Energy Policy, Regulation, and Economics
This domain tests the instruments that move capital into energy assets and the cost arithmetic used to judge them. Expect support-scheme mechanics, LCOE and cost-of-capital calculations, and questions on rate design and network regulation.
Core rules and concepts
- Support schemes. A feed-in tariff fixes the price and leaves quantity risk with government. An auction or RES-E tender discovers price and allocates delivery risk to the developer. A two-sided contract for difference pays or claws back the difference between strike price and reference price. Quota and certificate schemes (RPS/REC) leave price risk with the generator. Capacity markets and strategic reserves pay for availability rather than energy.
- LCOE. LCOE = (CAPEX × CRF + fixed O&M) / annual MWh, plus variable O&M and fuel. The capital recovery factor CRF = r(1+r)^n / ((1+r)^n - 1), with r as the real WACC and n the asset life. Higher WACC hits capital-intensive renewables hardest.
- LCOS for storage adds round-trip efficiency losses and degradation to the LCOE logic.
- Network regulation. Regulated asset base and price-control models such as RIIO set allowed revenue from capital and operating expenditure plus a return; performance incentives adjust the total.
- Rate design. Net metering pays the retail rate for exports; net billing pays an avoided-cost rate; buy-all-sell-all separates import and export. Fixed charges, time-of-use rates and demand charges allocate cost differently and create or remove cross-subsidies.
- Market fundamentals. Marginal pricing, merit-order effect, scarcity pricing, the missing money problem alongside price caps, and the social cost of carbon as an appraisal value.
Worked example
A 100 MW PV plant costs $80 M, has $1 M/yr fixed O&M, a 20-year life, 8% WACC and a 20% capacity factor. CRF = 0.08(1.08)^20 / ((1.08)^20 - 1) = 0.1019. Annualised capital = $8.15 M; total = $9.15 M. Output = 100 × 8,760 × 0.20 = 175,200 MWh. LCOE = $9.15 M / 175,200 MWh ≈ $52.2/MWh, so a $60/MWh PPA clears. Raising WACC to 12% lifts CRF to 0.1339 and LCOE to about $64.9/MWh, above the PPA, which shows why financing cost can decide project viability.
Traps that cost marks
- Comparing the LCOE of firmed renewables-plus-storage with a bare generation LCOE.
- Ignoring curtailment, network charges and balancing costs.
- Using undiscounted cash flows or nominal versus real discount rates interchangeably.
- Treating a contract for difference as one-sided; it is two-sided.
- Treating net metering as costless to the utility.