School of Civil Engineering
Level H
04 21169 (CE3EECa)
Time Allowed: 2 hours
Answer THREE questions from Section A (ten marks each), THREE questions from Section B (fifteen marks each), and ONE question from Section C (twenty-five marks).
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1
Calculators may be used in this examination but must not be used to store text.
Calculators with the ability to store text should have their memories deleted prior to the start of the examination.
Special Requirements: None
School of Civil Engineering Level H
04 21169 (CE3EECa)
Energy Economics
Summer Examinations 2013
Time Allowed: 2 hours
Answer THREE questions from Section A (ten marks each), THREE questions from Section B (fifteen marks each), and ONE question from Section C (twenty five marks).
The allocation of marks within each question is stated in the right-hand margin.
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2
Section A. Answer THREE questions from this section. Each question is worth 10 marks.
1. Why do we use discounting when assessing the value of an investment? [10]
2. Use a diagram to show what will happen to the price, and to the quantity sold, if the demand for a product falls. [10]
3. Define the income elasticity of demand. What can you say about the value of the income elasticity for a normal good? [10]
4. Define fixed costs and variable costs. How do they differ? [10]
5. What is the Hotelling model? How does it help to determine resource prices? [10]
6. What is an oligopoly? Give an example from the energy sector. [10]
Section B. Answer THREE questions from this section. Each question is worth 15 marks.
As well as calculating the answers, explain the method you use.
7. The demand for a good is given by Qd = 80 – 2P where Qd is the quantity demanded, and P is the market price. The supply of this good is given by Qs = (P – T) – 10 where Qs is the quantity supplied and T is the tax on the good.
a) If T = 0, what is the market price and what is the quantity supplied? [4]
b) If T = 15, what is the market price and what is the quantity supplied? [3]
c) How much worse off, in total, are producers with the tax? [2]
d) How much worse off, in total, are consumers with the tax? [2]
e) How much better off is the government? [2]
f) How are your answers to (c), (d) and (e) related to the deadweight loss of the tax? [2]
8. Generator A has a cost of CA = where QA is the generator’s output.
Generator B has a cost of CB = where QB is the generator’s output.
The total demand for electricity is 15 units. Using a Lagrange multiplier, and explaining your method:
a) What is the optimal output from generator A? [6]
b) What is the optimal output from generator B? [2]
c) What is the total cost? [3]
d) What is the marginal cost of meeting demand (the system lambda)? [4]
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9. A monopoly has marginal costs given by MC = 3 and fixed costs equal to 12. The demand for its product is given by P = 15 – 2Q, where P is the market price and Q is the quantity produced.
a) Give (and explain) the formula for the monopolist’s total costs. [3]
b) Give (and explain) the formula for the monopolist’s total revenue. [3]
c) What is the profit-maximising quantity to produce? [5]
d) What will the market price be? [2]
e) How much more would the monopolist sell if its fixed costs were equal to 20? [2]
10. An electricity network has three nodes, A, B and C. There are three lines, AB, AC and BC, linking the three nodes. The generator at A has a marginal cost of £50/MWh. The generator at B has a marginal cost of £150/MWh. There is no generator at C. There is a (binding) constraint on the amount of power that can flow from A to C on line AC. The other lines are not constrained. Generators A and B both have spare capacity.
a) What is the marginal cost of electricity at A? Why? [3]
b) What is the marginal cost of electricity at B? Why? [3]
c) What is the marginal cost of electricity at C? Why? [5]
d) What is the shadow cost of the constraint on AC? Justify your answer. [4]
11. Consider an investment project which involves an initial payment of £1,000, followed by revenues of £300, £400 and £500 in the three years following the initial payment.
a) At an interest rate of 8%, what is the net present value of the project? [5]
b) Will the internal rate of return be greater than, less than or equal to 8%? [3]
c) At an interest rate of 10%, what is the net present value of the project? [2]
d) What value would the third and final year of revenues need to take in order to give a net present value of zero at a 10% interest rate? [5]
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12. An electricity industry has 10 GW each of combined cycle gas turbines, coal-fired plant and nuclear plant. The gas turbines have a thermal efficiency of 50%, while the coal-fired plant and nuclear plant have thermal efficiencies of 30%. Gas costs £60/MWh, coal costs £30/MWh, and uranium fuel costs £6/MWh.
a) If the demand for electricity is 16 GW, what is the marginal cost of power? Explain your calculations carefully. [5]
b) If the demand for electricity is 22 GW, what is the marginal cost of power? [2]
The generators now have to buy carbon permits at a cost of £50 per tonne. Assume that each kWh of gas combusted in a plant releases 200 grams of CO2, that each kWh of coal produces 300 grams of CO2 when burnt, and that nuclear is effectively carbon neutral.
c) If the demand for electricity is 14 GW, what is the marginal cost of power? [4]
d) What coal price would be needed to equalise the marginal cost of power from coal and from gas? [4]
Section C. Answer ONE question from this section. Each question is worth 25 marks.
