Economic concepts Flashcards
(119 cards)
1
Q
What are the key characteristics of the UK energy system
A
-Capital intensive
-Long liftetimes
-Geographically extensive - global trade in fuel, international agreements
-Socio-economic impact - energy and energy intensive industries, fuel poverty
-Policy dependent
2
Q
What is scarcity?
A
-The excess of wants over what can actually be produced due to limited resources or production factors e.g labour/land/raw materials/capital
3
Q
What is an opportunity cost?
A
Opportunity cost of an action is the best of the alternative actions which you have to give up
Money may measure this cost, but the cost is what you could do with money
4
Q
What does making rational choices mean?
A
-Assume people choose their best option
-Assume people choose at the margin, what could you do with the extra cost/benefit
5
Q
What is microeconomics?
A
Demand and supply of particular goods, services and resources
6
Q
What is macroeconomics?
A
Aggregated demand and supply of the economy as a whole - inflation, balance of trade, recession, unemployment
7
Q
What assumptions are made for perfect competition
A
-Many firms, many consumers -> no single firm or consumer can affect prices
-Homogeneous product, perfect knowledge -> consumers will buy from the cheapest supplier
-Free entry and exit -> No super-normal profits
8
Q
What is the law of demand?
A
If only price changes - the higher the price of a good, the smaller the quantity demanded
Combo of income and substitution effect
9
Q
What is the income effect?
A
At a higher price, more people will be unable to afford the goods
10
Q
What is the substitution effect?
A
At a higher price, goods will cost more than the alternatives
11
Q
Other than direct price of the product, what else influences demand?
A
-The price of other goods (substitutes and complements)
-Income (normal goods and inferior)
-Future prices
-Population
-Tastes
12
Q
What is the law of supply?
A
Assuming only price changes, the higher the price of a good, the higher the quantity supplied - more companies come into the market
13
Q
What influences supply?
A
-Price of inputs
-Technology to create product
-Government
-Price of other goods (substitutes and complements)
-Profitability of goods in joint production
-Number of firms
-Future prices
14
Q
What is the equilibrium price and how is it denoted?
A
p* = D(p) = S(p)
15
Q
What is the equilibrium quantity and how is it denoted?
A
q* = D(p) = S (p)
16
Q
What is elasticity?
A
-Slope of demand/supply curve
-Measure of responsiveness to price
-Time dependent
17
Q
What is price elasticity of demand?
A
% change in quantity demanded / % change in price
18
Q
What is elastic demand?
A
Where proportional change in DEMAND is GREATER than proportional change in PRICE
19
Q
What is inelastic demand?
A
Where proportional change in DEMAND is LESS than proportional change in PRICE
20
Q
What would perfectly elastic demand look like and mean?
A
-Horizontal line
-Demand increases, price doesn’t change
-Market price for producers
21
Q
What would perfectly inelastic demand look like and mean?
A
Vertical line
Demand doesn’t shift according to price - e.g. an essential
22
Q
What affects elasticity?
A
-How many substitutes are there
-What proportion of your income do you spend on the good
-Timescales - can habits or equipment adjust
23
Q
What is cross-price elasticity of demand?
A
-A relative measure of how quantity of A responds to changes in the price of B
% change of quantity demand of A / % change in price of B
Substitutes +
Complements -
24
Q
What is income elasticity of demand?
A
-Relative measure of how demand quantity responds to change in income
% change in quantity demanded / % change in income
Normal goods +
Inferior goods -
25
What is price elasticity of supply?
-Relative measure of how quantity supplied responds to change in price
% change in quantity supplied /
% change in price
26
What is a marginal benefit?
Extra benefit you get from consuming one extra unit of a good
27
What is a marginal cost
Extra cost involved in producing one extra unit of a good
Generally assume cost increases as quantity increases
28
What is the efficient quantity of a good
The amount produced and consumed when marginal benefit = marginal cost
29
What is consumer surplus?
-Difference between maximum amount consumers would be willing to pay for their level of consumption, and what they actually pay for it
30
What is producer surplus?
The difference between the minimum amount suppliers would be willing to receive for their level of supply and what they actually receive for it
31
What is the law of diminishing marginal returns?
Extra output from additional variable factors will diminish when one or more factors is held fixed
32
What is welfare in market terms?
-An efficient market where consumer surplus and producer surplus are maximised
33
How can Welfare losses be justified?
-Due to market failures which need addressing
-Take into account effects of externalities
-May be the reward for innovation (patents)
Net effect on economic and social welfare needs considering
34
Proportion of tax paid by buyer?
Elasticity of supply/ (elasticity of supply + |elasticity of demand|)
35
What is constant returns to scale
Average cost doesn't change with quantity
36
What is increasing returns to scale? And why does it occur?
