MASSOL Olivier

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The purpose of this paper is to investigate, for the first time, whether the next day’s consumption of natural gas can be accurately forecast using a simple model that solely incorporates the information contained in dayahead market data. Hence, unlike standard models that use a number of meteorological variables, we only consider two predictors: the price of natural gas and the spark ratio measuring the relative price of electricity to gas. We develop a suitable modeling approach that captures the essential features of daily gas consumption and, in particular, the nonlinearities resulting from power dispatching and apply it to the case of France. Our results document the existence of a long-run relation between demand and spot prices and provide estimates of the marginal impacts that these price variables have on observed demand levels. We also provide evidence of the pivotal role of the spark ratio in the short run which is found to have an asymmetric and highly nonlinear impact on demand variations. Lastly, we show that our simple model is sufficient to generate predictions that are considerably more accurate than the forecasts published by infrastructure operators.

We examine the profitability of flexible routing by LNG cargoes for a single supplier taking into account uncertainty in the medium-term dynamics of gas markets. First, we model the trajectory of natural gas prices in Asia, Northern America, and Europe using a Threshold Vector AutoRegression representation (TVAR) in which the system’s dynamics switches back and forth between high and low regimes of oil price volatility. We then use the generalized impulse response functions (GIRF) obtained from the estimated threshold model to analyze the effects of volatility shocks on the regional gas markets dynamics. Lastly, the valuation of destination flexibility in LNG supplies is conducted using a real option approach. We generate a sample of possible future regional price trajectories using Monte Carlo simulations of our empirical model and determine for each trajectory the optimal shipping decisions and their profitability. Our results portend a substantial source of profit for the industry and reveal future movements of vessels. We discuss the conditional impact of destination flexibility on the globalization of natural gas markets.

We examine the profitability of flexible routing by LNG cargoes for a single supplier taking into account uncertainty in the medium-term dynamics of gas markets. First, we model the trajectory of natural gas prices in Asia, Northern America, and Europe using a Threshold Vector AutoRegression representation (TVAR) in which the system’s dynamics switches back and forth between high and low regimes of oil price volatility. We then use the generalized impulse response functions (GIRF) obtained from the estimated threshold model to analyze the effects of volatility shocks on the regional gas markets dynamics. Lastly, the valuation of destination flexibility in LNG supplies is conducted using a real option approach. We generate a sample of possible future regional price trajectories using Monte Carlo simulations of our empirical model and determine for each trajectory the optimal shipping decisions and their profitability. Our results portend a substantial source of profit for the industry and reveal future movements of vessels. We discuss the conditional impact of destination flexibility on the globalization of natural gas markets.

No summary available.

This paper examines the deployment of a shared CO2 transportation infrastructure needed to support the combined emergence of Bio-energy with Carbon Capture andStorage (BECCS) and Fossil energy with Carbon Capture and Storage ( CCS). We develop a cooperative game-theoretic approach to: (i) examine the conditions needed for its construction to be decided, and (ii) determine the break-even CO2 value needed to build such a shared infrastructure. In particular, we highlight that, as biogenic emissions are overlooked in currently-implemented carbon accounting frameworks, BECCS and CCS emitters face asymmetric conditions for joining a shared infrastructure. We thus further examine the influence of these carbon accounting considerations by assessing and comparing the break-even CO2 values obtained under alternative accounting rules. We apply this modeling framework to a large contemporary BECCS/CCS case-study in Sweden. Our results indicate that sustainable and incentivecompatible cooperation schemes can be implemented if the value of CO2 is high enough and show how that value varies depending on the carbon accounting framework retained for negative emissions and the nature of the infrastructure operators. In the most advantageous scenario, the CO2 value needs to reach 112€/tCO2, while the current Swedish carbon tax amounts to 110€/tCO2. Overall, these findings position pragmatic policy recommendations for local BECCS deployment.

The liberalization and globalization of natural gas markets have accelerated research on market integration. This thesis provides a deeper understanding of the issues and mechanisms involved. We study gas market integration at three levels: local (within a country), global and mixed. First, we clarify the definition of integration and identify the methodologies used to assess it. Then we examine the impact of a political decision to merge gas balancing zones on the French market by applying spatial equilibrium theory. We continue by analyzing the integration of gas markets at the global level. Finally, we explore the internal and external markets of Russia, an exporting country whose gas sector is in the process of liberalization. We investigate the progress of reforms and their impact on its export strategy.

