Assignment

To complete this assignment, you will need the excel file ESGPortfolios.xls which describes the variable operating costs, fuel efficiencies, and CO2 emissions rates of the set of power plants that comprise the Electricity Strategy Game (ESG). To play the game, you will need to familiarize yourself with these data. This problem set kicks off that process!

The generation portfolios in the electricity strategy game are based upon the actual portfolios of the seven largest generation firms in the California market during the California electricity crisis in 2001 (many of these power plants still around today!). The number of generation plants in a portfolio ranges from 5 to 8, and the generation capacities of the portfolios ranges from around 2000 MW to almost 4000 MW. Each portfolio contains differing generation technologies with varying operating costs.

For the purpose of describing the variable operating costs, generation units are divided into two categories, thermal and hydro.

Thermal Generation: Each thermal generation unit has a variable cost that is based upon its fuel cost, thermal efficiency, and variable OM costs. These are marginal costs ($/MWh) that are constant up to the full capacity of each plant.

Greenhouse gas emissions: Each fossil unit has an emissions rate that is listed in the portfolio data. Nuclear and Hydro units are assumed to have zero carbon impact. The emissions rate gives the tons of CO2e (greenhouse gasses in units of CO2 equivalent) emitted with each MWh generated from each unit.

Hydro Generation: There are two generation portfolios that contain a hydroelectric facility. These are run-of-river hydro plants. These units have no fuel costs. Being run-of-river, the plants can generate a given amount of power each hour at zero fuel cost, though there is still a small variable OM cost that is part of the marginal cost. They cannot ever generate more than their run-of-river quantities.

Question 1

The hourly spot market for electricity is the core of the ESG. In each hourly market, the supply bids of each generator will be used to construct an aggregate supply curve and intersected with a demand curve.

For the purpose of this problem, assume that the market operates like a uniform price auction. Further assume that the demand curve is completely inelastic (i.e. vertical).

(i) Suppose all firms bid competitively into the spot market in an hour when demand is 16,200 MWh. What is the market clearing wholesale price?

(ii) Compute the carbon emissions associated with electricity production in this hour.

(iii) Compute the short run profits (i.e. revenues less variable operating costs) earned by ‘Big Coal' and ‘Fossil Light' in this hour.

(iv) Now suppose that this market was subject to a carbon tax of $10 per ton of CO2. How would the introduction of this tax affect the market clearing price, firm profits (at Big Coal and Fossil Light), and total emissions? Please be specific (i.e. compute the new price, profits, and associated emissions) as part of your answer.

Question 2

The ESG manual includes demand forecasts for the 24 hours of the game. You will need these demand forecasts, together with the data on plant operating costs and capacities, to answer this question.

(i) Building on your approach to answering Question 1, now solve for the market clearing price in all 24 hours of the game, assuming all firms behave competitively. Graph these 24 simulated prices over time.

(ii) Using a 5 percent discount rate per round, compute the net present value of profits (i.e. revenues less operating costs) earned by Fossil Light, again assuming that all firms in this market behave competitively. Please explain the calculations behind your answer.

(iii) Imagine that some engineers have developed storage technology that allows electricity to be stored for one hour. There is no loss of electricity when electricity is stored for an hour, but 100 percent loss if the energy is stored for more than an hour.
Explain in words how fossil light would use this technology to increase its profits? How do you think the graph in part (i) would change if this technolgy were widely adopted? Qualitative answers are fine!

Attachment:- esgporfolios.xlsx