Average cost decreases with quantity
could happen due to
physical e.g bigger more efficient machines,
financial e.g getting large loans
specialisation e.g. different workers doing different things
37
What is diminishing returns to scale
Average costs increase with quantity
e.g. Factory may get too big, poor communication, slower work
38
When are profits maximised
Marginal revenue = marginal cost
for a firm in perfect competition, marginal revenue = price
39
What assumptions are needed for a monopoly
-One seller, no close substitutes
-Many buyers
-May be due to a number of barriers to entry:
-Legal
-Natural monopoly: economies of scale/non-duplication e.g. national grid, more efficient to have one firm to get lower costs
-Behavioural/social
40
What is an oligopoly
-Small number of firms
-Some barriers to entry or exit
-Need to predict rivals' reactions
e.g. petrol and electricity sector
41
What is assumed in Cournot competition?
-Describes how competing firms in ogliopoly decide on output quantity
-Competing firms choose a quantity to produce independently and simultaneously.
-Firms produce identical or standardized goods.
-It's assumed that they can't collude or form a cartel.
-Takes rivals outputs as a given
42
What is the internal rate of return for a project?
The interest rate which makes the project's net present value equal to zero
43
What are they key factors in managing electricity
-Demand and generation must match each other continuously
-Electricity storage is limited
-Demand can vary sharply over time ~ most consumers don't see real-time price
-Power stations can fail suddenly
-Most stations can only change output slowly
-System operators must carry reserves
44
What is power, units etc
-A flow kW, MW, GW
45
What is energy units etc
-A stock, flow x time
kWh, MWh, GWh
46
What is capacity
Ability to provide a flow of power
kW,MW, GW
47
What is the overnight cost
-Cost of buying (or building) capacity (£/kW)
48
What is a day-ahead auction?
-Held one day before delivery
-Companies submit offers to sell elec, and bids to buy it in each hour of the next day
-Auctioneer finds market-clearing price for each hour
-Accepted bids and offers are now 'firm' -if you can't deliver you must pay
49
What is a real time/balancing market
-Generally run by system operator
-Trades balance demand and generation
-Most participants are generators -bids to buy back or sell more power
-Some customers can offer to reduce demand, if they are paid for it
-Prices may be set at the margin, may be 'pay as bid'
-Prices then used to cash out imbalances
50
What are key points on electricity network costs?
-Losses proportional to flow squared, lose up to 10% at margin
-Constraints such as distance limit flow on network
-Power can't be steered
-Kirchhoff's laws determine flow
-(N-1) rule, must operate with contingency, ensure enough power if a big power station drops
51
What is nodal pricing and where is it used
-System lambda + marginal cost of moving power from swing bus (reference point) to that node
-North Eastern USA
52
What is the price at the swing bus?
System lamba - marginal cost of generating power there
53
What is the electricity market reform and when was it introduced?
2013
-Feed-in-tariffs with contracts for difference
.Long term contracts for price stability
.generators receive price they achieve in elec market plus top up from market price to agreed level
-Capacity market, ensure no blackouts incase renewables fail
-Emissions performance standard
.Regulations to limit CO2 emitted from new fossil fuel plant, no new coal plants
54
What are the 3 main features of a wholesale electricity market?
-Bilateral trading, long in advance of delivery
-Day ahead trading, auction to sell and buy electricity
-Real-time adjustment, conducting by system operator to ensure everything works
55
What does deregulation mean?
-Process where parts of the regulated sector are opened to competition
56
How did the liberalisation of the energy supply industry change it?
-Reduced role of the state
-Create/enhance competition through deregulation
-Allow entry into elec generation
-Transmission remains a natural monopoly, regulator sets rules for access to the grid
57
What is vertical integration - energy supply?
One firm carries out several different stages of production
58
How does an independent system operator work - vertical separation?
-Company owns assets, separate body runs them
-Reduces conflicts of interest
59
What do economic regulators do?
Try to give firms incentives to keep costs down, high quality service and well structured prices
60
What are the two basic regulatory forms?
1) Rate of return/cost of service
2) Performance based/price
61
What is a natural monopoly?
-Exists when a single firm can serve a market at significantly lower costs than two or more firms would
-Due to economies of scale and non-duplication
e.g electricity networks
62
How does regulating by price level/rate of return work?
-Input focused
-Revenues = costs, supernormal profit is zero
-Set prices in 'rate cases' so firm gets fair rate of return on the fair value of its assets
-Used in USA
63
What is an issue of regulating by price level/rate of return?
-Asymmetric info problem between regulator and utility - company has more knowledge - the more they invest, the more revenue they will be able to collect
- regulator won't be able to know if this is needed input
64
How does performance-based regulation work?
