The Energy Centre Quarterly ReportNovember 2010

NOVEMBER 2010 THE ENERGY CENTRE QUARTERLY REPORT 2

1. Marsden Fund SuccessDr Judith Wang (Energy Centre), Associate Professor Matthias Ehrgott (Engineering Science) and Dr Andrea Raith (Engineering Science) were successful in winning a three-year grant from the Marsden Fund valued at $585,000. This is an outstanding achievement. Marsden grants fund “blue sky” research. Competition for these funds is fierce; this year 9.5 percent of the preliminary proposals were successful.

Dr Wang’s expertise is in transport economics and modelling. She has proposed algorithms to improve the rate of convergence in traffic assignment, methodology to consider multiple objectives in a transport network design problem and tolling analysis with bi-objective traffic assignment. She also studied extensively the modelling of market equilibrium and demand equilibrium in an oligopolistic transport market structure and their welfare implications using a game theoretical approach. Her role in this project is to focus on the development of methodologies and applications in transport and energy.

An abstract describing their project “Multiobjective network equilibria from definition to algorithms” is listed below.

Abstract We are surrounded by network structures. Everyone interacts with telecommunication, transportation and energy networks every day. Mathematical models of these physical as well as many virtual networks representing the interactions between agents in an economy can be used to predict the behaviour of the agents in the networks and hence the performance of the networks. In this research, we are interested in equilibrium problems in networks. An equilibrium in a network is a state in which no agent has an incentive to change their own behaviour, because no such change results in an improvement of

their situation. Existing theory assumes that agents use a single measure of cost or benefit to assess their situation, which is unrealistic. We investigate the more general and more realistic situation where cost and/or benefit is expressed through several incommensurate and conflicting objectives. Under this assumption, there exist multiple equilibria, and in our research we develop algorithms to find these multiple equilibria, study their mathematical properties, and their relevance in specific network types, thereby enriching the theoretical foundation of fields such as economics, transportation, supply chains, and finance.

2. Energy Research PresentationsThe aim of research workshops held in the Department of Economics is to provide an opportunity for researchers to present work in progress. These workshops can be quite informative because of their focus on work in-progress. Researchers also benefit from comments and suggestions from the various fields of economics and engineering science.

Three research workshops related to energy were held:

• 23August2010:ProfessorBryceHoolpresented an overview of his research on “The role of royalties in natural resource extraction contracts’. This topic is of great relevance to New Zealand as it seeks to attract exploration and development of energy and mineral resources.

• 28September2010:ProfessorTimHazledine presented preliminary results from his research into urban form and transportation. About one in ten journeys to work by Auckland City residents on Census Day2006were‘active’–walkingorcycling.Thepaperuses2006Censusdatatoexplaindifferences in active journey to work decisions

SUMMARY REPORT For the Energy Education Trust

Summary report for discussion at the meeting of the New Zealand Energy Education Trust, 25 November 2010.

Professor Basil Sharp, Director of the Energy Centre in The University of Auckland Business School’s Department of Economics, is pleased to provide the following summary of activities since 26 August 2010:

Professor Basil Sharp joined the Department in 1991. His research interests span the field of environmental economics and law and economics. He has a specific interest in developing microeconomic foundations for analysing mechanisms for allocating natural resources, treaties and institutional structures in general. He has also applied non-market valuation methods to a range of environmental problems in New Zealand. His current research focuses on contracting and international treaties.

NOVEMBER 2010 THE ENERGY CENTRE QUARTERLY REPORT 3

at the Area Unit (suburb) level in Auckland City. Census-derived demographic and socio-economic variables, as well as average distance travelled to work, are reasonably successful at explaining inter-Area Unit differences.

• 19October2010:DrGeoffPritchardprovided an overview of the research underway on wind energy. Wind as a source of electricity comes with numerous challenges. Beingableto“predict”windvariabilityandthe distribution of wind sites are major challenges, as is integrating supply into the grid.BartvanCampenoutlinedtheroleofgas in providing back-up capacity when the wind doesn’t blow.

BartvanCampenwasinvitedtospeakatChile’s2ndAnnualConferenceonRenewableEnergyinSantiago,Chile,on12November2010.TheworkshopwashostedbyChile’sEconomic Development Agency and was opened by the Minister of Energy.

Bart’spresentationtraversedtheenergyscene in New Zealand and the expertise at The University of Auckland in energy research and education in general and geothermal energy in particular. He will have follow-up discussions with officials on geothermal energy, natural gas and identify prospects for the industry forum scheduled for next year. The interchanges with the Universidad de Chile are most likely to pay off and result in the first student exchanges next year with a masters student studying electricity markets and a PhD doing research into geothermal energy coming to study at The University of Aucklandin2011.

