Seminar: Energy Economics

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

Whether on a transmission or distribution level, power-, natural gas and district heating grids are natural monopolies. This gives rise to a wide array of questions; How can regulation be put in place to provide incentives for the monopolistic companies to secure a cost efficient provision of their network services? – and how can such regulation be enforced?

The energy market is unpredictable and heavily dependent on nature – both on the demand side and on the supply side, with a growing share of wind- and solar power in the energy mix. A seasonal demand leaves room for storage of energy (oil tanks, gas storages, thermal power pits), 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, transmission lines or gas pipelines), transportation time, political instability, storage capacity, 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. Energy prices are volatile, and depends on local as well as global conditions. This leaves room to apply financial analysis to the energy markets.

Looking at the supply side of energy, some areas are characterized by competition (i.e. the generation of power) whereas others are characterized by monopoly or oligopoly. The most obvious example is OPEC, which is a prime example of a cartel that dictates output. However the market power is not isolated to oil – there are only few major coal producers in the world, and a majority of European natural gas imports stems from one supplier.

When transporting energy across borders in Europe, a shipper will face tariffs for using the transmission grid. There are different methodologies for tariffs, and the different tariff structures hold different properties. Questions on the optimal tariff structure, the potential cross subsidization and the deadweight loss imposed by tariffs can be analyzed.

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’, market interventions, 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.