Final Exam for ICPE 611 Economics of Energy
February 2022
Instructors: Bruce McCarl and Richard Woodward
1. (8 points) Suppose your firm was deciding whether to produce via a new technology with a
process that: a) required a lot of a feedstock that is now in the marketplace at a low price; b)
doubled the firms output of diesel; and c) created a by-product that was said to be usable for
a chemical used in making cosmetics. What issues would you investigate in advising
management as to whether to do this?
Answer: The key issues in advising management is about derivation of user cost, demand
response, energy and product forecasting, energy derivatives, and supply and demand in energy
market.
2. (8 points) Suppose the US government decided to institute a program where it required
production of 25% more wind energy than is produced today and the program is designed so
it would pay wind generators for the difference between the cost of production and the
electricity sale price. What would this do to the sale price for electricity and the cost of wind
energy production? What subsidy would the government need to pay? Do a graphical
analysis.
Answer: As long-term fixed-price power from wind is available and its fuel is free, wind energy
reduces the price volatility associated with conventional energy sources. Government should
pay approximately $10.9 billion in tax incentives went to renewable energy, 4.6 billion to
fossil fuels, and $2.7 billion to energy efficiency or transmission of electricity.
3. (6 points) What is the rebound effect and explain how consideration of it might allow one to
understand the results of a program that subsidized new efficient utility generators?
Answer: Rebound effects, measured in terms of GHG emissions, range from 0% to 32% for
household energy consumption, 26% to 67% for automobile fuel usage, and 67% to 108% for
initiatives to decrease food waste. Measures taken by low-income families result in bigger rebound
effects, with direct emissions accounting for a larger percentage of the overall rebound impact for
these households. To reduce overall emissions, measures that are subsidised or impact highly taxed
energy commodities may well be ineffective. These results emphasise the need of accounting for
rebound effects in policy evaluations and strengthen the argument for a carbon tax that applies to
the whole economy.
4. (8 points) Conceptually, how would you look at what would a carbon tax of say $10 per ton
of CO2 equivalent imposed by the state do to the relative attractiveness of using natural gas
versus wind power to generate a megawatt hour of power. What information would you need
to find in order to do this? How would you factor in an estimate that production of wind
turbines that produce 30 megawatts of power per year yields one ton of the high GWP gas
SF6?
Answer: The earth is warmed by greenhouse gases, which absorb energy and slow down the rate
at which it escapes into space. Depending on how much energy they can take in, these gases
have different radiative efficiency levels. The period they spend in the atmosphere varies as
well. It is possible to compare the amount of energy absorbed by a tonne of gas emissions
during time periods ranging from 100 years on average to that of one tonne of CO2 emissions
using the global warming potential (GWP) of each gas. CO2 emissions produce long-term
increases in CO2 concentrations in the atmosphere because CO2 has a very long lifetime in
the atmosphere. About a decade is the typical length of time that methane is in the atmosphere.
In contrast, it has a GWP of 28 to 36 because of its ability to absorb much more energy than
CO2. Indirect effects are also taken into consideration by the GWP, such as the formation of
ozone from another greenhouse gas, CH4. An average N2O residence period of 100 years gives
it a global warming potential (GWP) of 265–298 times that of carbon dioxide. Carbon disulfide
gas (CDS), hydrogen fluoride gas (HFC), hydrogen chloride gas (HCFC) and perfluorocarbons
(PFC) are all examples of high-GWP gases. They can store a lot more heat per unit mass than
carbon dioxide can.
5. (7 points) Suppose you are advising a city that supplies local electricity. Suppose upper
management had looked at demographic projections of 30% more people and they indicate
that electrical demand will increase by 35% by 2035. In turn, suppose the staff argues that
your company needs to augment its generation capacity by 35%. They also say we will be
increasing our wholesale price by about 15% in order to fund this expansion.
Answer: To settle the issues, we need to identify them below:

Global Imbalances

Rise of Poverty and Conflicts

Global Health Problems and Crises

Globalisation Trends

Environmental and Energy Security
6. (9 points) List: a) 3 ways would the energy industry might be directly or indirectly impacted
by direct or indirect effects of climate change, b) 3 ways industry assets could be adapted to
reduce the impacts and c) three ways the industry could contribute the limiting the amount of
future climate change though greenhouse gas related actions?
Answer:
(a) Direct or Indirect Effects of Climate Change: Warmer summers and colder winters are
projected to increase power demand for cooling in the summer and reduce demand for heating
in the winter, due to climate change. Climate change may alter the quantity of water available
for the generation of power or the extraction of fuel.
(b) These are:

Coastal Wetlands should be protected.

