CEA Energy Policy & Market Analysis 2 — Questions and Answers
Question 1: Under the Public Utility Regulatory Policies Act (PURPA), utilities are required to purchase power from qualifying facilities (QFs) at what rate?
- The utility's marginal cost of generation
- The utility's avoided cost (Correct answer)
- The wholesale spot market price
- A federally mandated fixed tariff
Correct answer: The utility's avoided cost
PURPA requires utilities to purchase QF power at the utility's avoided cost — the cost the utility would have incurred to generate or purchase that power elsewhere.
Question 2: Which market structure characterizes most U.S. electricity markets operated by regional transmission organizations (RTOs)?
- Vertically integrated monopoly
- Bilateral contract market only
- Nodal locational marginal pricing (LMP) (Correct answer)
- Fixed-price regulated tariff
Correct answer: Nodal locational marginal pricing (LMP)
RTOs use nodal LMP, which sets prices at each bus in the transmission network based on local supply, demand, and congestion.
Question 3: The Social Cost of Carbon (SCC) is used in federal rulemaking primarily to:
- Set the federal carbon tax rate
- Quantify climate damages for cost-benefit analyses of regulations (Correct answer)
- Calculate state renewable portfolio standard compliance costs
- Determine utility avoided cost under PURPA
Correct answer: Quantify climate damages for cost-benefit analyses of regulations
The SCC monetizes the long-term economic damages from emitting one additional ton of CO₂, enabling agencies to weigh climate impacts in regulatory cost-benefit analyses.
Question 4: In a capacity market, such as PJM's Reliability Pricing Model (RPM), what does a generator sell?
- Actual kilowatt-hours delivered to end users
- The right to curtail load during emergencies
- A commitment to be available to generate power during peak periods (Correct answer)
- Long-term power purchase agreement contracts
Correct answer: A commitment to be available to generate power during peak periods
Capacity markets compensate generators for their commitment to be available, ensuring adequate reserves to meet peak demand even if energy sales alone are insufficient.
Question 5: Which federal agency oversees wholesale electricity markets and interstate natural gas pipelines in the United States?
- Environmental Protection Agency (EPA)
- Department of Energy (DOE)
- Federal Energy Regulatory Commission (FERC) (Correct answer)
- Nuclear Regulatory Commission (NRC)
Correct answer: Federal Energy Regulatory Commission (FERC)
FERC regulates wholesale electricity sales, transmission access, and interstate natural gas and oil pipeline rates under the Federal Power Act and Natural Gas Act.
Question 6: A renewable portfolio standard (RPS) policy requires:
- All new power plants to use renewable fuels
- Utilities to procure a minimum share of electricity from renewable sources (Correct answer)
- Consumers to install on-site renewable generation
- States to match federal renewable tax credits dollar-for-dollar
Correct answer: Utilities to procure a minimum share of electricity from renewable sources
An RPS mandates that a specified percentage of a utility's retail electricity sales come from eligible renewable energy sources by a target date.
Question 7: Price elasticity of demand for electricity in the short run is typically described as:
- Highly elastic, because consumers quickly switch fuels
- Perfectly inelastic, because electricity cannot be stored
- Relatively inelastic, because few immediate substitutes exist (Correct answer)
- Unit elastic, because demand moves proportionally with price
Correct answer: Relatively inelastic, because few immediate substitutes exist
Short-run electricity demand is relatively inelastic because most end uses lack immediate substitutes and equipment changes take time, so consumption responds little to price changes.
CEA Energy Policy & Market Analysis 2
Under the Public Utility Regulatory Policies Act (PURPA), utilities are required to purchase power from qualifying facilities (QFs) at what rate?