2. (20 points) Suppose an electric utility is considering whether to install a wind farm with 20 megawatts (Mw) of capacity instead of a natural gas plant that would generate the same amount of annual electricity. An engineering study showed that the site for the wind farm would produce a load factor of 25 percent. (Actual generation would be 25 percent of capacity on average over the course of a year.) The natural gas plant could be operated with a load factor of 50 percent. Capital costs for the wind farm would $1.5 million per megawatt, compared to $1.0 million per megawatt for the natural gas plant. Operating costs for both plants would be $2 million per year excluding fuel costs.

b. What would be the levelized cost of electricity from the wind farm and the natural gas plant generating the same annual electricity, assuming a 10 percent annual interest rate and that both facilities have a 25 year life? Explain your calculations. Which is the least cost source of electricity? c. The electric utility is investor-owned and subject to rate of return regulation. The capital costs are allowed in the rate base, but not operating or fuel costs. If the regulatory agency allows the firm to earn a 10 percent return on the rate base, what would be the utility's regulated profit with each type of generation? Which would the utility prefer? Explain how you derived your answer. d. If the electric utility has to pay an emission fee of $25 per metric ton of carbon dioxide emitted from fuel consumption, what would be the effect on the levelized cost of power for the gas plant? Use the emission factorsfor natural gas combustion on the EIA's website to derive your answers. e. If the price of natural gas increases to $6 per MBtu, how would that change the answers to parts b and c?