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Consider an electricity market where the base of the demand curve is vertical and varies linearly...

Consider an electricity market where the base of the demand curve is vertical and varies linearly between 4000MW and 8000MW (so is equally likely to be found anywhere in that range). Above 7500MW demand can be curtailed at a price of $5000/MWh. The market is competitive with three types of plants as below. Technology FC per MWh Variable costs per MWh Carbon Emissions in tonnes per MWh Peak (diesel peaker) $15 $150 25 Mid (gas) $30 $60 10 Baseload (hydro) $50 $0 0

(a)What is the optimal amount of baseload plant that should be built? (2 marks)

(b) What is the duration of the price spike so that the peaker plant just recovers its fixed costs? (2 marks)

(c) What is the optimum mid-load capacity? (2 marks)

(d) What is the total capacity and hence peak capacity? (2 marks)

(e) Sketch the load duration curve and the offer stack (2 marks) (f) Show all plants just cover costs (4 marks)

(g) Suppose now the government imposes a tax of $30 a tonne. Find the optimal capacity mix supposing that capacity mix adjusts in the long run to the tax. What is the average price now and how does it compare to the average price with no carbon tax? (6 marks)

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