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Working Papers

Can Forward Commodity Markets Improve Short-Term Market Performance? Evidence from Wholesale Electricity

Akshaya Jha, Frank Wolak
Program on Energy and Sustainable Development , 2019

Economists traditionally argue that forward commodity markets allow more efficient risk-sharing and information aggregation. However, there is little empirical evidence that commodity markets provide economic benefits to producers and consumers of the commodity. This paper demonstrates that the introduction of financial trading to California’s electricity market on February 1st, 2011 improved price discovery and lowered production costs.

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Working Papers

Transformation and Modernization of the Wholesale Electricity Market in Colombia

Frank Wolak
Program on Energy and Sustainable Development , 2019

This report provides recommendations on the six topic areas in the transformation and modernization theme “Competition, participation and structure of the electricity market.” These are: (1) investment, reliability charges, and contracts; (2) generation diversification, of Non-Conventional Renewable Energy Sources (NCRES) and greater number of agents; (3) new services and agents: storage systems and aggregators; (4) restrictions, nodal prices and infrastructure; (5) market structure; and (6) pathways to de-carbonization and implications for market design.

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Working Papers

Reference Dependence in the Demand for Gasoline

Laurence Levin, Matthew S. Lewis, Frank Wolak
Program on Energy and Sustainable Development , 2019

Recent behavioral models of reference-dependent or context-dependent preferences have posited that consumers form reference points or consideration sets based on expectations. We investigate this hypothesis empirically within the retail gasoline market. Given that gasoline consumers have been shown to form price expectations based on past price lev- els, reference- or context-dependence would likely cause gasoline demand to become more price-sensitive when prices are high relative to the recent past (i.e., higher than expected).

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Working Papers

Measuring the Impact of Own and Others' Experience on Project Costs in the U.S. Wind Generation Industry

John W. Anderson, Gordon Leslie, Frank Wolak
National Bureau of Economic Research , 2019

We investigate the relationship between accumulated experience completing wind power projects and the cost of installing wind projects in the U.S. from 2001-2015. Our modeling framework disentangles accumulated experience from input price changes, scale economies, and exogenous technical change; and accounts for both firm-specific and industry-wide accumulated experience.

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Journal Articles

The benefits of purely financial participants for wholesale and retail market performance: lessons for long- term resource adequacy mechanism design

Frank Wolak
Oxford Review of Economic Policy , 2019

In April 2015, Singapore introduced an anonymous futures market for wholesale electricity. Using data on prices and other observable characteristics of all competitive retail contracts signed from October 2014 to March 2016, a larger average quantity of open futures contracts that clear during the term of the retail contract a month before the retail contract starts delivery predicts a lower price for the retail contract. This outcome is consistent with increased futures market purchases by independent retailers causing lower retail prices.

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Working Papers

Market power and incentive-based capacity payment mechanisms

Shaun McRae, Frank Wolak
Program on Energy and Sustainable Development , 2019

Capacity markets provide guaranteed payments to electricity generation unit own- ers for having the “firm capacity” to produce electricity. Historically, these markets are plagued by the weak incentives they provide for plants to be available during high-demand hours. The reliability payment mechanism in the Colombian electricity market provides market-based incentives for plants to produce during periods of system scarcity. This market has served as a model for the design of capacity markets in a number of jurisdictions in North America and Europe.

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Books

Coal

Mark C. Thurber
Polity , 2019

By making available the almost unlimited energy stored in prehistoric plant matter, coal enabled the industrial age – and it still does. Coal today generates more electricity worldwide than any other energy source, helping to drive economic growth in major emerging markets. And yet, continued reliance on this ancient rock carries a high price in smog and greenhouse gases.

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Journal Articles

The Role of Efficient Pricing in Enabling a Low- Carbon Electricity Sector

Frank Wolak
International Association for Energy Economics , 2019

Producers and consumers will make the investments and innovations necessary to transition to a low carbon electricity supply industry only if they are compensated for their efforts. In the absence of explicit government support for these activities, this outcome will occur only if wholesale and retail prices provide this compensation. Efficient wholesale and retail pricing provides compensation for the cost-effective deployment of these innovations. Multi-settlement locational marginal pricing markets set efficient short-term wholesale electricity prices.

