1. 1
Energy Economics

2. 2
• theenergycollective.com
– Schalk Cloete
– Robert Wilson
– Jeff St. John
– Michael Davidson
– Nathan Wilson
– Severin Borenstein
– Willem Post

3. 3
• Homework

4. 4
• 1. What is the main difference between
Alternating Current (AC) and Direct Current (DC)
transmission lines?
• 2. Why cant an AC transmission be built to
connect Finland and Russia (or Poland and
BeloRus)?
• 3, What is the frequency of the electricity grid in
Europe, what in the USA and what in Japan?

5. 5
Table 1
Fixed cost per MWh Variable cost per MWh
Baseload 40 0
Midload 20 30
Peaker 10 50
4. The (levelized) fixed and variable costs of 3 types of plants are
given in Table 1 above. In the system, the maximum price is capped
by Pcap = 1050, and we assume perfect competition.
a) Determine the ranges of duration (in %) that will be used for
the 3 types in an optimal investment and dispatch. (first draw a
figure with the total (levelized) costs of the 3 types as a
function of duration. As a hint, use the figure below from the
lecture and make the modifications for the case when
investment can also be done in Midload generators).

6. 6
Table 1
Fixed cost per MWh Variable cost per MWh
Baseload 40 0
Midload 20 30
Peaker 10 50
4. The (levelized) fixed and variable costs of 3 types of plants are
given in Table 1 above. In the system, the maximum price is capped
by Pcap = 1050, and we assume perfect competition.
b) assume that the daily load curve is as given in Figure 2. The
maximal price in the system is set at Pcap = 1050. How
much capacity (in MW) would be invested of each of the 3
types of generation in the case of optimal investment and
dispatch?

7. 7
DURATION (%)100500
1
2
3
Daily
Demand
in MW
Daily Load Curve LC:
Duration[y] = Pr[Demand > y]D=3-2* Duration
Fixed cost
per MWh
Variable cost
per MWh
Baseload 40 0
Midload 20 40
Peaker 10 50

8. 8
0
60
40
Duration
Baseload
Peaker
100%66%
10
(=8760 hours/year)
0%
Cost/MWh
Use baseload when
capacity factor > 66%
Use peakers when
capacity factor <50%
Fixed cost
per MWh
Variable cost
per MWh
Baseload 40 0
Midload 20 30
Peaker 10 50
50%
Midload
Use Midload when
50%< capacity
factor < 66%
Demand
Response
1%

9. 9
Table 1
Fixed cost per MWh Variable cost per MWh
Baseload 40 0
Midload 20 30
Peaker 10 50
4. The (levelized) fixed and variable costs of 3 types of plants are
given in Table 1 above. In the system, the maximum price is capped
by Pcap = 1050, and we assume perfect competition.
c) What is the duration of shortage? (the percentage of time that
supply will be lower than demand)
d) Show that the average price per MWh for a consumer is now
E41.8/MWh.
e) The regulator is very unhappy about any shortage. What
would you recommend him to do?
E40.1/MWh

10. 10
DURATION (%)
10050
1
2
3
Daily Demand
in MW
Daily Load Curve LC:
Duration[y] = Pr[Demand > y]
D=3-2* Duration
672
2.98
1.67
baseload
Midload
Peaker
Shortage

11. 11
Table 1
Fixed cost per
MWh
Variable cost per
MWh
Baseload 40 0
Midload 20 30
Peaker 10 50
5. The generation types are the same as in question 1. Also the demand-duration curve
is the same. The regulator now has– secretly – written a contract for extra backup
capacity in the amount of 0.4 MW with a foreign generator. The regulator uses this
capacity only when there is a shortage. It allows the regulator to avoid the shortage
and also to keep the electricity price at 50 (the marginal cost of the Peaker).
a) Once the contract has stopped being a secret, how will Peaker generator
investors react? What is now the equilibrium number of MW invested in
Peaker generator capacity?
b) What if the regulator would follow the procedure of NordPool: when there is a
shortage, the regulator uses the backup capacity to avoid blackouts, but it sets
the electricity price at the cap (E1050/MWh). How would Peaker generator
investors react? What is now the equilibrium number of MW invested in
Peaker generator capacity?

