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Crawford School of Public Policy EXAMINATION
Semester 2 – End of Semester, 2019
IDEC8089_Semester 2 Energy Economics
This paper is for all students.
Examination Duration: 120 minutes Reading Time: 15 minutes Exam Conditions:
Central Examination
Students must return the examination paper at the end of the examination This examination paper is available to the ANU Library archives Materials Permitted In The Exam Venue:
(No electronic aids are permitted e.g. laptops, phones)
Calculator (non programmable)
Materials To Be Supplied To Students:
1 x 20 page plain
Scribble Paper Instructions To Students: Please show all working.
Semester 2 – End of Semester, 2019
IDEC8089_Semester 2 Energy Economics
Page 1 of 4
SECTION A – TRUE/FALSE [30 marks]
[6 marks each]
State whether each is TRUE or FALSE and concisely explain your reasoning as well as you can.
1. If the wholesale price is high, an electricity generator may regret entering into a contract for difference arrangement.
2. If a baseline-and-credit emissions trading scheme is in place, a price signal exists that will incentivise reductions in emissions.
3. An oil resource rent tax involves a percentage tax on accounting profits from an oil extraction site.
4. Probabilistic safety analysis (PSA) of a proposed nuclear power station cannot take into account the costs of a nuclear accident on the natural environment.
5. When bidding into the wholesale spot market, each electricity generator should always bid its marginal cost of generation.
SECTION B – CONCEPTUAL [30 marks]
[10 marks each]
Use at least one graph in each of your answers.
6. Missing money
What is the “missing money problem” in electricity markets? What are its implications? Briefly describe two approaches for reducing the problem.
7. Time-varying prices
Explain how moving to time-varying retail electricity prices can lead to improved outcomes from an economic point of view. Please focus on opportunities from both lower prices at some times and higher prices at other times.
8. Domestic reservation policy
What is a domestic reservation policy for natural gas? What would be the advantages and disadvantages for Australia from adopting this policy?
Semester 2 – End of Semester, 2019
IDEC8089_Semester 2 Energy Economics
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Programming Help
SECTION C – CALCULATIONS [40 marks]
Make sure to provide the units for your answers.
9. Probabilistic safety analysis for nuclear [20 marks] Imagine that there are two design options for a new nuclear power station. The probabilistic safety analysis (PSA) parameters for each option are shown in Table 1.
Assume a real annual discount rate of 0.06 and that the life of each plant will be 40 years. For simplicity, assume that the plants can be opened immediately and are identical in all respects other than their level of safety. Also assume that there are no risks to consider after the 40 years of plant operation.
Probabilistic safety analysis (PSA) parameters for a new nuclear power station
Source term
(% of inventory) Design option 1 0
Design option 2 0
($ million; real prices)
4,200 100,210 1,000,000
800 20,000 1,000,000
Annual probability
0.99 0.004 0.003 0.002 0.001
0.994 0.003 0.002 0.0008 0.0002
a) Define “source term” in this context. [2 marks]
b) Based on the above data, what is the minimum up-front amount that society should be willing to pay for the safer option? Show your calculations clearly. [12 marks]
c) If a higher discount rate were used, should society be willing to pay more or less for a safer design? Explain the intuition behind your answer. Using the numbers above, provide a demonstration of this phenomenon. [6 marks]
Semester 2 – End of Semester, 2019
IDEC8089_Semester 2 Energy Economics
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10. International oil trade [20 marks] Imagine that the market for oil is characterised by the following demand and supply
functions:
United States (US) QD =4,000–20P QS =20P
Rest of world (RoW) QD =8,000–40P
Price (P) is in $/barrel. Quantity (Q) is in million barrels. D is demand. S is supply. There are no barriers to trade. Both markets are competitive. P, Q ≥ 0.
a) If there are no transaction costs, calculate the equilibrium oil price and the quantity of oil that will be traded between the US and the RoW. In which direction will the trade flow? [8 marks]
b) If the transaction cost of trade between the two markets is $6 per barrel, calculate the equilibrium oil prices in both the US and the RoW. [8 marks]
c) What is the “law of one price” in economics? Explain whether your above results are consistent with this law. [4 marks]
END OF EXAMINATION
Semester 2 – End of Semester, 2019
IDEC8089_Semester 2 Energy Economics
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