International Handbook on the Energy Economics

Citation

Bhattacharyya, S. (2010), "International Handbook on the Energy Economics", International Journal of Energy Sector Management, Vol. 4 No. 3, pp. 482-486. https://doi.org/10.1108/17506221011073905

The energy sector has seen significant developments since the aftermath of the first oil shock in 1970s. From a level of limited understanding of the issues related to the sector, there has been a significant build‐up of knowledge. In the three decades that followed since the first oil shock, the energy sector has experienced a wide range of influences. First, the rise in concerns about global warming required a very long‐term understanding of the implications of energy use. This has led to the development in very long‐term analysis covering 50‐100 years. Second, due to the changes in the market operations with the arrival of competitive market segments in various energy industries, especially in the case of electricity, the focus has shifted to short‐term decision making covering hours or days, essentially for operational purposes. But the drive for competitive markets has also led to concerns about the security of supply and long‐term investment in infrastructure to deliver the objectives of low carbon future and new technologies. Concurrently, a large section of the global population does not have access to clean energies and rely on traditional energies to meet their needs and following the present trend of economic development, this problem is expected to continue for decades to come. At the same time, vast improvements in computing and communication facilities and the emergence of low‐cost computing and internet facilities have dramatically changed the data processing and analytical capabilities. These in association with the advancements in the analytical tools have resulted in a global proliferation of analysis on energy issues.

This latest addition to the edited handbook family dealing with the economics of energy attempts to provide the state‐of‐the art review of the developments in the field through a collection of 33 chapters covering a wide range of topics. Unlike other edited books where the editors either put together conference papers or present a collection of previously published works, this book contains chapters that were specifically commissioned for the purpose of this handbook. Consequently, the book provides a fresh contemporary outlook on the subject by compiling an accessible set of works covering theoretical and policy‐oriented aspects suitable for the wider readership of the subject. The introduction to the book by the editors confirms this.

The first chapter by Roger Fouquet provides a long‐term historical review of the evolution of global energy demand. While this chapter shows the great effort put in compiling the historical information, it is surprising that the author does not acknowledge some serious prior research in this area, especially those by IIASA (Nakicenovic et al., 1998; and Grubler and Nakicenovic, 1996) dealing with energy transition.

The second chapter by Thomas Weyman‐Jones provides a succinct overview of the basics of energy economics starting with the cost‐benefit framework and using this to derive the common pricing and resource allocation issues in competitive and other market structures. Although the chapter is mathematically oriented, this should have a wider appeal because of its simplified but rigorous presentation of a large set of issues. The economics of energy supply is then presented in Chapter 3 by Kenneth Medlock III. The chapter outlines the Hotelling theory of extraction of exhaustible resources and presents extensions to the basic model to take care of additional features. The chapter also considers how the theory fares in explaining the developments in oil prices and provides a comment on peak oil. However, the chapter does not enter into the specific features of fossil fuel supply and no other chapter deals with such issues. Further, the case of renewable energies does not find in the chapter or in the book. This is surely a pity for a twenty‐first century handbook of this type.

Chapter 4 by Richard Gordon deals with energy policy issues of developed countries with a heavy emphasis on the US energy policy. The main message of the chapter is that governments tend to intervene in the markets for various reasons but ill‐informed decisions create more distortions in the market than resolving the issues. Clearly the absence of a similar chapter on the energy policies of main developing countries (China in particular) is felt. A handbook that claims to be international in its focus (as the title indicates) should have paid more attention to this aspect. In Chapter 5 Kenneth Medlock III presents the theory of energy demand. The chapter introduces the concept of energy accounting, discusses the derived nature of energy demand, presents energy intensity and concepts of dematerialisation, outlines energy demand modelling and considers elasticities of energy demand. This is followed by a chapter by David Ryan and Anndre Plourde that outlines the developments in the empirical side of demand modelling. This chapter traces the historical developments in econometric demand modelling techniques, starting with the initial applications and moving on to the “co‐integration” wave and subsequent developments in structural time series model applications. Although these two chapters cover a large ground, none of them fails to mention the engineering‐economy or end‐use modelling approach to energy demand. This omission is particularly disturbing given the extensive use of end‐use models for demand analysis.

Chapter 7 presents a pedagogic, analytical investigation into the economics of energy efficiency using a stylised small, open economy model. Using a Cobb‐Douglas function and assuming a single output and fixed local resources, the chapter discusses the effects of energy efficiency on the economy, and presents the ideas of rebound effect and back‐fire. Two other chapters – Chapter 8 by Harry Saunders and Chapter 9 by Steve Sorrel – also focus on the rebound effect. Chapter 8 provides the theoretical aspects of the concept while Chapter 9 presents a more non‐technical presentation of the definition and estimation of the concept. Clearly, there is some overlap in these chapters and it is not clear why so much emphasis is placed on the concept of “rebound” while limited attention is paid to the concept of energy efficiency. Finally, Chapter 10 by David Ryan and Denise Young discuss the issues related to the evaluation of policies promoting new technologies.