12. 12
Table 1
Fixed cost per
MWh
Variable cost per
MWh
Baseload 40 0
Midload 20 30
Peaker 10 50
c) The regulator now decides to make a Capacity Payment (CP) to all generation
of E5/MWh. The costs of the capacity payment will be added to the electricity
bill of consumers. What will be the duration of the different types of
generation? What is the duration of the shortage?

13. 13
0
60
35
Duration
Baseload
Peaker
100%66%
5
(=8760 hours/year)
0%
Cost/MWh
Use baseload when
capacity factor > 66%
Use peakers when
capacity factor <50%
Fixed cost per MWh
(Net of capacity payments)
Variable cost
per MWh
Baseload 35 0
Midload 15 30
Peaker 5 50
50%
Midload
Use Midload when
50%< capacity
factor < 66%
Demand
Response
0.5%

14. 14
Table 1
Fixed cost per
MWh
Variable cost per
MWh
Baseload 40 0
Midload 20 30
Peaker 10 50
c) The regulator now decides to make a Capacity Payment (CP) to all generation
of E5/MWh. The costs of the capacity payment will be added to the electricity
bill of consumers. What will be the duration of the different types of
generation? What is the duration of the shortage?
d) Show that the average price for consumers (including the capacity payment) is
still equal to 41.8.E40.1/MWh

15. 15
Table 1
Fixed cost per
MWh
Variable cost per
MWh
Baseload 40 0
Midload 20 30
Peaker 10 50
e) The regulator now decides – to save money – to follow the Spanish example
and make the Capacity Payment (CP) of E5/MWh only to Peakers. Show that
Midload will now leave the market.
f) What will be the duration of the different types of generation?
g) What is the duration of the shortage? Show that the average price is now
43.49/ MWh. Why has the system become more expensive?

16. 16
0
60
40
Duration
Baseload
Peaker
100%67%
5
(=8760 hours/year)
0%
Cost/MWh
Use baseload when
capacity factor > 66%
Use peakers when
capacity factor <50%
Fixed cost per MWh
(Net of capacity payments)
Variable cost
per MWh
Baseload 40 0
Midload 20 30
Peaker 5 50
75%
Midload
Use Midload when
50%< capacity
factor < 66%
20

17. 17
• Previous lecture

18. 18
• Is the “energy-only” model valid?

19. 19
19
•Source: ERU
•Jiří Krejsa
•Yearly Load-Duration Curve:
•Duration[y] = Pr[Demand > y]

20. 20
Installed power capacity 2011 (MW)
Steam 10787,5 53,27%
Nuclear 3970 19,60%
PV 1971 9,73%
Pumped-storage 1146,5 5,66%
Hydro 1054,6 5,21%
Gas 1101,7 5,44%
Wind 218,9 1,08%
Total 20250,2 100,00%
Source: ERU Jiří Krejsa
About 2x more capacity than peak demand!!!

21. 21
• Remains of the good old times of electricity being run as
state-owned Vertically Integrated Utilities (VIUs) (up to
2000)
– Civil engineers “gold-plate” the system: excess generation
reserves for “just-in-case” disregarding the costs
– Prices calculated as average costs + an uplift for capital
expenses
• 1990-2000: Onset of liberalization, privatization and
competition
– Prices are marginal prices
– Due to the excess capacity they are relatively low
– Thus: no investment in new capacity
• Now: “sweating” the assets
• Source: Helm, D. 2005. The assessment: the new energy
paradigm. Oxford review of economic policy, vol. 21, no.
1

