An Empirical Example from EEP 147

Let’s take a look at an empirical example of production. The dataset for this section comes from EEP 147: Regulation of Energy and the Environment.

ESG_table = Table.read_table('ESGPorfolios_forcsv.csv').select(
    "Group", "Group_num", "UNIT NAME", "Capacity_MW", "Total_Var_Cost_USDperMWH"
).sort("Total_Var_Cost_USDperMWH", descending = False).relabel(4, "Average Variable Cost")
ESG_table
Group Group_num UNIT NAME Capacity_MW Average Variable Cost
Old Timers 7 BIG CREEK 1000 0
Fossil Light 8 HELMS 800 0.5
Fossil Light 8 DIABLO CANYON 1 1000 11.5
Bay Views 4 MOSS LANDING 6 750 32.56
Bay Views 4 MOSS LANDING 7 750 32.56
Old Timers 7 MOHAVE 1 750 34.5
Old Timers 7 MOHAVE 2 750 34.5
Big Coal 1 FOUR CORNERS 1900 36.5
Bay Views 4 MORRO BAY 3&4 665 36.61
East Bay 6 PITTSBURGH 5&6 650 36.61

... (32 rows omitted)

This table shows some electricity generation plants in California and their costs. The Capacity is the output the firm is capable of producing. The Average Variable Cost shows the minimum variable cost per megawatt (MW) produced. At a price below AVC, the firm supplies nothing. At a price above the AVC, the firm can supply up to its capacity. Being a profit-maximising firm, it will try to supply its full capacity.

First, lets look at just the Big Coal producers and understand this firm’s particular behavior.

selection = 'Big Coal'
Group = ESG_table.where("Group", are.equal_to(selection))
Group
Group Group_num UNIT NAME Capacity_MW Average Variable Cost
Big Coal 1 FOUR CORNERS 1900 36.5
Big Coal 1 HUNTINGTON BEACH 1&2 300 40.5
Big Coal 1 REDONDO 5&6 350 41.94
Big Coal 1 REDONDO 7&8 950 41.94
Big Coal 1 HUNTINGTON BEACH 5 150 66.5
Big Coal 1 ALAMITOS 7 250 73.72
../../_images/02-eep147-example_5_0.png

We have created the Big Coal supply curve. It shows the price of electricity, and the quantity supplied at those prices, which depends on variable cost. For example, at any variable cost equal to or above 36.5, the producer FOUR CORNERS (the one with the lowest production costs) will supply, and so on. Notably, we observe that the supply curve is also upward sloping since we need higher prices to entice producers with higher variasble costs to produce.

Price: $30
No production
../../_images/02-eep147-example_7_1.png
Price: $37
Total Production/Market Supply:  1900

Suppliers:  ['FOUR CORNERS']
../../_images/02-eep147-example_8_1.png
Price: $50
Total Production/Market Supply:  3500

Suppliers:  ['FOUR CORNERS' 'HUNTINGTON BEACH 1&2' 'REDONDO 5&6' 'REDONDO 7&8']
../../_images/02-eep147-example_9_1.png

Now we will look at all the energy sources. They have been colored according to source for reference.

Price: $30
Total Production/Market Supply:  2800

Suppliers:  ['BIG CREEK' 'HELMS' 'DIABLO CANYON 1']
../../_images/02-eep147-example_11_1.png ../../_images/02-eep147-example_11_2.png
Price: $50
Total Production/Market Supply:  18650

Suppliers:  ['BIG CREEK' 'HELMS' 'DIABLO CANYON 1' 'MOSS LANDING 6' 'MOSS LANDING 7'
 'MOHAVE 1' 'MOHAVE 2' 'FOUR CORNERS' 'MORRO BAY 3&4' 'PITTSBURGH 5&6'
 'ORMOND BEACH 1' 'ORMOND BEACH 2' 'MORRO BAY 1&2' 'MANDALAY 1&2'
 'CONTRA COSTA 6&7' 'HUNTINGTON BEACH 1&2' 'PITTSBURGH 1-4'
 'EL SEGUNDO 3&4' 'ENCINA' 'REDONDO 5&6' 'REDONDO 7&8' 'COOLWATER'
 'ETIWANDA 1-4' 'SOUTH BAY' 'EL SEGUNDO 1&2' 'HUMBOLDT'
 'HUNTERS POINT 1&2' 'HIGHGROVE']
../../_images/02-eep147-example_12_1.png ../../_images/02-eep147-example_12_2.png

Look at the thin bars concentrated on the right end of the plot. These are plants with small capacities and high variable costs. Conversely, plants with larger capacities tend to have lower variable costs. Why might this be the case? Electricity production typically benefits from economies of scale: it is cheaper per unit when producing more units. Perhaps the high fixed cost required for electricity production, such as for equipment and land, is the reason behind this phenomenon.