Problem 1 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 if 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 (same as Utility 2) Tech Capacity MC Coal 1000 $10 Gas OC 750 $30 Gas OT 250 $50 Demand in the Baja market follows two levels, peak and of-peak and is perfectly inelastic. Assume that in one year there are 5000 of-peak hours and 5000 peak hours. Demand in the peak hours is 3700 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. (a) What will be the on peak and of-peak prices in this market? (b) You are offered the opportunity to lease one of the above generation portfolios forone year. This means you will earn revenues according to the market clearing prices in 5000 #f-peak and 5000 peak hours. How much would you be willing to pay for this lease (in other words, 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 dur- ing peak hours. The capital cost of the technology is $215,(100 per MW of capacity. Unfortunately it is flimsy 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 profit from this investment. (d) Would your answer change if the solar could somehow also operate during $-peak as well as peak hours?"