13. Why do externalities pose a problem for society? Give an example of a positive and a negative externality in the energy sector, and explain the government policies used to internalise them. [25]
14. What makes electricity a difficult commodity to trade? How have these problems been overcome in typical liberalised markets? [25]
15. Explain the theory and evidence for peak oil. What problems are there in estimating the date of a global peak in production? [25]
16. What are the similarities and differences between a carbon tax and ‘cap and trade’ schemes? Why has one of these policies been more widely used than the other? [25]
A24431 Calculators may be used in this examination but must not be used to store text. Calculators with the ability to store text should have their memories deleted prior to the start of the examination
TURN OVER
College of Engineering & Physical Sciences (School of Electronic, Electrical & Computer Engineering)
Single Honours Degrees of BEng & MEng
Chemical & Energy Engineering
Civil & Energy Engineering
Electrical & Energy Engineering
Materials Science & Energy Engineering
Level H
04 21169 (CE3EECa)
ENERGY ECONOMICS
Summer Examinations 2014
Time Allowed: 2 hours
Answer THREE questions from Section A (ten marks each), TWO questions from Section B (fifteen marks each), and TWO questions from Section C (twenty marks).
The allocation of marks within each question is stated in the right-hand margin.
1
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Section A
Answer THREE questions from this section.
Each question is worth 10 marks.
1. Describe, with a diagram, how the equilibrium price of a product will change with shifts in supply and demand, and give an example of each in the energy sector.
[10]
2. Use a diagram to show how a monopoly can lead to a price of a product being above that in a perfectly competitive market. Give a description of a monopoly in the energy sector. [10]
3. Describe how the Hotelling model explains the pricing of exhaustible resources. [10]
4. Draw a typical load-duration curve for the UK’s electricity system, and annotate to show the operation of generation plant along it, giving a description of the merit order. [10]
5. Describe how game theory can be applied to the energy market. [10]
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Section B
Answer TWO questions from this section.
Each question is worth 15 marks.
As well as calculating the answers, explain the method you use.
6. The demand for a good is given by Qd = 36 – P where Qd is the quantity demanded, and P is the market price. The supply of this good is given by Qs = ½ (P – T) – 3 where Qs is the quantity supplied and T is the tax on the good.
(a) If T = 0, what is the market price and what is the quantity supplied? [4]
(b) If T = 6, what is the market price and what is the quantity supplied? [3]
(c) How much worse off, in total, are producers with the tax? [2]
(d) How much worse off, in total, are consumers with the tax? [2]
(e) How much better off is the government? [2]
(f) How are your answers to (c), (d) and (e) related to the deadweight loss of the tax? [2]
7. A new offshore wind turbine has been developed which has CapEx of £500,000 and annual OpEx of £50,000. It will take one year to construct, then supply 2000 MWh/year, selling at £100/MWh, but only for four years of operation before it sinks.
You may use the following table in calculations:
Year discount factor Year discount factor
1 0.93 6 0.65
2 0.87 7 0.60
3 0.80 8 0.56
4 0.75 9 0.52
5 0.70 10 0.49
(a)
What is the NPV of the investment? [4]
(b) What is the Levelised Cost of Electricity generated by the turbine? [5]
The owners believe there is an 80% chance that a new law will be passed next year that will introduce a £10/MWh subsidy the following year.
(c) What is the option value of waiting for this law to be passed before constructing the turbine? [6]
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8. An electricity industry has 20 GW each of combined cycle gas turbines, coal-fired plant and nuclear plant. The gas turbines have a thermal efficiency of 50%, while the coal-fired plant and nuclear plant have thermal efficiencies of 30%. Gas costs £60/MWh, coal costs £30/MWh, and uranium fuel costs £6/MWh.
(a) If the demand for electricity is 28 GW, what is the marginal cost of power? Explain your calculations carefully. [5]
(b) If the demand for electricity is 42 GW, what is the marginal cost of power? [2]
The generators now have to buy carbon permits at a cost of £10 per tonne of CO2 emitted. Assume that each kWh of gas combusted in a plant releases 200 grams of CO2, that each kWh of coal produces 300 grams of CO2 when burnt, and that nuclear is effectively carbon neutral.
