Journal of Energy Markets

Derek W. Bunn
London Business School

It is well known that trading in the energy markets has, for a long time, been dominated by oil. In this context, arbitrage strategies on various forms of spreads have been a primary focus. This is still the case and new opportunities continue to be sought. Thus, in the first paper in this issue of The Journal of Energy Markets, “Locational arbitrage strategies for Shanghai crude futures”, Helyette Geman, John Miller and Yuanye Ma analyze the crude oil futures introduced on the Shanghai Energy Exchange in March 2018 and look at the locational trading strategies they could motivate. These futures offer unique optionality in terms of delivery location and crude oil type. Geman et al propose an example of locational arbitrage that is hedged against foreign risk, since the contracts are the only oil futures to be denominated in Chinese currency.

Moving away from oil markets, in the energy transition toward low-carbon technologies, hydrogen has become very topical in recent years. In this issue’s second paper, “Scaling up hydrogen production in France: learning rates versus economies of scale strategies”, Rodica Loisel and Lionel Lemiale provide various insights on the infrastructure of hydrogen production in order to achieve an economic vision for electrolyzer planning in France. By means of a power plant dispatching model, they evaluate the potential for hydrogen production using the surplus capabilities of renewables and nuclear power. Their results show that intermittency in generation is passed on to the electrolyzers, leading to low capacity factors and unclear business models. Installing multiple decentralized electrolyzers could benefit learning rates, and it seems to be a better strategy than installing a few large electrolyzers with potential economies of scale. However, unless it is likely that there will be a high dependence on imported hydrogen, the cost of French hydrogen production would have to increase by 2050 due to low capacity and low surplus energy. As a consequence, a massive deployment of clean hydrogen production would also require ambitious investment in power generation with dedicated wind and solar power farms.

Further, on the topic of capacity adequacy in electricity, the role of capacity markets in achieving national reliability standards is now actively debated. The so-called forward capacity market could on its own compensate for the potential failure of the wholesale electricity markets, and could secure adequate investment going forward. Thus, in “An experimental study of capacity remuneration mechanisms in the electricity industry”, our third and final paper, Céline Jullien, Haikel Khalfallah, Virginie Pignon, Stéphane Robin and Carine Staropoli observe that Europe is heading toward a patchwork of different, uncoordinated national capacity mechanisms, driven by different policies, needs and constraints. The authors propose a generic capacity remuneration mechanism. The results from their laboratory experiments confirm that this mechanism gives better incentives to invest in new capacity than the energy-only market alone. The forward capacity market contributes to lower energy market prices in peak periods and lower average energy costs if the social cost of unserved energy is also taken into account.