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Commentary

Tax brown energy or subsidize green? The choice is easy

Frank Wolak
The Hill , 2019

Progressive Democrats assert that the Green New Deal is the best way to reduce global greenhouse gas emissions.

But this claim ignores the fact that subsidizing “green” energy technologies, such as wind and solar, is less effective than taxing the greenhouse gas emissions produced by brown energy sources, such as oil, natural gas and coal.

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Working Papers

Can Incentives to Increase Electricity Use Reduce the Cost of Integrating Renewable Resources?

Laura M. Andersen, Lars Gårn Hansen, Carsten Lynge Jensen, Frank Wolak
National Bureau of Economic Research , 2019

We report results from a large field experiment that with a few hours prior notice provided Danish residential consumers with dynamic price and environmental signals aimed at causing them to shift their consumption either into or away from certain hours of the day. The same marginal price signal is found to cause substantially larger consumption shifts into target hours compared to consumption shifts away from target hours.

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Working Papers

Benchmark Regulation of Multiproduct Firms: An Application to the Rail Industry

Wesley W. Wilson, Frank Wolak
National Bureau of Economic Research , 2019

A number of formerly regulated multiproduct industries have a transitional or permanent residual regulatory mandate to protect consumers from "excessive" prices. The legislation that deregulated most rail rates contains a statutory mandate for the regulator to protect shippers from "excessive" prices. Fulfilling this mandate has been challenging because of the cost and administrative burden to shippers in obtaining regulatory relief.

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Commentary

A carbon tax to fund increased border security?

Frank Wolak
The Hill , 2019

As the old saying goes, politics makes strange bedfellows.  A national carbon tax to fund increased border security fits that description. President Trump's request for these funds is a major sticking point with Democrats in the current budget impasse. However, many of the younger generation of Democrats elected to the House in the midterm election strongly support government action to address the climate challenge. 

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Journal Articles

Comparing auction designs where suppliers have uncertain costs and uncertain pivotal status

Par Holmberg, Frank Wolak
RAND Journal of Economics , 2018

We analyze how market design influences bidding in multiunit procurement auctions where suppliers have asymmetric information about production costs. Our analysis is particularly relevant to wholesale electricity markets, because it accounts for the risk that a supplier is pivotal; market demand is larger than the total production capacity of its competitors. With constant marginal costs, expected welfare improves if the auctioneer restricts offers to be flat. We identify circumstances where the competitiveness of market outcomes improves with increased market transparency.

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Working Papers

Assessing Opportunities for Solar Lanterns to Improve Educational Outcomes in Rural Off-Grid Regions: Challenges and Lessons from a Randomized Controlled Trial

Ognen Stojanovski, Mark Thurber, Frank Wolak, George Muwowo, Kat Harrison
Program on Energy and Sustainable Development , 2018

Solar lanterns are promoted across rural Sub-Saharan Africa to improve both lighting in homes and educational outcomes. We undertake a randomized controlled trial in Zimba District, Zambia, to evaluate whether solar lanterns help children study more effectively and improve academic performance. Our research design accounts for potential income effects arising from the giveaways of lanterns and also “blinds” participants to the study’s purpose.

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Policy Briefs

Gas-to-Power Value Chain

Mark Thurber
Energy for Growth Hub , 2018

Many countries with electricity shortages - such as Nigeria, Ghana, Mozambique, and Tanzania - have large gas reserves but face challenges developing gas for power.

The gas-to-power value chain can break down in many places and is rarely financially viable if the power sector is not.  Successful development of domestic gas for domestic power requires careful attention to gas and electricity pricing.  International companies and governments may be incentivized to take the more straightforward payout from exports, even where domestic gas use could add more value to the economy.

