.1): OLS statistics, full dataset – basic and integrated portfolios Equation (11.1): OLS statistics, entire dataset – aggregated portfolios Equation (11.2): OLS statistics, entire dataset – aggregated portfolios Rolling regressions: estimation statistics, equation (11.2)

178 179 180 180 181 197 198 200 202 203 209 213 215 216 222 222 229 230 237 243 245 246

List of Figures 1.1 1.2 2.1 3.1 3.2 5.1 5.2 5.3 7.1 8.1 8.2 9.1 9.2 9.3 10.1 10.2 11.1 11.2 11.3 11.4 11.5 11.6 11.7 11.8

Comparison between the Törnqvist aggregate index and the toe-aggregate index Decomposition of energy intensity changes Industrial energy consumption, average price and value added/GDP: France 1978–2002 Simplified strategy for unit root tests Evolution of the spot price of electricity expressed in logarithms (LPRIX) Commercial energy intensity in selected countries Transition Function with m = 1 and c = 0 (analysis of sensitivity to the slope Parameter) Individual PSTR and FEM income elasticities (1950–99) Energy cost shares in French and British industrial sectors in per cent Gas network and interconnection map of Europe Biannual evolution of the price of gas for industrial use Adjusted basis vs. residual load Adjusted basis vs. ARMA modelled residual load Adjusted basis vs. EGARCH modelled residual load Log price of crude oil in 2005 dollars (1865–2004) Log oil price forecasts Portfolio positioning and value in the mean-return/market beta space Vertically integrated vs. non-integrated oil portfolios: risk-adjusted returns Vertically integrated vs. non-integrated natural gas portfolios: risk-adjusted returns Vertically integrated vs. non-integrated power portfolios: portfolio values and risk-adjusted returns I Vertically integrated vs. non-integrated power portfolios: portfolio values and risk-adjusted returns II Horizontal diversification between oil and natural gas: absolute and risk-adjusted returns I Horizontal diversification between oil and natural gas: absolute and risk-adjusted returns II Horizontal diversification between natural gas and power: portfolio values and risk-adjusted returns I

ix

12 23 40 61 62 99 107 117 153 173 176 196 198 202 210 223 236 238 239 240 240 242 242 243

x

List of Figures

11.9 11.10 11.11 11.12 11.13

Horizontal diversification between natural gas and power: portfolio values and risk-adjusted returns II Horizontal diversification: all fuels, aggregated portfolios Horizontal diversification: mean rolling regressions results Market risk dynamics Cumulated excess returns

243 244 247 248 249

Notes on the Contributors Marie Bessec is Assistant Professor in Economics and member of the EURIsCO research centre at Dauphine University in Paris. She has published several articles on econometric modelling in macroeconomics. Régis Bourbonnais is Assistant Professor at Dauphine University and specializes in econometrics. He is the author of several books on econometrics and sales forecasting (Prévisions des ventes with J. C. Usinier, 2001, Econométrie, 2003, Analyses des séries temporelles en Economie, 2004). He also is the co-director of the Master in Logistics at Dauphine University. Sophie Chardon works at Natexis Banques Populaires, the financing and investment bank of the Banque Populaire Group, where she specializes in fixed income quantitative analysis. She holds an advanced degree in energy and environment economics from Toulouse University and a MSc in Statistics and Economics from ENSAE, the French ‘Grande Ecole’ for Statistics and Economic Administration. Jean-Marie Chevalier is Professor of Economics at Dauphine University in Paris and Director of the Centre de Géopolitique de l’Energie et des Matières Premières (CGEMP). He is also a senior associate with the Cambridge Energy Research Associates (CERA). He has published a number of books and articles on industrial organization and energy. His latest book is Les grandes batailles de l’énergie. Nathalie Desbrosses works at ENERDATA, an independent company specializing in the energy and environment sectors, where she specializes in energy demand forecasting. She holds an advanced degree in energy economics and modelling from the Institut Français du Pétrole. Ghislaine Destais is Assistant Professor in Economics at Pierre Mendès France University in Grenoble and a member of the Energy and Environment Policy Department(LEPII-EPE). Her principal area of expertise is energy and economic modelling. She is also an engineer of the Ecole Centrale de Lille and the author of a software package which measures the profitability of firms in relation to their global productivity. Julien Fouquau is a PhD student in Economics at the University of Orléans. His work deals with Panel Threshold Regression models. The aim of his dissertation is to apply this methodology to various economic problems, with a special FOCUS on threshold effects in data dynamics. Patrice Geoffron is Professor of Economics at Dauphine University in Paris and vice-president for International Relations. He is senior researcher at the xi

