2. Microeconomics fundamentals Flashcards
How is the marginal cost defined?
The change in total cost when output rises or declines by one unit
How are marginal cost mathematically determined?
As the derivative of total fuel costs with respect to the amount of electricity produced.
How is the wholesale marginal cost defined in the short run?
The variable cost of the last unit needed to satisfy the demand at any given time
Which cost is most important in the short term?
Marginal cost
Which cost is most important in the long term?
LCOE
Levelized cost of energy
What is the LCOE?
The average present cost of electricity generation for a generating plant over its life time
On which parameters ar the demand and generation bid based on the short term?
demand = marginal utility production = marginal cost
In which cases is generation not sufficient to supply all demand?
- Not enough available generation
2. Cost of supplying is above the price the demand is willing to pay
In which cases is the equilibrium price equal to the non-served energy?
When generation is not sufficient to supply all demand
- not enough available generation
- cost of supplying is above the price the demand is willing to pay
Which type of plan is best suited if it is expected to be producing during many hours?
high-investment & low-variable costs
Which type of plan is best suited if it is expected to be producing during few hours?
Low investment & high variable costs
How does a plant recover its investment cost if it only bids its marginal costs?
A plant can recover its investment cost during the hours where higher variable costs plants set the market price.
In the particular case of the highest variable cost plant, the key is the hours of non-served energy, where the price is set by the demand curve.
What is an oligopoly?
A market structure in which only a small number of generating companies compete and therefore they can influence market prices with their decisions.
What is one way a dominant player can exercise market power abuse?
Capacity withholding (or bidding higher than variable costs)
Leads to higher market price with other generation units.
What is the difference between a financial and a physical contract?
Physical contract: you get the product.
Financial contract: you do not get the product, but you need to buy the energy in the short-term market.
What happens at a financial forward?
If a resulting wholesale price (p) is higher than the “strike price” (pf), the generator will refund the difference between the actual price for that period and the “strike price”.
What is the long position?
The obligation to buy electricity at the agreed price.
A long position profits when prices rise
What is the short position
The obligation to sell the asset at the agreed price.
A short position profits when prices go down
Without the financial you would have received far less money
What is a call option?
Option contract that gives the owner the right, but not the obligation, to buy
- a specified amount of an underlying security at
- a specified price withing
- a specified time.
The long position (buyer) receives
- nothing if the price is equal or below the strike price
- the difference if the price is above the strike price
What is a put option?
The buyer (demand) pays the seller (generator) the difference between the agreed price (strike) and the market price if the difference is positive
Economics efficiency as pricing principle
- Allocative efficiency
- Productive efficiency
- Dynamic efficiency
How’s allocative efficiency defined?
Goods and services are distributed according to consumer preferences
How are productive and dynamic efficiency?
Productive efficiency
- Optimal combination of inputs to produce maximum output for the minimum cost
Dynamic efficiency
- Productive efficiency over a period of time
Other basic pricing principles
- Transparency
- Simplicity
- Social & political acceptance
What does revenue sufficiency/adequacy mean?
- Enough to finance the business as well as any new investment required to continue to operate in the future
