This problem will highlight some of the features of deregulated (competitive) and regulated elec-

tricity markets. It may be helpful to do your calculations in Excel.

In regulated electricity markets, prices are set at so-called average cost pricing (ACP). In each

period, the utility meets demand by turning on the cheapest generators rst. The ACP is set

by taking the weighted average of marginal costs for all plants producing power each period and

adding a regulator-approved rate of return.

In deregulated regions, dispatch is set by the market. Each period, every generator submits to

the auctioneer the quantity they will supply at a given price. Absent market power, the correct

strategy here is to submit your true marginal cost. The auctioneer then selects the cheapest bidders

until demand is met. Every plant that supplies power receives payment equal to the marginal cost

of the most expensive dispatched plant (MCP).

Consider a market with three types of power plants:

There are two (inelastic) demand curves in this market: a peak period, with demand of 7000 MWh, and an off-peak period, with demand of 4000 MWh.

a) Calculate the weighted average marginal cost for each period

Fuel Nuclear Coal Natural Gas Marginal Capacity Cost Co2 (MW) ($/MWh) (tons/MWh) 20 1000 1 4000 40 3000 60 0.3