xii Notes on the Contributors

Centre de Géopolitique de l’Energie et des Matières Premières (CGEMP). His main area of research is the industrial organization of network industries. Jacques Girod is Director of Research (CNRS) at the Energy and Environmental Policy Group, LEPII Laboratory Grenoble, France. His areas of research are energy in developing countries and energy planning and modelling. He is also the author of several books on these topics. Christophe Hurlin is Professor of Economics at the University of Orleans. He teaches econometrics in the Master of Econometrics and Applied Statistics of the University of Orleans and at Dauphine University, Paris. His principal areas of research are econometrics of panel data models and time series models. Jan Horst Keppler is Professor of Economics at Dauphine University in Paris and Senior Researcher at the Centre de Géopolitique de l’Energie et des Matières Premières (CGEMP). He held previous appointments with the International Energy Agency (IEA) and the Organisation for Economic Co-operation and Development (OECD). His main areas of research are electricity markets and energy and development. Sophie Méritet is Assistant Professor in Economics at Dauphine University and is a member of the Centre de Géopolitique de l’Energie et des Matières Premières (CGEMP). After completing her PhD in Economics at Dauphine University, she worked for two years in Houston, Texas, in the energy industry. She published several articles on the deregulation process in the electricity and natural gas industries in the US, Europe and Brazil. Carlo Pozzi is Associate Researcher with the Centre de Géopolitique de l’Energie et des Matières Premières (CGEMP) at Dauphine University Paris and a Lecturer at the Department of Finance of ESSEC Graduate School of Business in Paris. A graduate of Bocconi University, he holds a doctorate and a master in International Relations with a specialization in International Finance from the Fletcher School at Tufts University. Patricia Renou-Maissant is Associate Professor at the University of Caen and member of the Centre for Research in Economics and Management (CREM). Her research deals with applied econometrics in the fields of energy and money demands. Published works concern interfuel and monetary assets substitution modelling and analysis of convergence of money demands in Europe. Philippe Vassilopoulos is a PhD student in Economics at the Centre de Géopolitique de l’Energie et des Matières Premières (CGEMP) of Dauphine University and cooperates closely with the French Energy Regulatory Commission (CRE). His research focuses on price signals and incentives for investments in electricity markets.

Introduction: Energy Economics and Energy Econometrics Jean-Marie Chevalier

Energy is today, more than ever, at the core of the world economy and its evolution. One of the major challenges of the century is to generate more energy, to facilitate access to energy and economic development of the poor, but also to manage climate change properly in a perspective of sustainable development. The growing importance of energy matters in the daily functioning of the world economy reinforces the need for a stronger relationship between energy economics and econometrics. Econometrics is expected to improve the understanding of the numerous, interconnected, energy markets and to provide quantitative arguments that facilitate the decision-making process for energy companies, energy consumers, governments, regulators and international organizations. Econometrics is a tool for meeting the energy and environmental challenges of the twenty-first century. The academic field of energy economics has been completely transformed in the last twenty years. Market liberalization and globalization have accelerated for the oil industry, but also, more dramatically, for the natural gas and power industries. New economic issues that emerge in energy economics are combining macro-economics, investment decisions, economy policy, but also industrial organization and the economics of regulation. In addition, the approach to energy economics has to be multi-energy because the growing complexity of markets open new opportunities for inter-fuel substitution and fuel arbitrages. Another factor is rapidly emerging: the concern for protecting the environment by reducing greenhouse gas emissions. All these changes have to be explained and analysed, with the econometric instruments that have been developed recently. Historically, the energy sector has always had very good data infrastructure – even if these data are sometimes in dire need of interpretation. This data base and the growing complexity of energy markets allow the extensive use of econometric techniques. The development of econometric methods has accelerated considerably in the last twenty years, in parallel with the development of the new technologies of information and communication. Research work on non-stationary time series, unit root testing and co-integration opened the door for a renewed analysis of time series. Autoregressive conditional heteroskedasticity offers new modelling opportunities for analysing volatility. Nobel Prize xiii

xiv Introduction

winners Daniel McFadden and James Heckman (2000), Robert Engle and Clive Granger (2003) symbolize this recent development and the importance of econometrics in modern economic analysis. For energy economists, facing an increasing number of data, the use of sophisticated econometric tools is becoming essential and can be easily achieved by simple web browsing. Through the net, they can access data and initiate the implementation of advanced econometric software algorithms, rapidly producing graphics and other results. All these arguments show that energy economics and econometrics are interlocked. A new research programme has to be launched. However, there is no single manual on the use of econometric techniques in the energy sector currently available. The work currently done on energy econometrics is widely dispersed in specialized journals and company research departments that often have limited circulation. This book, written and edited jointly by energy economists and econometricians, offers to the practitioner an introduction to the state of the art in econometric techniques, while showing some of the most pertinent applications to the daily issues arising in energy markets. Not all energy issues that call for econometric analysis are covered in this book. The field is virtually unlimited. A great number of other applications could be surveyed but the book should, nevertheless, provide a referential framework. Using econometric methods in the field of energy economics implies having a global vision of the world energy sector at the beginning of the twenty-first century. The purpose of this introduction is, therefore, to avoid the ‘pure’ economic and econometric approach without losing track of energy realities and associated challenges. Our global energy consumption comes from oil (37 per cent) coal (23 per cent) and natural gas (21 per cent). This means that more than 80 per cent of final energy consumption is produced through fossil resources that are, by nature, exhaustible. However, one should keep in mind that energy consumption is not a target per se. Energy production and transformation are directly related to human needs for: heating, cooling, l...