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The cost of flexibility provision by electricity generators

The government’s 2003 Energy White Paper has, at its core, a commitment to the environment and renewable energy. As we move towards a future in which a significant proportion of renewable energy development is expected to come from wind generation, and the remainder of the generation mix changes in response to environmental concerns—in particular, a reduction in coal-fired generation—there is a question about the ability of the system to maintain its real-time fluctuations in demand, and the cost associated in doing so.

To address this question, The Coal Authority commissioned an Oxera study to evaluate the cost of keeping the electricity system in balance under a range of generation mixes, differentiating between ramping costs, imbalance costs and system-security costs.

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Estimating the relative efficiency of Telecom New Zealand

Oxera undertook a performance assessment of Telecom New Zealand for the New Zealand Commerce Commission. Oxera’s performance assessment was based on numerous models using regression analysis, stochastic frontier analysis and data envelopment analysis, and examined both operating and capital expenditure, using the US local exchange carriers as comparators to Telecom New Zealand.

The analysis dealt with monetary conversion issues, differences in the operational, regulatory and the data reporting environment faced by telecom companies in the USA and New Zealand. In addition, a substantial cost standardisation exercise was undertaken, and, given the uncertainties surrounding the data underpinning the analysis, Oxera carried out extensive sensitivity analysis of the relative efficiency estimates.

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Passenger rail services and economic performance

Oxera was commissioned by the Strategic Rail Authority to investigate the impact on the wider economy of rail punctuality and reliability. In particular, Oxera examined the impact of rail performance on business travellers, businesses via impacts on commuter productivity, individuals, and services such as tourism.

Oxera applied the theoretical model derived by Bates et al. (2001), using punctuality data from the SRA and assuming individuals will choose an optimum departure time that minimises their disutility from poor rail performance. Values of time and journey certainty were then applied to the outturn arrival times relative to simulated desired arrival times, in order to evaluate the disutility associated with current levels of rail performance for business, commuter and leisure travellers. The simulation modelling was backed up with surveys carried out of businesses, government departments, employee and business organisations. In addition, data from Visit Britain was used to analyse the impact of rail performance on tourism.

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A review of PWCC’s efficiency study for Telecom New Zealand

Oxera provided a critical review of the comparative efficiency analysis implemented by Price Waterhouse Coopers Consulting (PWCC) on behalf of Telecom New Zealand.

The review provided a discussion on the use of comparative efficiency for the regulation of telecom operators, the various estimation techniques available, the likely issues the analysis will have to face when using international comparisons (the analysis compared Telecom New Zealand with US local exchange carriers) and dealt with issues relating to the standardisation of costs and operating characteristics, the application of a variable selection methodology and PWCC’s application of stochastic frontier analysis.

See ‘Efficiency analysis to support cost–benefit analysis: report by Oxera’ in the attached report.

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Assessment of the economic impact of the proposed EC Consumer Credit Directive

In 2003, Oxera was commissioned by the Association for Payment Clearing Services, the British Bankers’ Association, the Finance & Leasing Association, and the Council of Mortgage Lenders to assess the impact of the draft EC Consumer Credit Directive (CCD) on credit for consumers and, more broadly, the implications for the UK economy.

The study consisted of three elements:

a qualitative cost–benefit analysis of the CCD;
a quantitative impact assessment of changes in the usage and costs of credit on the UK economy;
a quantification of additional net welfare effects.

Oxera’s analysis showed that the CCD is unlikely to achieve its objectives—the economic costs may be significantly larger than envisaged by the European Commission, and its benefits are likely to be small.

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The regulation of licensed taxi and PHV services in the UK

Oxera was commissioned by the Office of Fair Trading to analyse consumers’ valuation of different aspects of taxi services and to enable calculations of the effect of taxi regulation on consumer welfare. To inform the design of a stated preference survey, a revealed preference exercise was undertaken, which provided guideline estimates for the levels of the attributes, and their likely relative importance. The stated preference survey was constructed using the outputs from the revealed preference survey and other information on taxi markets, and the survey design was tested through the use of a pilot survey. 

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Water industry financial model of periodic review of pricing 2004

Using Oxera’s bespoke financial model developed for the Environment Agency, Oxera modelled several hypothetical scenarios for the potential price limits at the 2004 price review of the UK water sector. The model provided a useful and easy-to-use tool for a detailed examination, at the aggregate industry level, of several scenarios regarding the main building blocks (eg, operating expenditure efficiency, capital expenditure, depreciation, and the cost of capital).

In particular, the model assessed the possible impact on price limits of different levels of water quality and the environmental improvement programme. The future prices modelled in the scenarios were particularly sensitive to the cost of capital assumption in the model. Although financeability considerations were not explicitly modelled, this also illustrates the impact, in setting price limits, of potential adjustments to the allowed rate of return to reflect financeability considerations.

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Assessing profitability in competition policy analysis

Oxera was commissioned by the Office of Fair Trading to produce a discussion paper on assessing profitability in the context of competition analysis.

The paper focused on the relevance of profitability and the implications for competition policy, provided a framework for undertaking profitability assessment, and addressed a wide range of practical difficulties that may arise.

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Interim review of Network Rail’s track access charges

Oxera acted as the lead economic adviser to Office of the Rail Regulator (ORR) during the interim review of Network Rail’s access charges. This included detailed input to the three main workstreams identified by the ORR as part of the review.

In relation to the assessment of expenditure, Oxera undertook top-down and process benchmarking analysis including the use of international evidence on costs and productivity. For the incentives and financing workstreams, Oxera assisted the ORR in the development of a regulatory framework consistent with the status of Network Rail as a debt-financed company limited by guarantee.

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The non-market value of generation technologies

The government’s 2003 Energy White Paper has environmental and energy-reliability goals at its core. It promises low-carbon energy for the UK, and recognises the tensions this would create in delivering affordable heating for vulnerable households, and competitive energy markets. Much of the task before the government is in quantifying these tensions.

In this report, Oxera provided the first quantification of the value to the economy of improved reliability and lower environmental damage from electricity generation. It estimated the value of avoiding blackouts, and of environmental harm from burning polluting fuels. These hidden benefits have been ignored in previous studies. The results and methodology are now available for stakeholders to scrutinise and to debate.

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