We examine the profitability of flexible routing by LNG cargoes for a single supplier taking into account uncertainty in the medium-term dynamics of gas markets. First, we model the trajectory of natural gas prices in Asia, Northern America, and Europe using a Threshold Vector AutoRegression representation (TVAR) in which the system's dynamics switches back and forth between high and low regimes of oil price volatility. We then use the generalized impulse response functions (GIRF) obtained from the estimated threshold model to analyze the effects of volatility shocks on the regional gas markets dynamics. Lastly, the valuation of destination flexibility in LNG supplies is conducted using a real option approach. We generate a sample of possible future regional price trajectories using Monte Carlo simulations of our empirical model and determine for each trajectory the optimal shipping decisions and their profitability. Our results portend a substantial source of profit for the industry and reveal future movements of vessels. We discuss the conditional impact of destination flexibility on the globalization of natural gas markets.

In poor developing countries, the discovery of large gas deposits often stimulates the public authorities' appetite for ambitious development strategies requiring the construction of a large national pipeline system. However, the foreign private investors financing its installation usually prefer smaller infrastructure designs that are solely intended to supply a few creditworthy industrial sites. Focusing on the situation in Mozambique, we examine whether the adoption of rate-of-return (RoR) regulation can reconcile these conflicting objectives. As a first step, we assess the magnitude of the overcapitalization generated ex ante at the planning stage by the application of RoR regulation (i.e., the Averch-Johnson effect) to the investors. Then, analyzing the ex post situation when the enlarged domestic demand materializes, we prove that the allowable rate of return can be set by the regulator to obtain ex ante the degree of overcapitalization needed ex post to serve the enlarged demand in a cost-efficient manner. We finally discuss whether RoR regulation can still protect society from monopoly prices when it is tuned to prompt an optimal degree of building ahead of proven demand.

No summary available.

The prevention of climate change is one of the priorities of the global energy policy, which aims to massively reduce greenhouse gas emissions. Faced with these challenges, it is striking that our knowledge of energy demand modeling remains imperfect because it is based largely on old empirical work and methodologies that are now outdated. The scientific objective of this thesis is twofold: to quantitatively analyze the economic determinants of energy demand and to develop new forecasting models. This thesis is structured in four chapters. The first chapter shows that natural gas consumption in France can be predicted with a simple model using only the information available to market participants. This chapter proves the existence of a long-term relationship between natural gas demand and the prices of other energies and provides estimates of their marginal impacts on observed demand levels. The second chapter empirically investigates the role of temperature in forecasting gas prices in the United States. It develops a methodology for constructing a new monthly temperature-based index. This index captures changes in the residual demand for natural gas in real time. It is used as an additional exogenous variable in structural VAR models to improve forecasts . and we show that these predictive models derived from structural models are improved by relying on real time data (not subject to revision). The third chapter proposes to use, in the case of oil, a structural model capturing expectations using non-causal VARs and to correctly identify the reactions of key oil variables to a news shock. The fourth chapter re-examines the predictive power of the convenience yield of oil and gas prices by incorporating expectations into an empirical specification, using a non-causal VAR based on storage theory that provides very competitive price forecasts in a simple bivariate framework.

In poor developing countries, the discovery of large gas deposits often stimulates the public authorities’ appetite for ambitious development strategies requiring the construction of a large national pipeline system. However, the foreign private investors financing its installation usually prefer smaller infrastructure designs that are solely intended to supply a few creditworthy industrial sites. Focusing on the situation in Mozambique, we examine whether the adoption of rate-of-return (RoR) regulation can reconcile these conflicting objectives. As a first step, we assess the magnitude of the overcapitalization generated ex ante at the planning stage by the application of RoR regulation (i.e., the Averch-Johnson effect) to the investors. Then, analyzing the ex post situation when the enlarged domestic demand materializes, we prove that the allowable rate of return can be set by the regulator to obtain ex ante the degree of overcapitalization needed ex post to serve the enlarged demand in a cost-efficient manner. We finally discuss whether RoR regulation can still protect society from monopoly prices when it is tuned to prompt an optimal degree of building ahead of proven demand.

