Economics -energy market exam

You may use the lecture notes, the videos, the slides, D2L course material, your assignments, and the readings when answering the questions.  You may not use any other material.

Good luck and Perform well.

1. (20 points) Renewable energy technologies such as wind turbines and solar photovoltaic panels are characterized by variable and intermittent power generation.

a. Why does renewable intermittency present problems for the electric power grid?

b. What can electricity utilities do to address problems posed by intermittency?

2. (36 points) Consider a dispatchable electricity generation technology and an intermittent renewable generation technology. The 2 technologies have the following characteristics:

Note that construction and O&M fixed costs have been listed on an annual basis per MW of capacity.

a) Find the levelized cost of energy (LCOE) in $/MWh for each technology.

b) Would a subsidy for the renewable technology be required in order for it to achieve the same LCOE as the dispatchable technology?

c) Electricity generated from these technologies can be sold into the wholesale market. Suppose the wholesale price of electricity is $100/MWh during peak hours (which occur one-half of the time) and $30/MWh during off-peak hours (the other half of the time). Assume that one-half of generation occurs during peak hours and the other half occurs during off-peak hours for each technology. Find the wholesale market profits per MW per year for each technology. Does the technology with the lower LCOE yield the most profit per MW per year? Explain why or why not.

d) Suppose as in part c that electricity generated from these technologies can be sold into the wholesale market. Assume that the wholesale price of electricity is $100/MWh during peak hours (which occur one-half of the time) and $30/MWh during off-peak hours (the other half of the time). Now assume that one-half of dispatchable generation occurs during peak hours and the other half occurs during off-peak hours and assume that all of the renewable generation occurs during peak hours. Find the wholesale market profits per MW per year for each technology. Does the technology with the lower LCOE yield the most profit per MW per year? Explain why or why not.

3. (24 points) The graph below depicts the marginal benefit (MB) of carbon emissions and the social cost of carbon (SCC) curve. The MB curve is linear, starting at $100/ton at zero emissions and falling to $0/ton at emissions equal to 1,000 tons/day. SCC is constant at $60/ton. Use this graph to answer the questions below.

$100

SCC

$60

MB

CO2 Emissions

1,000 tons/day

a) Suppose that the government sets a tax on Carbon emissions (e.g., a carbon tax). What is the optimal tax on CO2 emissions for the situation depicted in the graph? How much emissions abatement would occur? How much tax revenue would this tax raise?

b) Suppose instead that the government establishes a cap and trade program for CO2 emissions, and sets the cap for CO2 emissions at 800 tons/day. How much emissions abatement is required to meet this cap? What is the total cost of emissions abatement?

c) The social cost of carbon is based on the net present value of current and future damages from an additional ton of carbon emissions now. Suppose that a higher social discount rate is used to calculate these damages. Explain how this change in the social discount rate would affect the position of the SCC curve, and the optimal current level of emissions and emissions abatement.

4. (30 points) The government provides subsidies for consumers who purchase energy efficient appliances and automobiles.

a) What is the argument for providing such subsidies? What market failure(s) are these subsidies aimed at correcting?

One type of unintended consequence of this kind of subsidy policy is the rebound effect.

b) Explain what the rebound effect is; use one or more examples in your explanation. Explain why it is important to consider the rebound effect when estimating the impact of the subsidy policy on energy use.

c) How would the size of a rebound effect depend on the price elasticity of household demand for energy (for example, the demand for electricity for appliances or the demand for gasoline for autos)? Explain.

5. (24 points) Environmental externalities can lead to illness and death for people.

a. Explain the concept of 'value of statistical life' (VSL).

b. Explain how VSL factors into the economic benefits of reducing greenhouse gas emissions.

c. Suppose that new evidence emerges to show that VSL is lower than previously believed. How would this new evidence affect your recommendations about what to do about greenhouse gas emissions and global warming.

6. (16 points) Electricity restructuring led to deregulated wholesale electricity markets in many parts of the U.S. Merchant generation suppliers compete with one another to supply electricity in these markets. Market power (or, monopoly power) is a potential concern when the number of suppliers in a market is fairly low. Why might supplier market power be a serious concern in wholesale electricity markets? Explain your answer.

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