Key Concepts

A non-comprehensive list of key concepts covered in lecture this year.

  1. Electric Power Markets
    • Know the basic details of electric power systems and be able to explain why that makes electricity markets different from other markets.
    • Understand how an electricity market works. Be able to explain how plants should bid, and be able to compute prices, quanties and profits given a set of plants, marginal costs and demand.
    • Know how market power works in an electricity market, and the factors that make it more or less likely.
    • Understand how to compute levelized cost of energy (LCOE) and be able to compare different technologies. Be able to explain the strengths and weaknesses of LCOE as a metric.
    • Understand how the LCOE relates to the price a plant needs in expectation to want to enter the market. Contrast this with the the price a plant needs to want to produce power once in the market.
  2. Externalities
    • Know the conditions under which markets are efficient. Be able to explain why the market outcome is inefficient when these conditions aren’t met and demonstrate the inefficiency graphically.
    • Understand how a Pigouvian tax can correct for the inefficiency from externalities. Be able to show this graphically.
    • Be familiar with the concept of the social cost of carbon and why it is so difficult to estimate.
      • Know how discounting works and be able to explain how if effects Pigouvian taxes.
    • Understand how a carbon tax works in the electric power sector. Be able to explain the channels through which a carbon tax reduces emissions, and how it effects the relative competitiveness of different types of generators.
    • Understand the Coase Theorem and the conditions under which it holds. Be able to solve a numerical Coase problem, computing the welfare of all parties and range of side payments. Be able to consider what would happen if transaction costs are present.
  3. Incidence
    • Be comfortable showing how consumer and producers are effected by tax, analytically and graphically
    • Be comfortable computing the incidence of a tax based on price changes or surplus changes directly, or using the elasticity formula. Understand how these three are related.
    • Know the difference between statutory and economic incidence.
  4. Subsidies
    • Be able to explain how we know that a subsidy can never be as efficient as a tax and demonstrate this graphically.
    • Know the double dividend and be able to explain the two dividends graphically.
    • Know what it means for a subsidy to well / poorly targeted.
      • Be able to distinguish between average and marginal emissions.
      • Compare two possible subsidy situations and explain which would be a better target for subsidies.
    • Understand how the presense of a subsidy effects entry into a market bidding after entry.
  5. Battery Storage
    • Review why prices are volatile and how batteries make money arbitraging price differences.
      • Based on that, should be able to think through how different groups of producers or consumers will be impacted by batteries.
    • Be able to solve a simple 2 period battery problem numerically or graphically.
  6. Retail Electricity Prices
    • Markets achieve efficiency when prices equal social marginal costs. This is not generally true in retail electricity markets for several reasons: fixed costs, time varying prices, externalities, market power, and regualatory constraints.
    • Be able to explain each of these reasons, and whether they cause prices to be too high or too low. Be able to graph each of these situations and label deadsweight loss.
    • Understand the basics of economic regulation of utilities, including rate of return regulation..
    • Be able to explain how different rate designs (e.g. inclining block rates, time of use rates) effect consumer behavior and utility revenue.
    • Be able to explain the economic issues around residential solar and net metering.
  7. Energy Efficiency
    • Understand how energy efficiency policy differs from Piguovian taxes, and why the former is often preferred politically.
    • What is the energy efficiency gap? Be able to explain the two wins.
    • We spent a lot of time going over the model of the energy efficiency gap presented in Allcott and Greenstone (2012). Be able to explain the model and its implications.
  8. Electric Vehicles
    • Be able to explain why EV subsidies that only target upfront costs are inefficient.
    • Be able to compute additionality and cost-effectiveness of different EV subsidies given demand elasticities and prices.
    • Understand the main channels through which EV’s provide environmental benefits. Be able to explain how these depend on electricity grid mix, charging patterns, and other factors.
    • Be able to explain the main challenges with EV charging infrastructure and how these can effect EV adoption.