Under way to a European integrated energy market, policymakers need to find efficient measures aimed at increasing liquidity in local natural gas markets. The paper answers the question whether a merger of gas trading zones contributes to the development of liquid trading activities through a more efficient allocation and pricing of natural gas and an increased competition between market players. We analyse the effects of a policy decision to merge two gas trading zones in France on the observed degree of spatial market integration and the efficiency of the spatial arbitrage activity between the northern and southern French gas markets. An extended parity bounds model confirms a positive impact of the zone merger on the market's spatial equilibrium and indicates the causes of remaining market inefficiencies. The model offers a tool for the assessment of the efficiency of policy decisions in the context of policy initiatives to create an integrated and liquid natural gas market in Europe.

No summary available.

Under way to a European integrated energy market, policymakers need to find efficient measures aimed at increasing liquidity in local natural gas markets. The paper answers the question whether a merger of gas trading zones contributes to the development of liquid trading activities through a more efficient allocation and pricing of natural gas and an increased competition between market players. We analyse the effects of a policy decision to merge two gas trading zones in France on the observed degree of spatial market integration and the efficiency of the spatial arbitrage activity between the northern and southern French gas markets. An extended parity bounds model confirms a positive impact of the zone merger on the market’s spatial equilibrium and indicates the causes of remaining market inefficiencies. The model offers a tool for the assessment of the efficiency of policy decisions in the context of policy initiatives to create an integrated and liquid natural gas market in Europe.

No summary available.

This note details a complete microeconomic characterization of the physical relationships between input use and the level of output of a simple point-to-point gas pipeline system and uses it to contribute to the public policy discussions pertaining to the economic regulation of natural gas pipelines. We show that the engineering equations governing the design and operations of that infrastructure can be approximated by a single production equation of the Cobb-Douglas type. We use that result to inform three public policy debates. First, we prove that the long-run cost function of the infrastructure formally verifies the condition for a natural monopoly, thereby justifying the need of regulatory intervention in that industry. Second, we examine the conditions for cost-recovery in the short-run and contribute to the emerging European discussions on the implementation of short-run marginal cost pricing on interconnector pipelines. Lastly, we analyze the performance of rate-of-return regulation in that industry and inform the regulatory policy debates on the selection of an appropriate authorized rate of return. We highlight that, contrary to popular belief, the socially desirable rate of return can be larger than the market price of capital for that industry.

This paper examines the performance of the spatial arbitrages carried out between two regional markets for wholesale natural gas linked by a pipeline system. We develop a new empirical methodology to (i) detect if these markets are integrated, i.e., if all the spatial arbitrage opportunities between the two markets are being exploited, and (ii) decompose the observed spatial price differences into factors such as transportation costs, transportation bottlenecks, and the oligopolistic behavior of the arbitrageurs. Our framework incorporates a new test for the presence of market power and it is thus able to distinguish between physical and strategic behavior constraints on marginal cost pricing. We use the case of the "Interconnector" pipeline linking Belgium and the UK as an application. Our empirical findings show that all the arbitrage opportunities between the two zones are being exploited but confirm the presence of market power. ☆ This paper has greatly benefited from the judicious comments of two anonymous referees. We are also greatly indebted to Michel Le Breton, Derek Bunn and Steven Gabriel for insightful suggestions. We have also benefited from helpful discussions with Frédéric Lantz, Yves Smeers, conference participants at ISEFI (Paris, 2016) and the 9 th Conference on Energy Markets (Toulouse, 2014) and seminar participants at the universities of Cambridge, Paris-Dauphine and Grenoble. Of course, any remaining errors are ours.

This paper examines the conditions for the deployment of large-scale pipeline and storage infrastructure needed for the capture of CO 2 in Spain by 2040. It details a modeling framework that allows us to determine the optimal infrastructure needed to connect a geographically disaggregated set of emitting and storage clusters, along with the threshold CO 2 values necessary to ensure that the considered emitters will make the necessary investment decisions. This framework is used to assess the relevance of various policy scenarios, including (i) the perimeter of the targeted emitters for a CCS uptake, and (ii) the relevance of constructing several regional networks instead of a single grid to account for the spatial characteristics of the Spanish peninsula. We find that three networks naturally emerge in the north, center and south of Spain. Moreover, the necessary CO 2 break-even price critically depends on the presence of power stations in the capture perimeter. Policy implications of these findings concern the elaboration of relevant, pragmatic recommendations to envisage CCS deployment locally, focusing on emitters with lower substitution options toward low-carbon alternatives.