-Strengthens financial incentives to lower costs, output focused
-Decouples link between regulated tariffs and costs
-Formula used to set prices between 'rates cases'
-Used in telecoms industry privatisation in the UK
65
Is the privatised energy market in the UK working
-Yes
-No evidence that companies exploit market power
-Elec prices reflective of costs
-No evidence of generators making excessive profits
-Allows independent generators and suppliers to compete
Negative - difficult for consumer to switch supplier
66
What is contango?
-Spot market price is lower than future delivery
-Can be profitable to buy physical oil now, sell it for future delivery
-Price difference must be more than cost of storage
67
What is backwardation
-When spot prices trade for more than future
-Signals tight supply and encourages oil out of storage
68
What is an externality?
When actions of producers or consumers affect people other than themselves
-Full cost (or benefit) to private firms + externalities of production/consumption
69
When can market failure occur?
-Imperfect market e.g. monopolies, vertical integration, market dominance
-Externalities influence
-Public goods
-Imperfect competition
-Coordination problems
-Failure to allocate resources efficiently
70
What is a public good?
Where positive externalities are so great that the free market may not produce e.g. firm may not make enough profit for it to be worthwhile
71
How can public goods be categorised?
-Non - rivalry
-Non - excludability
-Can only be provided by government or government subsidy
72
What characterises a non-rivalry public good
.consumption by individual doesn't prevent others consuming
.large external benefits compared to private benefits
.socially desirable, privately unprofitable
73
What characterises a non-excludability public good?
-Can't prevent others benefiting from provision of expenditure of a good/service
-No incentive to pay = free-rider problem
e.g flood barriers - can't prevent those living in the area from benefitting
74
What features do GHG emissions have as an externality?
-Global in causes and consequences
-Impacts of climate change are long term and persistent
-Uncertainties and risks in economic impact are wide spread (pervasive)
-Serious risk of major, irreversible change with non-marginal economic effects (effect in number of areas and ways)
75
What is the social time preference rate (STPR) ?
-Value society attaches to present consumption (rather than future) based on comparisons of utility across different times/generations
-3.5%
76
What is Stern discount rate?
-Used low discount rate to emphasise importance of addressing climate change and the benefit to future generations
-Makes sense due to intergenerational ethical issues with c.c.
-Zero time preference
-Have been subject to criticism
77
What were Stern's suggested solutions for Climate Change?
-Carbon price through tax/regulation
-Support renewables including R&D
-Removal of barriers to behavioural change through info and organisational inertia
78
What are the advantages of Marginal Abatement Cost Curves (MACC)?
-Strategic decision making: allows funding to be distributed to achieve greatest possible environmental advantages
-Tech and R&D prioritisation, help cut emissions at lowest possible cost
-Economic efficiency, direct expenditures toward policies with lower abatement costs
-Design policies that balance economic and environmental objectives
79
What are some challenges/limitations of marginal abatement cost curve ?
-Difficult to build accurate baseline scenario due to market imperfection and incomplete information
-Potential to overestimate energy savings, overlapping of various technologies
80
What are the 3 ways to price carbon?
-Market based, taxes emitters face full costs of emissions
-Non market based, laws and regulations
-Tradable permits, quotas on emissions with market based allocation
81
What challenges are there with tradable emissions permits?
-Verification, need to know how much CO2 is actually being emitted in the first place and the change
-Macrofactors - if product demand drops so does emissions without making any improvements
-Overseas credits, credits earned from projects to reduce emissions in other countries may have happened anyway
82
When is taxing corrective policy preferable over quota?
Where benefits of making further reductions in pollution are less impacted by the level of pollution than the costs of delivering the reductinos
83
When is quota corrective policy preferable over taxing?
Where benefits of further reductions in pollution increase more with the level of pollution than the costs of delivering the reductions
84
Explain a virtuous sprial
The more a technology is taken up by users, the more likely it will be produced in greater volumes
So the more likely the costs will go down and efficiencies up
Leading to further adoption etc
85
What are the 4 major classes of increasing returns to adoption?
-Network externalities, value increases as more people use it
-Adaptive expectations, leading design reduces consumer uncertainty
-Economies of scale
-Learning effects from experience of the technology
86
How % share do OPEC countries have of oil reserves?
72%
87
What % share do OPEC countries have of oil production?
36%
88
What countries have oil reserves?
OPEC 72%
US 4%
Canada 10%
Russia 6%
Rest of world <2%
89
What countries produce oil?