22. 22
• This lecture

23. 23
23
Missing Money
& Capacity
Payments

24. 24
24
0
60
40
Capacity factor
Baseload
Peaker
100%60%
10
(=8760 hours/year)
Fixed cost
per MWh
Variable cost
per MWh
Baseload 40 0
Peaker 10 50
0%
Cost/MWh
Use baseload when
capacity factor > 60%
Use peakers when
capacity factor < 60%
-8
-8
Capacity payment of $8 per MWh for all producers
Technology Costs Table

25. 25
25
0
60
40
Capacity factor
Baseload
Peaker
100%60%
10
(=8760 hours/year)
Fixed cost
per MWh
Variable cost
per MWh
Baseload 40 0
Peaker 10 50
0%
Cost/MWh
Use baseload when
capacity factor > 60%
Use peakers when
capacity factor < 60%
-8
-8
Capacity payment of $8 per MWh for all producers
Technology Costs Table

26. 26
26
0
60
32 Baseload
Peaker
100%60%
2
Fixed cost
per MWh
Variable cost
per MWh
Baseload 32 0
Peaker 2 50
0%
Cost/MWh
Use baseload when
capacity factor > 60%
Use peakers when
capacity factor < 60%
Capacity payment of $8 per MWh for all producers
Technology Costs Table
Capacity factor
(=8760 hours/year)

27. 27
27
P=0
S
50
0
0 1.81 32
P P=50
Fixed cost
per MWh
Variable cost
per MWh
Baseload 40 0
Peaker 10 50
40%
58%
PCAP=550
2%
πPEAKER= 0 πPEAKER= 0 πPEAKER=0.02 * 500= 10
Capacity payment of $8 per MWh for all producers
Total πPEAKER=8+10=18
Zero-profit condition
Supply & demand curve Technology Costs Table
DMAXDMIN

28. 28
28
P=0
S
50
0
0 1.81 32
P P=50
Fixed cost
per MWh
Variable cost
per MWh
Baseload 40 0
Peaker 10 50
40%
59.6%
PCAP=550
0.4%
πPEAKER= 0 πPEAKER= 0 πPEAKER=0.004 * 500= 2
Capacity payment of $8 per MWh for all producers
Total πPEAKER= 8 + 2 = 10
Zero-profit condition
Supply & demand curve Technology Costs Table
DMAXDMIN

29. 29
29
S
50
0
0 1.81 32
P P=50
Fixed cost
per MWh
Variable cost
per MWh
Baseload 40 0
Peaker 10 50
59.6%
PCAP=550
0.4%
Total πPEAKER=8+2=10πPEAKER= 0 πPEAKER= 0 πPEAKER=0.004 * 50= 2
Capacity payment of $8 per MWh for all producers
P¯=P¯=8* (0.996) + 0.4* 0 + 0.59.6* 50 + 0.004* 550P¯=8* (0.996) + 0.4* 0 + 0.59.6* 50 + 0.004* 550
=8 + 0 + 29.8 + 2.2 = 40
Zero-profit condition
Supply & demand curve Technology Costs Table
DMAX
P=0
40%
DMIN

30. 30
30
0
60
40
Capacity factor
Baseload
Peaker
100%60%
10
(=8760 hours/year)
Fixed cost
per MWh
Variable cost
per MWh
Baseload 40 0
Peaker 10 50
0%
Cost/MWh
Use baseload when
capacity factor > 60%
Use peakers when
capacity factor < 60%
-8
Capacity payment of $8 per MWh only for Peakers
Technology Costs Table

31. 31
31
0
60
Capacity factor
Baseload
Peaker
100%76%
2
(=8760 hours/year)
Fixed cost
per MWh
Variable cost
per MWh
Baseload 40 0
Peaker 2 50
0%
Cost/MWh
Use baseload when
capacity factor > 76%
Use peakers when
capacity factor < 76%
Capacity payment of $8 per MWh only for Peakers
Technology Costs Table
60%
40

