Northwestern University

Econ 371

Economics of Energy
Spring 2016

Problem Set #3
Due Monday, May 9

Please, make sure to put your solutions in the allowed space. Show your work in
the main area, and put the main numbers in the provided box. There are a total
of 20 points. You may work with groups of up to three people. If you work
in groups, make sure your problem set gets submitted correctly through Canvas.
In doubt, each of you can submit the file. Please, write the names of the
members of your group in the top of this document.
Question 1. (10 points)

Peak-Load Pricing - Getting the technology mix

In this exercise, you will solve for the peak-load pricing model using some real data from the
Iberian electricity market.
To perform this exercise, you will need to download a data set with hourly data on electricity
demand and renewable production during 2014.
You can analyze the data using any program that you like (Excel, Stata, R,...).
(a) Plot the load duration curve in this market. [Hint: Sort the demand from highest to
lowest to obtain a plot on the level of demand at dierent hours in the year.]
(a) [2 points]

Continuation of Question 1.
Suppose now that you can serve this demand with dierent technologies. For each unit built,
these are the costs of the dierent technologies:
Technology
Base load
Intermediate
Peaking

Capital Cost (FC)

Operating Costs (MC)

$240, 000
$160, 000
$80, 000

$20
$35
$80

For example, to build a base load unit (one MW), there is an annualized fixed cost of
$240K/MW and then you pay $20/MWh for every hour you run the power plant.
Additionally, there is the option to curtail demand (i.e., cut some electricity). The cost of
such event is estimated to have a marginal cost of $4,080 per hour, and no fixed cost.
(b) Plot the costs of each of these technologies including curtailing (MC = 4,080), as a
function of utilization (hours).

(b) [2 points]

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