Question
Assume a constant marginal cost of $0.01/kwh for hydro and $0.09/kwh for natural gas given installed capacity. Assume that installed capacity can be bought at
Assume a constant marginal cost of $0.01/kwh for hydro and $0.09/kwh for natural gas given installed capacity. Assume that installed capacity can be bought at the beginning of the year and sold at the end of the year at the same price and that the discount rate or interest rate is 8.76% and that there are 8760 hours in a year. A kilowatt of natural gas capacity costs $1000 and a kilowatt of hydro capacity costs $10,000. Because you can buy and sell the capacity at the same price this means that the fixed cost of installed capacity is just the opportunity cost of capital, or the interest rate times the purchase price of the capacity. a. What is the average total cost of producing 8760 kilowatt hours in a year using one kilowatt of installed hydro capacity? b. What is the average total cost of producing 8760 kilowatt hours in a year using one kilowatt of installed natural gas capacity?
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