32. 32
32
Use baseload when
capacity factor > 76%
Use peakers when
capacity factor < 76%
0
60
40
Capacity factor
Baseload
Peaker
100%76%
10
DURATION (%)100500
1
2
3
BASELOAD
D=3-2* Duration
1.48
PEAKER
Daily
Demand
in MW
60
Daily Load-Duration Curve:
Duration[y] = Pr[Demand > y]
Screening curve
(Capacity-cost based)
76

33. 33
33
P=550
DURATION (%)100500
1
2
3
BASELOAD
D=3-2* Duration
1.48
PEAKER
Daily
Demand
in MW
60
Daily Load-Duration Curve:
Duration[y] = Pr[Demand > y]
76
Supply & demand curve
Uniformly
distributed
50
0
0 1.481 32
P
P=0
P=50
24%
76%-x%
Supply & demand curve
DMAXDMIN
X%

34. 34
34
P=0
S
50
0
0 3
P P=50
Fixed cost
per MWh
Variable cost
per MWh
Baseload 40 0
Peaker 10 50
76-x
P=550
X=0.4%
Total πPEAKER=πPEAKER= 0 πPEAKER= 0 πPEAKER=x * 500= 2
2
0.004
500
x = =
Capacity payment of $8 per MWh only for Peakers
Total πPEAKER=
8+0+0+2=10
Zero-profit condition
Supply & demand curve Technology Costs Table
DMAX
24%
DMIN
1.481

35. 35
35
P=0
S
50
0
0 3
P P=50
Fixed cost
per MWh
Variable cost
per MWh
Baseload 40 0
Peaker 10 50
76-x
P=550
X=0.4%
P=0.24 * 0=
0
P=0.756* 50=
37.8
P=0.004* 550=
2.2
P=0.76* 8=
6.08
Capacity payment of $8 per MWh only for Peakers
P=6.08 +37.8+2.2=46.08>40!
Zero-profit condition
Supply & demand curve Technology Costs Table
DMAX
24%
DMIN
1.481

36. 36
36
• Capacity payments:
- Is a subsidy that allows the system to
- Lowers the price spikes and the duration of
spikes
- Can distort generation technique choice if
capacity payments are not equal for all
techniques
- Example: Spain

37. 37
Electricity generation and
climate change

38. 38

39. 39

40. 40

41. 41

42. 42

43. 43
Renewables Efficiency
Carbon
emissions
EU’s 20-20-20 strategy for
2020

44. 44
• 20-20-20 strategy
a) 20 reduction of CO2
b) 20% increase in efficiency
c) 20% renewables

45. 45
b) 20% increase in efficiency

46. 46
• What is the effect of an increase in
efficiency on fuel demand?
– Substitution effect
– Income effect

47. 47
Other
consumptio
n goods
Car
Usage
Effect of a fall in the price
of car fuel (here a normal
good)
5 2010
Substitution
effect
Income
effect
Total effect
Fuel=12

48. 48
Other
consumptio
n goods
Car
Usage
If car useage were an
inferior good (it is not!),
the income effect could
undo a part of the
substitution effect
5 2010
Substitution
effect
Income
effect
Total effect

49. 49
• Both substitution and income effect
contribute to an increase in demand
• What can be done?
• Price must increase too.

50. 50
Other
consumptio
n goods
Car
Usage
Increase in price makes
consumers use less.
Both income and
substitution effect lower
care useage
5 209
Income
effect
Substitut
ion effect
Total effect
Fuel=12

51. 51
Other
consumptio
n goods
Car
Useage
Effect of a fall in the price
of car fuel (here a normal
good)
5 2010
Substitution
effect
Income
effect
Total effect
Fuel=12
PPizza=10

52. 52
c) 20% renewables

53. 53
Wind turbines
Solar panels
Renewable energies

54. 54
• Do subsidized renewables lower
the price of electricity?
• Price versus charge

55. 55
10
50
P=10 P=50
DL
DH
Units Fixed
cost
Variable
cost
Baseload 1 20 10
Peaker 1 0 50
prob DL DH
50% 50%
10% 10 50
1 20
0

