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This content is taken from the University of Groningen's online course, Solving the Energy Puzzle: A Multidisciplinary Approach to Energy Transition. Join the course to learn more.

Skip to 0 minutes and 13 seconds In order to understand what energy transition is, you first need to understand how energy producers and consumers make their decisions. A fundamental notion within economics is that economic agents pursue their own interests. Applying this notion to producers, they are assumed to maximise their profits. An electricity producer, having two options to produce electricity, for instance, by a coal fired power plant or a gas fired power plant, will choose the lowest cost option if the revenues from selling electricity in both cases would be equal. The optimal decision for the firm is equal to that decision that minimises total costs. The revenues of selling electricity are, however, not constant, but depend strongly on the period for which electricity is sold.

Skip to 1 minute and 6 seconds During business hours, on working days, the total demand for electricity is generally higher than during weekends, and as a consequence, the price of electricity is higher in the former periods. Hence, for a firm, it would be more profitable to sell electricity for the demand during working hours than for the weekend demand. In order to produce only during peak hours, the power plants need to be frequently interrupted. The power plants differ strongly in the cost of stopping and starting production. Coal fired power plants generally have higher stop and start costs than gas fired power plants. As a result, coal fired power plants are more used for so-called base load demand.

Skip to 1 minute and 52 seconds That means the constant level of demand, while gas fired power plants are more used to deliver flexibility. That means producing during hours of peak demand. Hence, in order to maximise their profits, electricity firms utilise a portfolio of different types of power plants. Using the different types of plants for different types of demand is optimal for the producers. This notion is important to understand energy transition. Later on in this session, we will show that energy transition means, amongst others, that individual electricity producers are given incentives to deviate from their privately optimal decisions regarding their portfolio of power plants.

What drives the decisions of energy producers?

This video provides you with an insight into how energy producers make their decisions. Assuming that economic agents pursue their own interests Machiel discusses the optimal decisions for an electricity producer, taking into account total costs as well as revenues in different periods and the different types of power plants in the producer’s portfolio.

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This video is from the free online course:

Solving the Energy Puzzle: A Multidisciplinary Approach to Energy Transition

University of Groningen