This paper develops a detailed partial equilibrium model of the global helium market to study the effects of the recently decided rapid phase out of the U.S. Federal Helium Reserve (FHR), a vast strategic stockpile accumulated during the 1960s. The model incorporates a detailed representation of that industry and treats both helium producers and the FHR as players in a dynamic non-cooperative game. The goal of each player is assumed to be the maximization of discounted profit, subject to technical and resource constraints. We consider two alternative policies aimed at organizing the phase out of the FHR: the currently implemented one and a less stringent one whereby the FHR would be allowed to operate as a profit-maximizing agent during an extended period of time. Evidences gained from a series of market simulations indicate that, compared to the current policy, a less stringent policy mandate systematically increases the financial return to the U.S. federal budget, always enhances environmental outcomes as it lowers helium venting into the atmosphere, and also augments global welfare in three out of the four scenarios considered in the paper.

Purpose of Review The purpose of this paper is to clarify the definition of an integrated market and to provide a commented overview of the different empirical methodologies that have been proposed to assess the degree of spatial integration of natural gas markets. Recent Findings In recent years, the methodologies assessing gas market integration have evolved from simple empirical works based solely on price data analyses to more complex ones based on the theoretical notion of spatial equilibrium capturing the effects of both price and non-price data. Summary A number of liberalization reforms have stimulated the emergence of spatially diverse markets for wholesale natural gas interconnected through spatial arbitrage, which plays a crucial role in the determination of local prices. In recent years, a vast and rapidly growing empirical literature has emerged to examine the degree of integration of these markets. A close examination of this literature has shown that only a handful of studies pay attention to the theoretical notion of market integration and account for the role played by trade flows, capacity constraints, and unit transaction costs.

In the electricity industry, the technological progress brought about by smart grids is challenging the idea that consumers cannot react to wholesale market prices. However, the integration of Demand Response (DR) into the power system is challenged by the question of its economic efficiency. This thesis evaluates the economic value of DS by using an energy market model under uncertainty to calculate the profits of an aggregator, by consumer class and end-use. The model belongs to the class of linear stochastic multi-period problems. Its resolution is based on Stochastic Dual Dynamic Programming. It appears that in France, the profitable sectors are the industrial load-shedding and the load-shifting of cement and paper. The load-shifting of electric heating is not profitable for the tertiary and residential sectors. In addition, the capacity value of DEs is critical. Overall, DEs are becoming viable, but the development of their potential seems to be conditional on a decrease in fixed costs in smart grid technologies.

Purpose of Review: The purpose of this paper is to clarify the definition of an integrated market and to provide a commented overview of the different empirical methodologies that have been proposed to assess the degree of spatial integration of natural gas markets. Recent Findings: In recent years, the methodologies assessing gas market integration have evolved from simple empirical works based solely on price data analyses to more complex ones based on the theoretical notion of spatial equilibrium capturing the effects of both price and non-price data. Summary: A number of liberalization reforms have stimulated the emergence of spatially diverse markets for wholesale natural gas interconnected through spatial arbitrage, which plays a crucial role in the determination of local prices. In recent years, a vast and rapidly growing empirical literature has emerged to examine the degree of integration of these markets. A close examination of this literature has shown that only a handful of studies pay attention to the theoretical notion of market integration and account for the role played by trade flows, capacity constraints, and unit transaction costs.

This paper examines the performance of the spatial arbitrages carried out between two regional markets for wholesale natural gas linked by a pipeline system. We develop a new empirical methodology to (i) detect if these markets are integrated, i.e., if all the spatial arbitrage opportunities between the two markets are being exploited, and (ii) decompose the observed spatial price differences into factors such as transportation costs, transportation bottlenecks, and the oligopolistic behavior of the arbitrageurs. Our framework incorporates a new test for the presence of market power and it is thus able to distinguish between physical and strategic behavior constraints on marginal cost pricing. We use the case of the “Interconnector” pipeline linking Belgium and the UK as an application. Our empirical findings show that all the arbitrage opportunities between the two zones are being exploited but confirm the presence of market power.