US
Russia
China
OPEC
UK
Norway
Canada
(a lot wider)
90
What is energy storage
Buffer between production and consumption
can be placed across the system in different forms and scales
has a capital and running costs
91
What does energy storage do
-balances supply and demand
-affects production and consumption quantities and price
-reduce the system cost
92
What are the challenges facing the electricity market? Found in 2nd REMA consultation
-consumers aren't seeing value of renewable based system
-need to invest to create a renewables based system at pace
-must transition away from unabated gas-based system to flexible, resilient decarbonised one
-operating and optimising cost effectively
93
What barriers need to be overcome to deploy energy storage?
-tech cost and performance
-value uncertainty
-policy/regulations
-societal resistance
94
Barriers to improving energy efficiency?
-financial, lack of access to capital
-hidden transaction costs such as installation time
-lack of information
-risk & uncertainty
-poorly aligned incentives, landlord/tenant split - landlords don't get benefit of insulation
95
What was the demand flexibility service?
-Incentivise consumers and businesses to reduce their power consumption
96
Benefits of participating in demand flexibility service?
-consumer satisfaction
-some rewards earned
-feel good factor
97
Challenges with participating in demand flexibility service?
-Incentives/rewards were fairly low
-Households who are struggling financially or who have long term health impacts did not find it as easy or rewarding to participate
-Unfairness - those with higher and more flexible demand were able to lower demand more easily and be rewarded than those with already low demands
98
Give two examples of UK policy failure
-Green deal 2013
~loans given to customers to make energy efficiency improvements
~Predicted savings often didn't transpire, was initially expensive, and had high risk
~up-take was slow, schemed axed in 2013
-Green homes grant 2020
~vouchers worth £5000 for energy saving improvements available
~low number were issued, government under invested
99
Practical barriers to energy efficiency measures
-Gaps in public advice and info
-Lack of long-term policy stability
-Shortages of skills
-Supply chain constraints
-Higher standards for low-emission and climate-resilient homes
100
What is a direct rebound effect - energy efficiency?
-Energy efficiency improvements make energy services cheaper, so consumption increases, offsetting energy savings
-Suggested they could be 10-30% (% of expected energy savings)
101
What are indirect rebound effects?
Money saved due to increased energy efficiency spent on other energy intensive activities/goods/services e.g. holidays
102
Approx sector consumptions of energy UK
-42% transport
-26% domestic
-16% industry
-16% services
103
Approx % of fuels used in UK
-45% petroleum
-28% natural gas
104
UK oil imports & exports (how much and where from)
Import 47Mt crude, 29Mt petrol mainly US and Norway
Export 31Mt crude, 21Mt petrol
105
UK gas imports & exports (how much and where from)
Import 618,000GWh, 55% from Norway, 22% from US, 14% Qatar
Export 260,000GWh to Belgium, Netherlands, Ireland
106
What makes up the energy trilemma
-Sustainability
-Affordability
-Supply security
107
What costs make up an energy bill?
~50% wholesale costs
~20% Network costs
~15% Operating costs
~15% Policy Costs
108
What is LCOE and how is it defined?
Levelised Cost of Electricity
=NPV total costs/NPV of electricity generation
109
Strengths of LCOE
-Simple
-Widely used
-Easy to understand
110
Weaknesses of LCOE
-Doesn't consider all costs associated with decision
-Assumes value of MWh is equal between all techs - not true as speed of supply and storage is of high value
-Ignores project risks
111
Five causes of inefficient markets or market failure
-Public Goods
-Externalities or spillovers
-Imperfect information
-Imperfect competition
-Coordination problems
112
Advantages of Marginal Abatement Cost Curve
-Allows limited funding to be distributed to achieve greatest possible environmental advantages
-Helps prioritise R&D expenditures
-Helps design policies that balance economic and environmental objectives
113
Challenges & Limitations of marginal abatement cost curve
-Difficult to build an accurate baseline scenario due to market imperfection, market barriers and incomplete info
-Overestimates savings
-Doesn't consider the interaction of various energy saving techs
114
What are the three approaches to economic policy interventions
-Market-based (taxes -internalising the externalities)
-Non-market based (laws and regulations)
-Tradable permits, quotas on emissions
115
Challenges with tradable emission permits
-Verification of emissions, may overestimate
-Fairness, should same reductions be expected for all firms
-If demand for product drops so will emissions, without having done anything
116
What was the oil price before and after 2008 financial crisis? Why?
$140/barrel
$30/barrel
-Demand reduction
117
What was the oil price 2011-2015 and why?
-Europe Brent $100-125/barrel
-Cushing WTI $75-110/barrel
Oversupply from Middle East and US, weakening China demand
118
What was the price of oil in 2020? Why?
$10 Brent, longer contract so didn't go as low
-$30, WTI, negative price all storage was used up
COVID, massive reduction in demand
119
What was the oil price in 2022? Why?
-$130/barrel
-Russia-Ukraine, supply distribution
