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ECC2460: Strategy Report #2 [40 marks]

Please modify this document and submit via Moodle your completed version. Full credit can be achieved with answers less than 100 words for each question. Longer responses are allowed but responses will be penalised if containing incorrect statements or if they introduce ambiguity to the answer.

Part I [19 marks]

To answer the questions below, use the file “Strategy Report #2 – Worksheet.XLSX”. It contains the details for every plant in the stylised game – capacity, marginal cost, emissions – and solves for the equilibrium.

To complete the problem set you will have to change the values in columns S, T and U where required, and then sort the column D (capacity) from largest to smallest, followed by column N (Tot. Var Cost incl Carbon Price) from smallest to largest. You will need to sort by these columns every time you change an input!

Change the Demand by altering the value in cell T21. Price and Total Carbon will automatically update in cells T24 and T25. Note that if multiple units are at the market-clearing price, the sheet will run the largest units first (unlike in our classroom games). This is fine.

The sheet takes advantage of many formulas, I encourage you to have a play around to understand how it works. If you are not familiar with VLOOKUP have a watch of this quick tutorial: https://www.youtube.com/watch?v=ODZfwD39gGE

We assume a uniform price auction, a competitive market, no transmission constraint (i.e. one unified market between North and South), and completely inelastic demand (unlike in our classroom games) at the following levels:

The worksheet is initially set up to give the result of question 2 (period 1, Gas = 4.5)

For questions 2-4 we have given partially filled in tables which you need to complete and use in your submission. Make sure you also fill in the total CO2 for the day in the bottom row of each table. [6 marks for the completed tables]

1) [1 mark] Briefly explain what the formula in cell G6 does

2) [3 marks] If the price of natural gas decreased from $4.50/mmBtu to $2.50/mmBtu, how would this affect total CO2 emissions and electricity prices in each of the four periods relative to the baseline ($4.50/mmBtu gas) case? Compare the period 1 change in emissions to the periods 3 change in emissions and explain what you see.

3) [4 marks] What CO2 emissions and electricity prices do you observe in each period with $4.50/mmBtu gas and a carbon tax of $100/ton of CO2? How do total CO2 emissions over the four periods and electricity prices in each period compare with both of the cases in question #1 (no carbon pricing, gas prices of $4.50/mmBtu and $2.50/mmBtu)? What are some possible policy implications of these observations?

4) [5 marks] With a gas price of $4.50/mmBtu, consider a cap-and-trade system in which Big Coal and Bay Views assume (i.e. factor into their bids) a carbon price of $50/ton; Fossil Light, East Bay, and Old Timers assume a price of $100/ton; and Beachfront and Big Gas assume a price of $150/ton. How do total CO2 emissions over the four periods and electricity prices in each period compare to both the no-carbon-pricing baseline and the $100/ton carbon tax of Question #2? How did the differences in carbon price expectations among market participants affect emissions and total cost of supply? What are some possible policy implications?

[NOTE: This question is about firms assumptions on carbon prices, not actual carbon prices paid by the firms. Refer to discussions during class for the electricity market game with carbon cap and trade]

Part II [21 marks]

Use the following game creation link for this question:

https://fsi-pesd-server.stanford.edu/game/gsb2020/cgi-bin/create_1p_stylized_games.py 

Relevant formulas for these problems (no discounting):

 , where i is the period, N=4 in the context of the game

 , where i is the period, N=4 in the context of the game

5)

Fill in the table below using single-player games with the following conditions:

o Scenario = “renewables”

o Portfolios = “base_California”

o Team = “East_Bay”

o Seed: VALUE DOESN’T MATTER

o Demand is random: UNCHECKED (i.e. demand is exactly as forecast)

o Solar/wind (if any) are random: UNCHECKED (i.e. renewables exactly as forecast)

o Computer agent behavior = “marginal_cost” (i.e. all other gencos bid marginal cost)

o (Note that the seed value doesn’t matter when the above boxes are checked.) 

For each row of the table, go to “Manage Power plants” and buy the number of wind units (Altamont.Pass, assumed fixed cost = $20,000/hr) and solar PV units (Central.Valley, assumed fixed cost = $21,000/hr) specified, then increment 4 periods to run the game. (We suggest using a spreadsheet to calculate LCOE and market value of the wind and solar units as a function of the market prices and unit output by period from the game results.)

Complete the table and then use the results to answer questions 5a-g. [2 marks]

a) [3 marks] How does the market value of a solar PV unit in the 1 wind / 1 solar case compare to the market value of the PITTSBURGH_5-6 unit in the 1 wind / 1 solar case? Explain this difference.

b) [3 marks] How does the market value of a solar PV unit in the 1 wind / 80 solar case compare to the market value of the PITTSBURGH_5-6 unit in the 1 wind / 80 solar case? Why is this different from the 1 wind / 1 solar case above?

c) [2 marks] More generally, what happens to the market value of a given type of intermittent renewable unit as more units of that type are added, and why?

d) [3 marks] Are there any cases above where the LCOE of a given type of unit (solar or wind) is higher than it is for that same type of unit in other cases? If so, why is that occurring?

e) [3 marks] The wind and solar units here are expected to have the same average output if they run full-out (i.e. there is no curtailment). If you are a policymaker, which of the two 41-renewable-unit scenarios (1 wind / 40 solar or 20 wind / 21 solar) would you prefer and why?

f) [2 marks] Policymakers have decided to provide a production subsidy to both wind and solar facilities for every MWh they generate. Assume the following: 1) the same value of the subsidy applies to both wind and solar facilities (i.e. the subsidy is technology-neutral), 2) the subsidy is as good as cash for these facilities, and 3) there are no other incentives for renewable energy. Based on the table you have filled in above, what value of production subsidy ($/MWh) would have been sufficient to incentivize the development of 20 wind units and 7 solar units in this market?

g) [3 marks] All of the gencos bid marginal cost in the above example. If gencos were trying to exercise all available market power, how might this change the relative attractiveness of solar and wind, and why?