BartvanCampen,RobKirkpatrick,BasilSharpandGolbonZakeriattendedtheNewZealandPetroleumConferencefrom20-23September.DrFaroukAl-Kasim’spresentationon Norway’s experience with petroleum development was well received. We met with DrAl-Kasimandfurtherdiscussedthe“Nordicmodel” of resource development. Despite the positive talk of the cooperative model, basic competitive instincts drive the industry and officials distrust government intervention.

DrAl-Kasimisalikelyprospectfortheindustry forum next year.

ProfessorAlexKemp,UniversityofAberdeen,providedanoverviewoftheUK’sapproachtopetroleumdevelopment.TheUK’sapproachwas to extract industry rents using royalties which stands in contrast to the Norwegian approach of government participation in development. These alternative approaches could provide a useful context for discussing policy in New Zealand; that is, leaving development to the private sector or enabling anSOEtoleaddevelopment,possiblyincollaboration with an overseas partner.

BasilSharpadvisedacommercialfirm

(Lanzatech) on the development of a model for analysing the economics of “Coal to ethanol” in China. The work was completed, to the satisfaction of the company, by a student from the School of Engineering. Lanzatech will now take the results of the model to market in China.

3. Summer School in Energy EconomicsThe Summer School (see Appendix A) is set to runMonday14FebruaryuntilFriday18February2011.Theprogrammehasbeenadvertised, in electronic form, in association with the Ministry of Economic Development’s energy newsletter and is posted on the Centre’s website. We have included a full one-day field trip to the Huntly power station andGenesis’selectricitytradingroom.Threespeakersfromindustry–SolidEnergy,MightyRiverPowerandChevron–haveagreedtomake presentations which will expose participants to the practical realities of energy markets. We are waiting on responses from two further speakers from Methanex and Auckland Transport, both of whom presented atthe2010SummerSchool.

4. TransportationJudith Wang was awarded a grant from The University of Auckland’s Transforming Research Initiatives (TRI) for her proposal “Transforming Auckland into a bicycle-friendly city”.

The TRI fund is titled Transforming Auckland. Valuedat$15,000thegoaloftheprojectistohelp improve sustainability in transport in the Auckland region by conducting research relevant to transforming Auckland into a bicycle friendly city.

Theresearchquestionis,‘Ifweweregoingtotransform Auckland into a bicycle-friendly city, how should we invest in bicycle infrastructure and facilities in order to maximise the benefits to society?’

In order to answer this question, a first step is to determine the motivators of, and deterrents to, cycling in Auckland. A comprehensive literature review of the lessons from international experience will be performed followed by a survey specifically designed to identify the factors influencing the choices of current and potential cyclists in Auckland. This will enable us to understand why the current bicycle modal share is so low, what the motivators that can attract potential cyclists are and, in particular, how their decisions to cycle or not are influenced by the built environment. The results and tools developed in this study will become the foundation for the development of a decision analysis tool to support policy decisions on bicycle infrastructure and facility investment in the future.

With further research, the tools can be applied to perform a more comprehensive

travel demand analysis, which will enable the estimation of utilisation of cycling facilities, and a more accurate assessment of the subsequent effect on safety, energy consumption, population health and the environment.

Judith Wang’s participation in NIWA’s research project “Towards sustainable urban form” has continued with an additional subcontract being awarded to complete stage three of the project outlined in the Centre’s August2010report.Thisresearchwillinvolveliaising with Auckland’s transport analysis and planningteam,developmentofGeographicInformationSystem(GIS)informationanditsintegration into transportation models.

5. Lord Nicholas Stern’s lecture series, 8-10 SeptemberLord Nicholas Stern presented three lectures: Lecture1,“Managingclimatechangeandpromotingdevelopment”;Lecture2,“Policiesforlow-carbongrowth;and,lecture3,“progress towards a global deal”.

Interest and attendance was overwhelming. Two 500-seat lecture theatres were at capacity and the video link with Victoria University of Wellingtonattractedafurther200.

Lord Stern’s itinerary was packed. He gave a presentation to a well attended Trans-Tasman BusinessCirclelunchandaclimatechangeseminar specifically for business leaders. He met with staff and graduate students in economics and engineering. In addition he gave a radio and Television interview, and met with the Minister of Science, Dr Wayne Mapp.

HisvisitenabledBasilSharptonetworkwiththe“100%PlanGroup”(PhilipMills,SirStephenTindall,SirGeorgeFistonich),theHonNicSmith,theHonTimGroser,DrRogerBlakely(HeadofPlanningAucklandCity)andtheLeaderoftheOpposition,PhilGoff.