(c) If the demand for electricity is 32 GW, what is the marginal cost of power? [4]
(d) What carbon price would be needed to equalise the marginal cost of power from coal and from gas? [4]
9. An electricity network has three nodes, A, B and C. There are three lines, AB, AC and BC, linking the three nodes. The generator at A has a marginal cost of £20/MWh. The generator at B has a marginal cost of £120/MWh. There is no generator at C. There is a (binding) constraint on the amount of power that can flow from A to C on line AC. The other lines are not constrained. Generators A and B both have spare capacity.
(a) What is the marginal cost of electricity at A? Why? [3]
(b) What is the marginal cost of electricity at B? Why? [3]
(c) What is the marginal cost of electricity at C? Why? [5]
(d) What is the shadow cost of the constraint on AC? Justify your answer. [4]
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END OF PAPER
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Section C
Answer TWO questions from this section.
Each question is worth 20 marks.
10. What policies from the European Union having an impact on energy systems in Member States, and how? [20]
11. Describe how models and scenarios of the energy system can inform policy making in Governments. [20]
12. How has the global oil market changed since 1970, and what are the prospects for the future? [20]
13. How (and why) should the UK support renewable electricity generators? [20]
EE3EEC Any calculator
Page TURN OVER
1
Calculators may be used in this examination but must not be used to store text. Calculators with the ability to store text should have their memories deleted prior
to the start of the examination.
Special Requirements: None
Department of Electronic, Electrical and Systems Engineering
Level H
04 21169 (EE3EEC)
Energy Economics
Summer Examinations 2016
Time Allowed: 2 hours
Answer THREE questions from Section A (ten marks each), TWO questions from Section B (fifteen marks each),
and TWO questions from Section C (twenty marks each).
EE3EEC Any calculator
Page TURN OVER
2
The allocation of marks within each question is stated in the right-hand margin.
Section A. Answer THREE questions from this section.
Each question is worth 10 marks.
1. Define the price elasticity of demand, and the factors that can affect it. [10]
2. What are the assumptions made for (a) perfect competition, and (b) a monopoly?
[10]
3. Give the main costs that go to making up a domestic consumer’s electricity bill, and an indication of their relative size.
[10]
4. Use a diagram to describe a Marginal Abatement Cost Curve, and the associated policy interventions that can be applied to meet emissions reduction objectives.
[10]
5. Describe how current oil production and proved reserves are concentrated across the globe, and the trends in these over the last 30 years.
[10]
Section B. Answer TWO questions from this section.
Each question is worth 15 marks.
As well as calculating the answers, explain the method you use.
6. An electricity network has three nodes, A, B and C. There are three lines, AB, AC and BC, linking the three nodes. The generator at A has a marginal cost of £30/MWh. The generator at B has a marginal cost of £50/MWh. There is no generator at C. There is a (binding) constraint on the amount of power that can flow from A to C on line AC. The other lines are not constrained. Generators A and B both have spare capacity.
a) What is the marginal cost of electricity at A? Why? [3]
b) What is the marginal cost of electricity at B? Why? [3]
c) What is the marginal cost of electricity at C? Why? [5]
d) What is the shadow cost of the constraint AC? Justify your answer. [4]
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7. Consider an investment project which involves an initial payment of £200, followed by revenues of £75, £85 and £95 in the three years following the initial payment.
a) At a discount rate of 10%, what is the net present value of the project? [4]
b) Will the internal rate of return be greater than, less than or equal to 10%? [2]
c) At a discount rate of 15%, what is the net present value of the project? [3]
d) What value would the third and final year of revenues need to take in order to give a net present value of zero at a 15% discount rate?
[3]
e) Explain how the choice of discount rate is important when investing in climate change mitigation actions.
[3]
8. Generator A has a cost of CA = 4QA 2 where QA is the generator’s output.
Generator B has a cost of CB = 8QB 2 where QB is the generator’s output.
The total demand for electricity is 36 units.
Using a Lagrange multiplier, and explaining your method:
a) What is the optimal output from generator A? [4]
b) What is the optimal output from generator B? [2]
c) What is the total cost? [2]
d) What is the marginal cost of meeting demand (system lambda)? [4]
e) Describe the main costs of generation from OCGT and nuclear, and how these affect their operation.
[3]
9. A monopoly has total costs given by C = 15 + 4 Q where Q is the quantity produced. The demand for its product is given by P = 32 – 2Q where P is the market price.
a) Give (and explain) the formula for the monopolist’s marginal costs. [3]
b) Give (and explain) the formula for the monopolist’s total revenue [3]
c) What is the profit-maximising quantity to produce? [5]
d) What will the market price be? [2]
e) How much more would the monopolist sell if its price was equal to
marginal cost?
