1. You run a venture capital fund that is considering an investment in the newly deregulated power market in Baja California. Baja has a small market with two utilities that are both selling off their generation assets. The capacities and costs of the two generation portfolios are described in Tables 1 and 2 below. 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 Tech Capacity MC Coal 1500 $10 Gas Steam 500 $30 Table 2: Generation portfolio of Utility 2 Capacity Coal 500 $10 Gas Steam 1000 $30 Gas Turbine 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 rm would sell 250 MW. Assume that generators cannot exercise market power. (a) What will be the on peak and off-peak prices in this market? Duff = 1500 Dpeak = 3800 (b) You are offered the opportunity to lease portfolio 2 for one year. This means you will earn revenues according to the market clearing prices in 5000 oil-peak and 5000 peak hours. How much would you be Willing to pay for this lease (in other words7 What is the expected annual producer surplus for one of these portfolios)? (c) In the above market, you have a chance to invest in a new solar plant that would only operate during peak hours. The capital cost of the technology is $215,000 per MW of capacity. Unfortunately it is imsy technology that will only last one year. The marginal cost of a solar plant is zero. Prices will be set according to the intersection of supply and demand using the same approach as before. How much solar capacity would you add to this market? Explain your expected net prot from this investment. (d) Would your answer change if the solar could somehow also operate during off-peak as well as peak hours