Question

1. You run a venture capital fund that is considering an investment in the newly dereg- ulated power market in Baja California. Baja has a small market with two utilities that are both selling off their generation assets. Both utilities have identical generation portfolios. The new power market will set prices according to the intercept of supply and demand. The supply curve will be determined by the registered marginal cost of every generator in the market. Those costs (for one utility) are given in the table below Table 1: Generation portfolio of Utility 1 Capacity MC 1500 $10 500 S30 Coal Gas Steam Table 2: Generation portfolio of Utility 2 Coal Gas Steam Gas Turbine Capacity MC 500 $10 1000 $30 500 $50 Demand in the Baja market follows two levels, peak and off-peak and is perfectly inelastic. Assume that in one year there are 5000 off-peak hours and 5000 peak hours. Demand in the peak hours is 3800 MW and in the off-peak it is 1500 MW. Prices are set at the intersection of demand and the aggregate market supply curve. If there is a tie in the cost of generation (between two firms) when setting the market price, the quantities are evenly divided between the two portfolios. For example if demand were 500 MW, the price would be $10 (the MC of the coal plants) and each firm would sell 250 MW. Assume that generators cannot exercise market power

Answer 1

A) The on peak price will be $10 and the off peak price will be $30.

The graph is as followed.

B) If the opportunity to lease portfolio 2 for one year is offered. This means you will earn revenue, According to the market so the generators will exactly get break even point that means there is no producer surplus. Producer and earning no profit in any period. so there is no producer surplus for one(any) of these portfolio.