Agroforestry's Positive Effects on the Environment.

Distribute energy more widely and more decentralised.

Land rights for indigenous peoples must be safeguarded.

Reduce Traffic.
(c) By adopting passive or renewable energy-based hvac equipment, increasing energy efficiency,
and solving other critical concerns, industry may cut its emissions by 7.3 Gt per year. It is
possible to lower emissions by 6.7 Gt of carbon dioxide per year by using new food production
methods.
7. (10 points). The figure below presents the wholesale prices for electricity on February 3,
2022. Temperatures across the state were predicted to fall below freezing in the early
afternoon and then drop to 21 degrees by midnight.
a.(4 points) Based on economic intuition, give two reasons why prices for electricity rose sharply
at 5:00 p.m. after remaining relatively flat during most of the day.
Reasons
1. Due to off-peak hours of electricity consumption.
2. The form of the load curve varies by area and changes with the time of year.
b. (3 points) Based on economic intuition, why would prices drop after 7:00 p.m. even though
temperatures continued to fall over that time.
Without them, the economic intuition remains intact. Off-peak, the variable generation sets the
pricing.
c. (3 points) Most retail customers in Texas pay a fixed price that does not vary during the day. If
retail prices were set so that they vary with wholesale prices, how might that affect prices
paid on a cold day like February 3?
Retail costs have soared over the world as a result of supply chain interruptions, bad weather, and
other factors.
8. (15 points). The figure below presents shows the demand curve from two purchasers of a
good, D1 and D2, and the supply curve for each of three identical firms (e.g., at a price of $4
per unit, each of the three firms would supply 400 units).
a. (3 points) Approximately how many units would be demanded in aggregate if the price is
$1 per unit?
Answer: 4 units.
b. (3 points) Approximately how many units would be supplied in aggregate if the price is
$2 per unit?
Answer: 2 units.
c. (3 points) Approximately what would be the market equilibrium price and quantity?
Answer: It’s constant.
d. (3 points) Suppose that each unit of production leads to environmental costs of $1 that
are external to the market. Approximately what would be the socially optimal quantity?
Answer: Market demand and marginal cost curves must be identical in order to arrive at an
optimum quantity of the good for society. The demand curve and marginal cost curve are
assumed to encompass all of the advantages and expenses, respectively that society has with
this item.
e. (3 points) Suppose that each unit of production leads to environmental costs of $1 that
are external to the market. Approximately what would be the market equilibrium price
and quantity?
Answer: It’s normal in a. market equilibrium price and quantity.
9. (10 points). (a) Define user costs and explain how it would apply to in the context of (b) a
non-renewable resource like oil and (c) a renewable resource like water used for
hydroelectric power.
Answer: To put it simply, a capital asset's "user cost" refers to all expenditures that the asset's
owner or renter incurs while using the item over time. Businesses earn money by using both
labour and the service flows from their capital assets.
10. (12 points). The figure below presents the levelized cost estimates from Lazard for a variety
of energy sources.
a. (4 points). Assuming that these estimates are correct, why do you think solar PV on
residential rooftops is expanding rapidly?
Answer: Due to centralized scaling.
b. (4 points). Based on current costs, is there any reason to believe that coal powered plants
will be pushed to close down due to competitive forces from renewable energy?
Answer: Yes.
c. (4 points). What is the difference between dispatchable and non-dispatchable sources and
how does the cost of electricity storage affect the economic viability of non-dispatchable
sources?
Answer: Energy sources that may be dispatched at the request of power grid operators,
according to market demands, are referred to as "dispatchable generation." Operators
have little control over non-dispatchable renewable energy sources like wind and solar
photovoltaic (PV).
11. (3 points). Michael Skelly, our guest speaker on February 1, has had two major projects
recently, one which was written about in the assigned article and one in which he is currently
involved. What do the two projects have in common and how does the new project differ
from what he did previously?
Answer: It is common due to two different divisions in one single project and it is different because
of the dissimilarity as well as different tasks in project work.
12. (4 points) There are certain economic concepts that almost anyone working in the energy
sector should understand. List 2 such concepts and explain how that might be important to a
professional in the energy industry who is not an economist.
Answer: Economic growth and its conceptual framework relies heavily on the availability of
energy. The utilisation of energy promotes economic productivity and industrial progress from
a purely physical standpoint, and it is therefore essential to the functioning of contemporary
economies.