Peter Zweifel

Uranium and Nuclear Energy

The peaceful use of nuclear energy began in the 1950s with the assumption that it would make electricity abundantly available at low cost. However, mistrust of this energy technology has been salient from its beginnings. After the nuclear catastrophe of 1986 in Chernobyl, Ukraine, public acceptance of nuclear energy plummeted in industrial countries even though the Chernobyl reactor was of a very different design from those common in Western models. The following issues are addressed in this chapter:

Bottom-Up Analysis of Energy Demand

Traditionally, energy economics has dealt with energy supply rather than demand. In contrast, this book gives demand precedence over supply, in keeping with the rule that without a minimum demand, supply does not come forth. Energy demand is often discussed in relation to the question of how to achieve ‘energy savings’, a term devoid of meaning without some prior knowledge of the factors affecting energy demand. These factors importantly derive from the profit-seeking actions of business managers and utility-oriented actions of consumers.

Markets for Liquid Fuels

This chapter focuses on markets for crude oil and oil products including gasoline, kerosene, diesel, heating oil, as well as biogenic fuels such as biodiesel, bioethanol, and synthetic fuels. Since the mid-twentieth century, crude oil has been the world’s most important energy source. However, the future prospects of crude oil are more unclear than ever. A lot of issues have to be analyzed: What is the development of oil extraction? What technical and economic consequences are to be expected if conventional crude oil extraction falls short of the demand for liquid fuels? What about the so-called peak oil hypothesis from an economic perspective? At what oil prices would alternative fuels, such as unconventional oils, biogenic fuels, and liquefied coal become competitive? How can the structure of the oil industry be explained in economic terms? What is the role of governments in exporting and importing countries? What are the influences on the price of oil in the short, medium, and long term? What is the relationship between spot and future prices? To what extent are oil prices influenced by speculation?

Markets for Gaseous Fuels

This chapter discusses markets for natural gas, biogas, and hydrogen. While the markets for biogas and hydrogen are still in their infancy, natural gas ranks third globally among primary energy sources (after crude oil and hard coal). One of its advantages are technologies with high fuel efficiencies which release relatively little carbon dioxide (CO2). Another advantage is the fact that existing infrastructure can be used for distributing gas from new, unconventional reserves. On the other hand, its transportation calls for a capital-intensive and geographically inflexible network of pipelines which cannot be used for other purposes and is therefore factor-specific . This raises several questions concerning the properties of natural gas markets: Are pipeline investments economically viable without long-term contracts? Can market liquidity for gas be achieved without abolishing long-term contracts? How can supply be secured in the absence of long-term contracts? Is vertical integration along the value chain economically beneficial or not? Can liquid natural gas (LNG) play the role of a game changer, making consuming countries less dependent on suppliers with monopoly power and political clout?

Top-Down Analysis of Energy Demand

The practical use of bottom-up models for analyzing energy demand is faced with significant micro-data requirements. In order to keep such models manageable, the individual components of energy demand are usually linked to the same macroeconomic variables such as the Gross Domestic Product (GDP), per-capita income, and relative energy prices. This gives rise to the question, “Why not model energy demand directly as a function of these macro variables?”. This macro approach is presented in this chapter, exploring the role of population growth, economic growth, and in particular changes in relative prices. However, this approach raises issues of its own: How does one differentiate between short-term and long-term adjustments of demand? Do rising and declining prices have the same effect on energy demand? How can the effects of technological change be isolated from the effects of changes in energy prices? Is the relationship between energy and other production inputs, in particular capital, substitutive or complementary?

Energy Reserves and Sustainability

The finiteness of fossil energy sources gives rise to the question of whether sustainable economic development is possible at all since these resources will increasingly become scarce and even cease to be available. Resource economics—the theory of dealing with the efficient use of exhaustible resources—has been addressing this problem. Grounded in the pertinent economic models, this chapter revolves around the following issues: How are energy reserves measured and how large are they? What is the optimal extraction strategy for the owners of an exhaustible resource? What is the optimal rate of extraction from a welfare point of view? Does market failure occur, i.e. are there systematic deviations from the optimal extraction path? What are the consequences of the increasing physical scarcity of energy sources for the price of energy? How far can these prices rise?

Economics of Electrical Grids

The electrical grid connects generators and customers. Without it, no electricity market is possible. For enabling competition among generators and retailers, third party access to the electrical grid must be assured on terms that are transparent and nondiscriminatory. From an economic point of view, electrical grids represent both a natural monopoly and an essential facility. This confers a dominant market position upon vertically integrated utilities and power grid operators that may be abused. To prevent this and the concomitant welfare losses, power grids need to be regulated.

Markets for Electricity

The electric value chain consists of the following elements: generation, wholesale trade, transmission, distribution, marketing, and metering. In many countries around the world, vertically integrated utilities used to assume all of these functions similar to the vertically integrated companies in other energy sectors (see Sect. 8.2.1). For several reasons, the European Union has mandated the electric industry to unbundle the grid from its other activities along the value chain (see Sect. 13.2.4). Therefore, it seems reasonable to structure the economic analysis of power markets accordingly. In this chapter the economic aspects of electricity generation and sales are discussed, whereas Chap. 13 is devoted to the economics of transmission and distribution.

Markets for Solid Fuels and CO 2 Emissions

Solid fuels are hard coal, lignite, and firewood. Their common properties are low energy densities resulting in high cost of transportation which in turn limits competition in solid fuel markets. Thanks to reduced costs of coal extraction, productivity increases in maritime transport, and reduced public subsidies, a global market for hard coal has nevertheless developed.

Energy in Science and Engineering

Energy markets cannot be analyzed without discussing the relationship between energy and the natural sciences. Energy itself is a term with origins in physics. All types of energy conversion are based on physical, chemical, or biological processes. Professional statements regarding energy economics require an appropriate usage and correct interpretation of basic thermodynamic principles and properties.