This visit was a huge success and provided an excellent opportunity to lift the profile of the Energy Centre with business and the community.

6. University commercialisation event The Energy Centre participated in an event organised by the University CommercialisationOfficesofNewZealand(UNCONZ)attheBusinessSchoolon19October2010.Commercialunitsfromeachuniversity displayed their research capacity. The Centre’s contribution is listed in Appendix B.LenBrown,AucklandMayorElect,addressed attendees. The Foundation for Research Science and Technology was available to outline the government’s new technology development grant initiative.

NOVEMBER 2010 THE ENERGY CENTRE QUARTERLY REPORT 4

While the outcome of this event is unclear it did provide an opportunity to showcase the Energy Centre. In contrast to other university research centres, the Energy Centre occupies a unique position with its emphasis on cross-disciplinary research in the commercial/policy space.

7. Teaching improvement grantDrStephenPoletti(Economics)andDrGolbonZakeri (Engineering Science) were awarded a teaching improvement grant valued at $9,900. The project aims to stimulate student interest and learning in the design and implementation of electricity markets, particularly the New Zealand electricity market. The design of these markets is based on economic advanced principles of auction design. A computerised electricity market simulator will be created to allow students to play the role of firms in an electricity market.

8. Master of EnergyPlanning for teaching into the Master of Energy has progressed to the point of designing the course outline. The course (Appendix C) is designed so that the outlines for Engineering and Economics run together.

Cross-disciplinary assignments will link the two courses.

9. Publications and presentations Downward, A.*, Young, D.*, and Zakeri, G.“Swappinggenerators’assets:Marketsalvation or wishful thinking?” (accepted for publication), Energy Journal.

Ehrgott, M., Wang, J.Y.T.*, Raith, A. and Van Houtte,C.,2010.“Abi-objectivecyclistroutechoice model”, (submitted to Transportation Research Part A).

Jiang,N.AndSharpB.*20010.“Potentialeconomics benefits of a Waikato water Market”, Report to Environment Waikato, October2010.

Philpott,A.,Guan,Z.,Khazaei,J.,andZakeri,G.,“Productiveinefficiencyinelectricitymarkets with hydroelectricity”, (To appear), Utilities Policy.

Poletti,S*.2010.“Welfareimplicationsofconsumers switching to real time pricing plans with imperfect competition in electricity markets”,paperpresentedatthe11thInternational Association of Energy

Economists European Conference, Vilnius, 25-28August2010.

Raith,A.,WangJ.Y.T.*,andEhrgottM.,2010.“Biobjectivetrafficassignmenttomodelnetwork user behaviour in networks with road tolls”. Paper presented at 7th Seventh Triennial Symposium on Transportation Analysis,Norway,June2010.

Sharp,B.*andC.Huang,2010.“Managingmineral resource development:

NeitherSilverBulletnorImmaterial,paperaccepted for publication in The University of Auckland Business Review,GoldenEdition.

Young,D.*2010.“Anagent-basedmodelofthe New Zealand electricity market”, presented at the Department of Economics Workshop(September2010)andtheEPOCWinterWorkshop(October2010).

Zakeri,G.,andDownward,A.*,October2010,“A literature survey of financial transmission rights auctions”, prepared for Mighty River Power.

ZakeriG.2010“Financialtransmissionrightsauctions:Entryandefficiency”,EPOCWinterWorkshop(October2010).

* Supported by the Energy Education Trust of New Zealand

NOVEMBER 2010 THE ENERGY CENTRE QUARTERLY REPORT 5

General comments

14 February 15 February 16 February 17 February 18 February9-9.15am Welcome (Sharp)

Field visit to Huntly StationandGenesisTrading Room (van Campen, Zakeri)

Electricity market simulation (Downward

and Young)

Geothermal(Guestspeaker-JoeGammon,

MRP)

Energy and environmental policies

New Zealand and abroad (Sharp)

9.15-10.30am Introduction to economics of natural resources and energy

(Sharp)

10.30-10.45am Coffee break Coffee break Coffee break Coffee break

10.45am-12pm

Electricity market models (Young)

New Zealand electricity and gas

market (van Campen)

Transport economics and modelling (Wang)

Carbon markets: uncertainty and

investment (Poletti)

Lunch Lunch

1-2.15pm Issues in electricity markets: Regulation

and competition (Young)

World oil and gas markets: peak oil and energy security (Poletti

andKirkpatrick)

Transport planning and sustainability (Wang)

Minerals and resources (Kirkpatrickandvan

Campen)

2.15-2.30pm Coffee break Coffee break Coffee break Coffee break

2.30-4pm Emerging energy technologies, resources and

potential for New Zealand energy future (GregVisser,Solid

Energy)

