Question 2 - Application of Supply and Demand to the Wholesale Electricity Market: The Economics ofDispatch. (Total:35marks.)

The wholesale market in the National Energy market (NEM) is organised as an energy-only, uniform price auction. These auctions determine the price of the electricity and the dispatch order of the generators supplying electricity. Dispatch order refers to the order in which generators supply electricity to meet demand in the market. Uniform auction means that all generators that get dispatched receive the same price for each MWh of electricity dispatched.

In these auctions, generators submit supply bids that report how much electricity the generator is willing to supply at different prices. The supply bids submitted by the generators to the market operator consist of 10 pairs of prices and quantities. Each pair reports the quantity of electricity the generator is willing to supply at the price. For example, suppose that a generator submitted the following bid:

This bid states that the generator is willing to supply 100 MWh at a price equal to $-100; the generator is also willing to supply 50 MWh at a price equal to $25. Consequently, the generator is willing to supply a total of 150 MWh of electricity if the price is greater than 25 but less than 50. Or at a price equal to $50, the generator is willing to supply a total of 170 MWh of electricity.

Suppose that Tasmania's wholesale electricity market is supplied by 5 generators. In the excel sheet called Bids.xlsx are the supply bids for these generators for one auction. Note that the generators use different fuels. For example, generators 1 and 2 are coal generators, whereas generators 4 and 5 are wind turbines. You will use these bid data to answer the following questions.

How much is generator 1 willing to supply in the market price is $460? How much is generator 4 willing to supply if the market price is $460? How much are all the generators willing to supply if the market price is $460 (aggregate electricity).

(2 marks)

Plot the supply functions for generator 1 and generator 4 and include these in your write-up (Hint: think carefully about what the supply functions look like). Provide possible explanations why the supply functions for the two generators are different.

(4 marks)

Draw a table that reports the aggregate supply schedule for the market and provide the table in your write-up. Plot the aggregate supply function for the market and provide the diagram in your write-up. Again, think carefully about the shape of the supply function.

(4 marks)

P ($)	-100	0	25	30	35	50	70	150	200	300
Q (MWh)	100	0	50	0	0	20	25	35	0	70

7

Suppose aggregate demand is perfectly elastic and equal to 830 MW. Illustrate the equilibrium in the same diagram you made in part c). Show the equilibrium price and quantity. Be sure to label all parts of your diagram.

(5 marks)

Make a table that reports the revenue earned by each generator. Compute aggregate

revenue.

(2 marks)

Compute producer surplus. Explain why producer surplus and the aggregate revenue

computed in part e) are different.

(5 marks)

Generator 4 is a wind turbine. Suppose that the available wind was not sufficient to produce the electricity the generator bid into the market. Compute the new if generator 4 cannot be dispatched. Illustrate the changes in the market and explain the changes to the equilibrium quantity and price.

(8 marks)

Do the generators that supply the market benefit from the lack of wind? You must support

your answer with evidence.

(5 marks)