Analysis Exercise - Electricity Investments
1. Assignment Description
You are an analyst working for the Big Energy Corporation of America (BECA), a company that operates as vertically-integrated regulated electric utility in the region of Caprica but is also considering adding generation capacity in Picon, a region with a deregulated wholesale electricity market. Your boss has tasked you with analyzing a number of options for investment.
Much like the types of analysis one would be expected to do in the real world, the scenarios described below will be very difficult to evaluate by hand, but should be easy to evaluate using a spreadsheet program like Microsoft Excel or Google Sheets. If you are a programmer, you are welcome to use software like R or Python to evaluate the options as well.
The Deliverable
You will use the tools you have learned in this class to evaluate the potential costs and benefits to BECA from investing in one of a few options for new generation in either Picon or Caprica. Your \deliverable" is a short, typed memo to your boss. Write it in 12 point font, 1.5 line spacing, 2-3 pages plus any tables or graphs. The memo should contain the following:
1. A calculation of the total expected present-value profits from each plant type, in each scenario, in both Caprica and Picon.
2. A table showing the expected profits for each option the plant is in operation
3. A brief description of the economic theory underlying your calculations and how you performed them
4. A written description of the factors contributing to the costs and profitability of each scenario
5. A conclusion with your recommendation for the best option for BECA
Target Audience
Your boss is the manager of your division at BECA with an MBA who has not taken a course Energy Economics. She will take your memo and use it to write a presentation to BECAs board of directors making recommendations for a new investment. All of these people are familiar with energy markets, but are not economists. The target audience of your memo is not \Electricity nerd Prof. Archsmith", it is a group of intelligent people who understand business and finance decisions, but will be very impatient with economics lingo. Your descriptions of the economics should be succinct and only include economic details that were relevant to the analysis you did. Your boss and the executives she will be presenting to are very busy people and their time is valuable. Your memo should only include charts and/or tables that are directly relevant to the analysis you were required to do. The text of your memo should be clear and simple; your audience will not be impressed by flowery language or overly verbose descriptions, they will see them as a waste of everyone's time.
Group Work -
Economic analysts often work in teams. For this assignment you may work in groups of up to three people. Groups should submit a single memo with the names of all participating group members.
As a disincentive to free-riding, students who turn in an individual assignment need only analyze Scenario 1, groups of two or more must analyze Scenarios 1 and 2. Regardless of whether you work in a group, you are encouraged to discuss how to evaluate these scenarios with your fellow students. However, copying someone else's work (including another student's or something you find on the Internet) and turning it in with minor modifications we be dealt with according the class policy on academic dishonesty.
2. Options to Analyze
BECA is considering investing in a new power plant. They have not yet decided on the technology or which market to place the plant in. Your job is to evaluate the costs and benefits of each option and make a recommendation on the single best investment for BECA. BECAs opportunity cost of capital is 6%, this means you should discount future profits at a 6% rate.
Description of the markets -
Caprica and Picon are similar, but independent markets; BECA currently operates as a regulated monopoly in Caprica. BECA is also considering building generation assets in the deregulated wholesale market of Picon. For each option you should compute expected profits in both markets.
Scenarios
The management at BECA have determined there are two possible scenarios policy in the future. The first (Business as usual) assumes no changes to the regulatory environment. The second (Carbon Tax) assumes the government imposes a tax on carbon emissions. This tax changes the marginal cost of every plant, including BECA's potential competitors in Picon. All assignments need to evaluate each plant type in Scenario 1. Students working in groups must also analyze the plants under Scenario 2 as well.
Attachment:- Assignment Files.rar