This note details a complete microeconomic characterization of the physical relationships between input use and the level of output of a simple point-to-point gas pipeline system and uses it to contribute to the public policy discussions pertaining to the economic regulation of natural gas pipelines. We show that the engineering equations governing the design and operations of that infrastructure can be approximated by a single production equation of the Cobb-Douglas type. We use that result to inform three public policy debates. First, we prove that the long-run cost function of the infrastructure formally verifies the condition for a natural monopoly, thereby justifying the need of regulatory intervention in that industry. Second, we examine the conditions for cost-recovery in the short-run and contribute to the emerging European discussions on the implementation of short-run marginal cost pricing on interconnector pipelines. Lastly, we analyze the performance of rate-of-return regulation in that industry and inform the regulatory policy debates on the selection of an appropriate authorized rate of return. We highlight that, contrary to popular belief, the socially desirable rate of return can be larger than the market price of capital for that industry.

The rise of variable input renewable technologies poses many challenges to the operation of the electrical system. This system must guarantee the supply-demand balance at all times, as well as ensure high levels of service reliability. Therefore, variability increases the need for flexibility and system services. There are several options capable of providing these services, including: strengthening interconnections, smart demand management, strengthening the rapid response capabilities of generation units, and implementing electricity storage technologies. However, the current electricity markets are based on the remuneration of energy. Therefore, the full valuation of the services that storage can provide seems difficult, which restricts the business case for flexibility options.This thesis focuses on the following issues: (1) modeling and evaluating the interrelationships between variability, flexibility needs and decarbonization objectives, (2) analyzing the role, as well as the value, of different storage technologies through the French case for the 2020, 2030 and 2050 time horizons, and (3) discussing the regulatory aspects of flexibility, as well as proposing concrete energy policies that allow the success of the energy transition and decarbonization objectives of the French electricity mix.

This note details two comments on a recent policy proposal in Comello and Reichelstein (2014) aimed at favoring the early adoption of Carbon Capture (CC) technology in the next generation of thermal-based power plants to be installed in the United States. First, we examine the implications of a worst-case scenario in which no new CC is adopted internationally beyond what is in place in 2014. Second, we show the potential, under the original proposed subsidy, for the emergence of coordination failures capable of hampering the desired early CC deployment. We propose and evaluate modified schedules of tax-credits sufficient to overcome these concerns. These additions strengthen the argument in the original article: namely, though higher incentive levels are necessary, our findings confirm that the cost of the proposed policy is not out of reach.

Iran’s energy and petrochemical exports have recently been restricted by a series of international sanctions. This paper focuses on one of the country’s exports, namely methanol – a petrochemical increasingly used for fuel blending and traded at various locations worldwide – and empirically explores the relationships among the North American, European, and Asian markets to investigate the incidence of these sanctions. The analyses are conducted under a parity bounds framework based on Negassa and Myers (2007). The model was applied to the main methanol importing markets to estimate the effects of the sanctions on the degree of spatial integration. The findings document the occurrence of a complete reconfiguration of the spatial extent of the methanol markets. Under the sanctions, an increased degree of market integration was observed across the Atlantic, while fragmentation rose between Europe, South East Asia, and the two giant economies of China and India which both experienced lower prices.

This paper develops a detailed partial equilibrium model of the global helium market to study the effects of the recently decided rapid phase out of the U.S. Federal Helium Reserve (FHR), a vast strategic stockpile accumulated during the 1960s. The model incorporates a detailed representation of that industry and treats both helium producers and the FHR as players in a dynamic non-cooperative game. The goal of each player is assumed to be the maximization of discounted profit, subject to technical and resource constraints. We consider two alternative policies aimed at organizing the phase out of the FHR: the currently implemented one and a less stringent one whereby the FHR would be allowed to operate as a profit-maximizing agent during a 20-year extended period. Evidences gained from a series of market simulations indicate that, compared to the current policy, the less stringent policy mandate systematically increases the financial return to the U.S. federal budget, always enhances environmental outcomes as it lowers helium venting into the atmosphere, and also augments global welfare in three out of the four scenarios considered in the paper.