Chapters 11‐15 cover various aspects of energy modelling. Chapter 11 by Lorna Greening and Chis Bataille provides a review of the “more common or longer‐lived models” from the entire spectrum of bottom‐up or technologically oriented models. It also discusses the hybridisation of models and asks whether this genre of models will end up as top‐down models in the future. Although this chapter reviews some well‐known models (such as MARKAL, NEMS, POLES among others), the modelling principles and their mathematical representations are not covered. Chapter 12 describes the application of MARKAL model to analyse the energy issues in the UK that provided substantial inputs to the 2007 Energy White Paper. Mark Jaccard in Chapter 13 discusses integration of top‐down and bottom‐up approaches for energy‐economic analysis through an example of the CIMS model. Ian Wing explains the computable general equilibrium models in simple terms starting from the basic economic concepts, through the social accounting matrix and finally describing the implementation of the CGE modelling from a SAM. The chapter provides an example from the US to show how CGE models can be used for energy – environment analysis. Chapter 15 provides a survey of energy‐economy‐environment models (by Claudia Kemfert and Troung Troung). The neoclassical approach to this sort of modelling is pretty similar to the models already discussed – and could have been shortened. However, the ecological modelling could have been given more emphasis.

Chapters 16‐20 are descriptive chapters covering topics such as oil supply security (Chapter 16 by Hillard Huntington), petroleum taxation (Chapter 17 by Carole Nnakhle), crude oil price behaviour (Chapter 18 by Dalton Garis), the future of coal (Chapter 19 by Richard Gordon) and natural gas and electricity markets (Chapter 20 by W.D. Walls). The economic analysis of these chapters varies. For example, Chapter 16 on oil security issue mainly discusses the debate and presents studies on risk of disruption and consequent impacts for the USA. Similarly, Chapter 17 relates to upstream petroleum taxation and should have been made clear in the title of the chapter. Both of them do not present the basic analytical principles that are used in such studies. The chapter on coal appears to be a recycled version of old studies. This chapter is outrageously dated (the most recent reference used is that of 2002) and does not really capture the emergence of coal as a potential fuel. The works of Martin‐Amouroux on the subject (Martin‐Amouroux; 2008) should have been consulted at least. Finally, Chapter 20 is a brave attempt to capture the developments in the electricity and gas markets and finally did not really do justice to either. The developments that (such as the LNG industry, and more recently shale gas) have vastly influenced the gas market were not adequately considered. Similarly, the wave of renewable electricity and a distinct move towards the decarbonisation of the electricity industry did not find any mention in this chapter. The chapter also failed to link the industry reform and the security of supply concerns.

Chapters 21‐26 deal with regulation, incentives and performance of energy industries. The basic principles of incentive regulation are discussed in Chapter 21 (by Thomas Weyman‐Jones). Chapter 22 presents an analysis of regulation of power transmission and distribution costs in North America, Europe and Australia. This is followed by a chapter on the market structure (Chapter 23) in the same business segment in the developed world. The logic of including two chapters dealing with similar issues is not clear and the value addition is also questionable. Chapter 24 presented the merchant approach to transmission expansion but the book does not deal with the generation capacity expansion. Chapter 25 focuses on the efficiency of electricity and gas distribution business and reviews the methods used in such studies. It is surprising to note that the authors do not refer to the original seminal work of Farrell (1957) and subsequent studies by Charnes et al. (1978).

The following three chapters, namely Chapters 26‐28, deal with the electricity industry. Chapter 26 reviews the incentives for generators in the wholesale electricity markets. This chapter reviews the experiences from different wholesale electricity markets to find out how such markets have affected the generators' incentives in terms of pricing, operating and investment decisions. By considering the market design, market power and resource adequacy and capacity mechanisms, the authors argue that none of the markets has addressed the incentive problems completely. This is an interesting chapter and confirms that “fools rush in where angels fear to tread”. Chapter 27 is a case study of security of supply of a hydro‐dominated system – Brazil. The issue of uncertainty of supply is considered here in terms of appropriate remuneration for generators in a hydro‐dominated system. The following chapter (Chapter 28) returns to a review of retail pricing in a competitive electricity market. This chapter is actually a continuation of Chapter 26 and have the same authors. Although the chapter has an international focus, it is dominated by the US cases. The chapter also discusses the rate of return regulation – which is not really the focus of the chapter and should have been covered in one of the chapters on regulation. These three chapters have a descriptive presentation, although some have used model‐based results without presenting the models.

The last five chapters cover miscellaneous topics. There is no common theme in these and are disparate attempts to give an international credential to the book. Chapter 29 touches on Australia through a discussion on the emissions trading system. It is surprising that the book did not cover the well‐established emissions trading or cap‐and‐trade systems but thought it appropriate to include a chapter on the Australian system. Chapter 30 covers the energy derivative markets while Chapter 31 covers the issues about the developing countries. Chapter 32 links energy security with the climate change concerns while Chapter 33 presents new issues in energy policy.

Clearly, the handbook covers a good ground but as can be visualised from the above description, the organisation lacks a clear thought process. It could have followed a better sequencing of ideas and chapters. There are glaring omissions – environment, renewable energies, rural energies, energy and sustainable development, various tools for analysis, and so on. The focus remained on developed countries – that too a great emphasis on the USA and the UK. The choice of authors also shows a similar bias. This bias really challenges the international coverage of the book as claimed by the title. The exposition follows the neo‐classical tradition of economics although energy economics has hugely benefited from other traditions – especially evolutionary economics and institutional economics. The quality of the chapters varies – but being a review of the state‐of‐the art literature it should have been possible to follow a more standard approach.

Despite these limitations, the book presents a highly readable set of chapters accessible to a wider readership. The book will surely appeal any student of energy economics who wants to have a good understanding of a broad range of topics and issues. This will surely be a valuable addition to any university library.