Peter Morris ChevronAuckland transport

challenges and round table discussion (Peter Clark to be confirmed)

Discussion forum: Presentation by student groups and discussion

with panel (Harvey to be confirmed)

4-5pm Drinks and nibbles with Energy PhDs, Staff

and Researchers at The University of

Auckland

Drinks and nibbles with forum participants

Appendix A: Summer School in Energy Economics

14 to 18 February 2011

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Appendix B: University Commercialisation Event

NOVEMBER 2010 THE ENERGY CENTRE QUARTERLY REPORT 7

APPENDIX B UNIVERSITYCOMMERCIALISATIONEVENT

NOVEMBER 2010 THE ENERGY CENTRE QUARTERLY REPORT 8

Appendix C: Masters of Energy

Week ENERGY721EnergyResources ENERGY722EnergyTechnology

1

Topics Introduction to the competitive economic model. Introduction to thermodynamics

Lecture plan and lecturers

Static modelEfficiency

and welfare theorems

Comparative statics

1stand2ndlawsofthermodynamics

1stand2ndlawsof thermodynamics

Thermodynamic cycles

2

Topics Market imperfections and policy Introduction to thermodynamics

Lecture plan and lecturers

Market imperfections

Gametheory–Cournot

model

Policy instruments

Thermodynamic cycles

Chemical thermodynamics

Biologicalthermodynamics

3

Topics Energy resource policy Geologyofoil,gasandcoal,exploration

Lecture plan and lecturers

Allocating development

rights

Resource depletion models

Resource rental and profit regimes

Geologyofoilandgas

GeologyofcoalOilandgasexploration

Rosalind Archer

4

Topics Oilmarkets Oilandgasdrillingandproduction

Lecture plan and lecturers

History of oilSupply and

demandOilmarket,

OPEC,oligopolyOilandgasdrilling

Rosalind Archer

Oilandgasproduction

Rosalind Archer

Oilandgasproduction

Rosalind Archer

5

Topics Coal and gasCoal production, uses of coal, coalbed methane, coal

gasification,gas,LNG,LPG

Lecture plan and lecturers

Coal and gas markets

ContractsNew

technologies

Coal production and uses of coal Sadiq Zarrouk/ industry

Coalbed methane, coal gasification, Sadiq Zarrouk/

industry

Gas,LNG,LPGRosalind Archer

6

Topics Electricity markets Overviewofelectricityproduction.Renewablesources

Lecture plan and lecturers

Single node, aggregated

industry stack and demand

Market power

Role of transmission

Overviewofelectricity production

MikeO’Sullivan

Wind energy StuartBradley

Wind turbines and wind farms

Richard Flay

7

Topics Electricity markets Geothermalenergy

Lecture plan and lecturers

Long run marginal price

Electricity game

Reserve and unit

commitment

Occurrence,useandtypes of geothermal

systems Mike O’Sullivan

Geothermalpowerplants Sadiq

Zarrouk

Direct use of geothermal

energy Sadiq Zarrouk

8

Topics Electricity markets Otherrenewablesourcesandnuclearenergy

Lecture plan and lecturers

Different market designs

Vertical integration

Demand response

Tidal energy Richard Flay/ industry

Wave energy Richard Flay/

industry

Nuclear power plants

Sadiq Zarrouk

9

Topics Economics of renewable sources electricity Energy storage and more on renewable energy

Lecture plan and lecturers

Water Geothermal Wind

Energy storage: pumped hydro, fly

wheels, condensers etc

Solar heating Robert Raine

Photovoltaics

10

Topics Economics of climate change Renewables and new technologies

Lecture plan and lecturers

Gametheoreticanalysis of

international agreement

Cap and trade, carbon

tax

Risk and uncertainty

Batteries Fuels cellsBio-energy

sources

11

Topics Economics of transport Energy efficiency, conservation, life cycle energy use

Lecture plan and lecturers

Demand and supply

Congestion pricing and externalities

Public transportEnergy efficiency

Robert Raine

Energy conservation Robert Raine

Life cycle energy use

Robert Raine

12

Topics Energy of transport New fuels for transportation, electric cars

Lecture plan and lecturers

Economic evaluation

Sustainable transport

Alternative liquid fuels,

electric vehicles

Production of bio-diesel

Production of bio-ethanol

Electric cars

NOVEMBER 2010 THE ENERGY CENTRE QUARTERLY REPORT 9

For further information please contact: ProfessorBasilSharp.Director,TheEnergyCentreb.sharp@auckland.ac.nzProfessorCoralIngley,coral.ingley@aut.ac.nz ProfessorJean-LucLeBideau,lebideaujeanluc@aol.com