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Working Papers

The Evidence from California on the Economic Impact of Inefficient Distribution Network Pricing

Frank Wolak
National Bureau of Economic Research , 2018

Charging full requirements customers for distribution network services using the traditional cents per kilowatt-hour (KWh) price creates economic incentives for consumers to invest in distributed generation technologies, such as rooftop solar photovoltaics, despite the fact that marginal cost of grid-supplied electricity is lower.

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Policy Briefs

Reports of the Demise of Carbon Pricing are Greatly Exaggerated

Frank Wolak
Stanford Institute for Economic Policy Research (SIEPR) , 2018

Abstract

Politicians in a number of jurisdictions with cap-and-trade markets for greenhouse gas (GHG) emissions or carbon taxes have argued that the evidence is in and the conclusion is clear: Carbon pricing doesn’t work. A number of journalists and environmental groups have jumped on the bandwagon, amplifying a misguided message.

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Working Papers

The Competitive Effects of Linking Electricity Markets Across Space and Time

Thomas Tangeras, Frank Wolak
Program on Energy and Sustainable Development , 2018

We show that a common regulatory mandate in electricity markets that employ locational marginal pricing (LMP) requiring all electricity retailers to purchase their wholesale electricity at the same quantity-weighted average of these prices can improve the performance of imperfectly competitive wholesale electricity markets. Linking loca- tional markets strengthens the incentive for vertically integrated firms to participate in the retail market, which increases competition in the short-term wholesale market.

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Policy Briefs

Gas-fired generation in a high-renewables world

Mark Thurber
Stanford Natural Gas Initiative , 2018

Are gas and renewables good for each other, or are they on a collision course?  We explored this question using a multi-player, web-based game.

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Working Papers

The strategic effects of lack of transparency and forward contracting by generators with market power

Ekaterina Moiseeva, Mohammad Reza Hesamzadeh, Derek W. Bunn, Darryl R. Biggar
2018

The ability of an electricity-generating firm with market power to influence the market price depends strongly on the volume the firm has pre-sold in the forward, or hedge, markets. However, the choice of hedge level may be a strategic decision in itself. In this analysis we show that the profit-maximizing choice of the hedge level depends on the extent to which the hedge price varies with the firms hedging decision, which relates to the transparency of the forward market. A lack of transparency results in the hedge price being independent of the firms hedge level.

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Journal Articles

Optimal offer-bid strategy of an energy storage portfolio: A linear quasi-relaxation approach

Egill Tómasson, Mohammad Reza Hesamzadeh, Frank Wolak
Applied Energy , 2018

This paper proposes a model of the behavior of an expected profit-maximizing merchant storage owner with the ability to exercise unilateral market power. The resulting non-linear bilevel optimization problem is transformed into a single-level stochastic bilinear program using the Karush-Kuhn-Tucker conditions of the lower-level Independent System Operator dispatch problem. By discretizing the offers and bids of the merchant storage owner, the problem is formulated as a stochastic disjunctive program.

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Journal Articles

High Frequency Evidence on the Demand for Gasoline

Laurence Levin, Matthew S. Lewis, Frank Wolak
American Economic Journal , 2017

Daily city-level expenditures and prices are used to estimate the price responsiveness of gasoline demand in the United States. Using a frequency of purchase model that explicitly acknowledges the distinction between gasoline demand and gasoline expenditures, the price elasticity of demand is consistently found to be an order of magnitude larger than estimates from recent studies using more aggregated data. Estimating demand using higher levels of spatial and temporal aggregation is shown to produce increasingly inelastic estimates.

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Journal Articles

Rural energy access through solar home systems: Use patterns and opportunities for improvement

Ognen Stojanovski, Mark C. Thurber, Frank Wolak
Energy for Sustainable Development, Volume 37 , 2017
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Policy Briefs

The costs of fossil-free development

Mark Thurber
Stanford Natural Gas Initiative , 2017

Climage change is a serious global threat with impacts that are already being felt.  In response, a growing number of environmentalists are taking the position that there should be no new energy developments that involve fossil fuels in any form.

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