Liberalized electricity markets are assumed to provide long-term coordination of investments to ensure security of supply, sustainability and competitiveness. In the energy-only reference model, price formation by aligning the variable cost of marginal equipment in successive hourly markets provides a price signal to investors. However, in practice, this model is questioned as to its ability to trigger investments in low-carbon technologies and in particular renewable energies (RE) and as to its ability to guarantee security of supply. This thesis first seeks to characterize these two market failures and then looks at different solutions to address each of them. The results show that the replacement of non-market support mechanisms by market investments with the help of a carbon price appears to be a solution to trigger the development of RE, provided that there is a strong political commitment to a high carbon price. On the other hand, it also appears that the energy-only market with capped prices does not succeed in ensuring capacity adequacy. The addition of a capacity market or the removal of the price cap would allow for an improvement in the number of hours of load shedding and collective welfare. Moreover, the capacity market appears to be the best choice for the regulator among the market architectures considered.

This paper examines the conditions for a widespread adoption of Carbon Capture transport and Storage (CCS) by a group of emitters that can be connected to a common CO2 pipeline. It details a modeling framework aimed at assessing the critical value in the charge for the CO2 emissions required for each of the emitters to decide to implement capture capabilities. This model can be used to analyze how the tariff structure imposed on the CO2 pipeline operator modifies the overall cost of CO2 abatement via CCS. This framework is applied to the case of a real European CO2 pipeline project. We find that the obligation to use cross-subsidy-free pipeline tariffs has a minor impact on the minimum CO2 price required to adopt the CCS. In contrast, the obligation to charge non-discriminatory prices can either impede the adoption of CCS or significantly raise that price. Besides which, we compared two alternative regulatory frameworks for CO2 pipelines: a common European organization as opposed to a collection of national regulations. The results indicate that the institutional scope of that regulation has a limited impact on the adoption of CCS compared to the detailed design of the tariff structure imposed on pipeline operators.

This note details two comments on a recent policy proposal in Comello and Reichelstein (2014) aimed at favouring the early adoption of Carbon Capture (CC) technology in the next generation of thermal-based power plants to be installed in the United States.

For small resource-rich developing economies, specialization in raw exports is usually considered to be detrimental to growth and Resource-Based Industrialization (RBI) is often advocated to promote export diversification. This paper develops a new methodology to assess the performance of these RBI policies. We first formulate an adapted mean-variance portfolio model that explicitly takes into consideration: (i) a technology-based representation of the set of feasible export combinations and (ii) the cost structure of the resource processing industries. Second, we provide a computationally tractable reformulation of the resulting mixed-integer nonlinear optimization problem. Finally, we present an application to the case of natural gas, comparing current and efficient export-oriented industrialization strategies of nine gas-rich developing countries.

This paper examines the efficiency of the arbitrages performed between two regional markets for wholesale natural gas linked by a capacity-constrained pipeline system. We develop a switching regime specification to (i) detect if the observed spatial arbitrages satisfy the integration notion that all arbitrage opportunities between the two markets are being exploited, and (ii) decompose the observed spatial price differences into factors such as transportation costs, transportation bottlenecks, and the oligopolistic behavior of the arbitrageurs. Our framework incorporates a test for the presence of market power and it is thus able to distinguish between the physical and behavioral constraints to marginal cost pricing. We use the case of the “Interconnector” pipeline as an application, linking Belgium and the UK. Our empirical findings show that all the arbitrage opportunities between the two zones are being exploited but confirm the presence of market power.

Most of the recent numerical market equilibrium models of natural gas markets use imperfect competition assumptions. These models are typically embedded with an oversimplified representation of the demand side, usually a single-variable affine function, that does not capture any dynamic adjustment to past prices. To remedy this, we report an effort to construct an enhanced functional specification using the system dynamics-based model of Moxnes (1987, 1990). Thanks to a vintage representation of capital stock, this putty-clay model captures the effect of both past and current energy prices on fuel consumption. Using a re-calibrated version of this model, we first confirm the pertinence of this modeling framework to represent interfuel substitutions at different fuel prices in the industrial sector. Building on these findings, a dynamic functional specification of the demand function for natural gas is then proposed and calibrated.