56. 56
Units Fixed
cost
Variable
cost
Baseload 1 20 10
Peaker 1 0 50
prob DL DH
50% 50%
10% 10 50
50% 10 50% 50 30P = × + × =
10
50
DL
DH
P=10 P=50
Average electricity price
50% ( ) 50% ( )L HQR P MC P MC= × − + × −
50% 50%L HP P P= × + ×
50% (0) 50% (40) 20QR = × + × =

57. 57
10
50
P=10 P=50
Wind output
Units Probability
2 10%
1 20%
0 70%
Units Fixed
cost
Variable
cost
Baseload 1 20 10
Peaker 1 0 50
Wind 2 23.5 0
DL
DH
1 20
0
Heavily subsidize to get 30%
electricity from wind

58. 58
P=10 P=50
10
50
0
P=0 P=0
Units Fixed
cost
Variable
cost
Baseload 1 20 10
Peaker 1 0 50
Wind 2 23.5 0
DL
DH
1 20
Wind output
Units Probability
2 10%
1 20%
0 70%

59. 59
P=10 P=50
10
50
0
P=0 P=10
Units Fixed
cost
Variable
cost
Baseload 1 20 10
Peaker 1 0 50
Wind 2 23.5 0
DL
DH
1 20
Wind output
Units Probability
2 10%
1 20%
0 70%

60. 60
P=10 P=50
10
50
0
Units Fixed
cost
Variable
cost
Baseload 1 20 10
Peaker 1 0 50
Wind 2 23.5 0
DL
DH
1 20
Wind output
Units Probability
2 10%
1 20%
0 70%

61. 61
Wind
availability
prob DL DH
50% 50%
2 10% 0 0
1 20% 0 10
0 70% 10 50
( ) 70% 10 20% 0 10% 0 7LP D = × + × + × =
( ) 70% 50 20% 10 10% 0 37HP D = × + × + × =
50% 7 50% 37 22P = × + × =0
Average electricity price
10
50
P=10 P=50
70%
DL
DH
10
50
P=0 P=10
20%
DL
DH
1
0
50
0
P=0 P=0
10%
DL
DH
Units Fixed
cost
Variable
cost
Baseload 1 20 10
Peaker 1 0 50
Wind 2 23.5 0
Electricity price

62. 62
Wind
availability
prob DL DH
50% 50%
2 10% 0 0
1 20% 0 10
0 70% 10 50
( )20% 50% (10 0)QR = × × −
1=
0
Average earnings of Wind
10
50
P=10 P=50
70%
DL
DH
10
50
P=0 P=10
20%
DL
DH
1
0
50
0
P=0 P=0
10%
DL
DH
Units Fixed
cost
Variable
cost
Baseload 1 20 10
Peaker 1 0 50
Wind 2 23.5 0
Electricity price

63. 63
50% 7 50% 37 22P = × + × =
Average electricity price
23.5 1 22.5
15
50% 1 50% 2 1.5
−
= =
× + ×
Uplift on electricity price
22 15 37+ =
Average electricity charge
23% increase
in charges for
consumers!
10
50
P=10 P=50
70%
DL
DH
10
50
P=0 P=10
20%
DL
DH
1
0
50
0
P=0 P=0
10%
DL
DH
Units Fixed
cost
Variable
cost
Baseload 1 20 10
Peaker 1 0 50
Wind 2 23.5 0
Average charge
without wind: 30

64. 64
Units Fixed
cost
Variable
cost
Baseload 1 20 10
Peaker 1 0 50
Wind 2 22.5 0
( )70% 50% (50 10)QR = × × −
( )70% 20 14= × =
0
10
50
P=10 P=50
70%
DL
DH
10
50
P=0 P=10
20%
DL
DH
1
0
50
0
P=0 P=0
10%
DL
DH
Average Baseload earning (QR)
Wind
availability
prob DL DH
50% 50%
2 10% 0 0
1 20% 0 10
0 70% 10 50
Electricity price