Consider a highly stylized market where the supply at the moment consists only of coal-fired generation with private mar

[answerhappygod]

Consider a highly stylized market where the supply at the moment
consists only of coal-fired generation with private marginal cost
of 20 EUR/MWh. On this market, the coal-fired generation can be
replaced with a wind power during 2900 hours of the year (i.e. the
capacity factor is ca. 33%). Building wind power has an overnight
investment cost of 1000000 EUR/MW and 0 EUR/MWh marginal cost. The
cost of capital is 5.0% and the life-time of the wind plant is 20
years.
No need to consider any other costs. Report the answer with two
decimal digits (e.g. 12.34). To ensure that you get the exact
answer, do the rounding only at the last stage of your calculation.
Subquestions a-c) follow directly from the lecture materials, d)
needs some more thought. Each subquestion gives 3 points.
a) In a competitive market, what would be the optimal bid of a
coal-fired plant?
b) Given the parameters above, what would be the levelized cost
of capital for a wind plant?
c) Assume that the marginal damages from emissions are flat at
60 t/CO2. The coal production causes emissions at a rate of 0.8
tCO2 per 1 MWh of electricity generated. If an optimal Pigouvian
tax is implemented, what would be new marginal cost of the coal
plant?
d) Assume now that the only feasible policy measure for you to
reduce coal use is to subsidize wind R&D, i.e. forget the CO2
pricing. Assume that out of the current 10 000 TWh of coal-fired
generation in the world per year, wind can technically replace 4
000 TWh per year. How many billion of EUR would you be willing to
invest to R&D at most to reduce the levelized capital cost of
wind power below the marginal cost of coal production? The
assumption is that firms will then replace coal with wind as it's
cheaper (Hint: Wind replaces coal for several years -> It's
going to be a lot.)
Remember: The social cost of carbon is assumed to be 60 t/CO2,
the interest rate is 5.0%, and the wind plants will operate for 20
years (ignore effects beyond that).