[2]
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Section C. Answer TWO questions from this section.
Each question is worth 20 marks.
10. Give an example from the past year that shows how economics plays an important role in the development of the energy system. Summarise the story, provide some economic analysis of the events, note what the reaction in the media has been, and comment on what this could mean for meeting energy policy aims
[20]
11. Discuss why energy technology costs are expected to reduce over time, and the governance styles through which innovation has been supported. Give examples of energy technologies where cost reductions have, and have not, been seen in recent years.
[20]
12. Discuss how energy storage could be an important component of an efficient energy system, and what the barriers to its deployment are.
[20]
13. Describe how the UK’s electricity market has changed since 1980, outlining the main market mechanisms that have been introduced.
[20]
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A24431 Page 1 of 4 TURN OVER
Calculators may be used in this examination but must not be used to store text.
Calculators with the ability to store text should have their memories deleted prior to the start of the examination.
Special Requirements: None
School of Engineering Department of Electronic, Electrical and Systems Engineering
Level H
04 21169
Energy Economics
Summer Examinations 2017
Time Allowed: 2 hours
Answer THREE questions from Section A (ten marks each), TWO questions from Section B (fifteen marks each),
and TWO questions from Section C (twenty marks each).
The allocation of marks within each question is stated in the right-hand margin.
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A24431 Page 2 of 4 TURN OVER
Section A. Answer THREE questions from this section.
Each question is worth 10 marks.
1. Describe with a diagram what is meant by a ‘deadweight loss’ in the case of both a tax being imposed on, and a subsidy being given to, the sale of products.
[10]
2. Describe how the Hotelling model explains the pricing of exhaustible resources.
[10]
3. Outline the main actors across the UK’s electricity market, and how money flows between them.
[10]
4. Sketch and annotate a cubic cost function of a product, showing how average and marginal costs change with quantity.
[10]
5. Compare how different discount rates are used to assess the costs and benefits of projects or programmes.
[10]
Section B. Answer TWO questions from this section.
Each question is worth 15 marks.
When required to calculate an answer, explain the method you use.
6. Consider an industry with two firms in it, 1 and 2. Their outputs are given by q1 and q2.
• The industry’s price, relative to those outputs, is given by the (inverse) demand function, which is p = 264 – 2 (q1 + q2).
• The cost function of firm 1 is c1 = 48 q1
• The cost function of firm 2 is c2 = 24 q2 Answer the following questions, explaining carefully what you are doing at each stage:
(a) Write down firm 1’s profits, as a function of q1 and q2. [1]
(b) Find each firm’s reaction function, which gives its profit-maximising output as a function of the other firm’s output.
[2]
(c) What would each firm produce in the market equilibrium? [2]
(d) What will the market price be? [1]
(e) What will be the level of each firm’s profits in this equilibrium? [1]
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Now assume that each firm has the same costs, given by ci = c qi for i = 1, 2.
(f) What level of c do we need to get the same market price as in the earlier answer? How does it compare to the earlier values?
[3]
(g) What is the level of each firm’s profits in this equilibrium? [2]
(h) Does the industry as a whole make more or less in profit if it has symmetric costs, compared to the profits with asymmetric costs? Why?
[3]
7. What would happen (in the UK markets) in response to each of the lettered events? Consider movements along, or shifts of, the demand and/or supply curves in each case, referring to the numbers below, and give an explanation.
(a) The population drops [3]
(b) The weather is unusually cold this winter [3]
(c) Landlords are legally required to ensure rented homes are properly insulated
[3]
(d) The price of coal on world markets drops [3]
(e) New supplies of natural gas are found in Norway [3]
(f) All fossil fuel power stations have to fit additional pollution control equipment
[3]
(i) A movement along the demand curve for gas (ii) A shift of the demand curve for gas to the right (iii) A shift of the demand curve for gas to the left (iv) A movement along the supply curve for gas (v) A shift of the supply curve for gas to the right (vi) A shift of the supply curve for gas to the left (vii) A movement along the demand curve for electricity (viii) A shift of the demand curve for electricity to the right (ix) A shift of the demand curve for electricity to the left (x) A movement along the supply curve for electricity (xi) A shift of the supply curve for electricity to the right (xii) A shift of the supply curve for electricity to the left
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A24431 Page 4 of 4 END OF PAPER
8. The demand for a good is given by Qd = 80 – 2P where Qd is the quantity demanded, a