Question

1. Assume you can purchase either a kw of capacity for $5000 for hydropower or $500 for natural gas. Assume further that hydropower has constant marginal costs of $0.01/kwh and natural gas has constant marginal costs of $0.05/kwh. The capacity you buy lasts forever (marginal costs include maintenance) and you have an opportunity cost of capital of 8.76%

   a. What is the annual fixed cost associated with hydropower?

   b. What is the annual fixed cost associated with natural gas?

   c. Assuming you use 8760 kwh annually, what is the annual variable cost of hydropower?

   d. Assuming you use 8760 kwh annually, what is the annual variable cost of natural gas?

   e. What is the total cost for each of annual production of 8760 kwh?

Answer 1

Answer a) Annual fixed cost is the initial cost invested in hydropower = $5000

Hence, $5000 is the fixed cost associated with the hydropower.
Answer b) Annual fixed cost is the initial cost it has invested in natural gas = $500

Hence, $500 is the fixed cost associated with the natural gas.

Answer c) if 8760kwh is used, variable cost per kwh for hydropower is,
8760 * 0.01 = $87.6

Hence, variable cost per kWh hydropower is $87.6.

Answer d) if 8760kwh is used, variable cost per kwh for natural gas is,
8760 * 0.05 = $438

Hence, variable cost per kWh natural gas is $438.

Concluded.