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Question: Imagine that you are a generator selling electricity in the day-ahead market as  What offer price should you post in the auction? Why did you select that price?

23 Oct 2022,11:51 PM

 

Imagine that you are a generator selling electricity in the day-ahead market. What offer price should you post in the auction? Why did you select that price? You don't need numbers to answer the question, but it might be easier to think through if you have some specific figures. So imagine that you are running a natural-gas fired plant. Your capital charge is $18 per MWh. You have fixed O&M costs that average $9 per MWh -- but remember, fixed costs are costs you have to pay whether or not you generate any electricity. You have variable O&M costs around $5 per MWh; that is, you only pay them if you run the generator. Finally, you need to burn $62 worth of natural gas to generate one MWh of electricity.

Expert answer


If you want to make a profit, you will need to charge more than your variable costs. In this example, that means you need to charge at least $5 per MWh just to cover the cost of the gas. But you also have fixed costs, which you have to pay even if you don't generate any electricity. So you need to charge enough to cover those costs as well. In this example, that means you need to charge at least $18 per MWh. Putting those two together, we can see that in order to make a profit in this example, you would need to charge at least .............

 

$23 per MWh for your electricity. Now, one important thing to remember is that there are other generators selling electricity in the market. So you will need to charge a price that is high enough to cover your costs, but low enough to still be competitive with other sellers. If you charge too high a price, then customers will buy from someone else and you won't make any sales. And if you charge too low a price, then you might make some sales but you won't cover your costs and you'll end up losing money.

 

So setting the right price is important. But it can be tricky, because you need to take into account not only your own costs, but also the prices of other generators in the market.  $23 per MWh for your electricity.

 

Now, one important thing to remember is that there are other generators selling electricity in the market. So you will need to charge a price that is high enough to cover your costs, but low enough to still be competitive with other sellers. If you charge too high a price, then customers will buy from someone else and you won't make any sales. And if you charge too low a price, then you might make some sales but you won't cover your costs and you'll end up losing money.

 

So setting the right price is important. But it can be tricky, because you need to take into account not only your own costs, but also the prices of other generators in the market.

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