ERP Examination Practice Exam: Practice Quiz 2 Electricity and Renewable Energy

2013 ERP Examination Practice Exam PRACTICE QUIZ 2 Electricity and Renewable Energy

Energy Risk Professional Examination (ERP®) Practice Quiz 2

TABLE OF CONTENTS

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1

ERP Practice Quiz 2 Candidate Answer Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3

ERP Practice Quiz 2 Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5

ERP Practice Quiz 2 Answer Sheet/Answers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9

ERP Practice Quiz 2 Explanations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11

© 2013 Global Association of Risk Professionals. All rights reserved. It is illegal to reproduce this material in any format without prior written approval of GARP, Global Association of Risk Professionals, Inc.

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Introduction

Suggested Use of Practice Quizzes

The ERP Practice Quizzes were developed for use in con-

To maximize the effectiveness of the practice quizzes,

junction with the ERP Exam Preparation Handbook. The

candidates are encouraged to do the following:

Practice Quizzes are designed to simulate both the style and range of questions found on the ERP Examination, helping

1. Complete ERP Core Readings prior to taking each

ERP Candidates gauge their level of preparedness to take

Practice Quiz.

the ERP Examination. Each Practice Quiz includes a series

Questions are derived specifically from Core Readings

of ten review questions drawn from specific sections of the

and represent a small sampling of the content covered

ERP Examination: Hydrocarbons, Electricity/Renewables,

in the Core Readings that proceed each scheduled quiz.

Financial Products, and Modeling/Risk Management techniques. The Practice Quizzes provide candidates with a tool

2. Simulate the test environment as closely as possible.

to review and test their comprehension of key concepts as

•

Take the practice quiz in a quiet place.

they work through the study plans outlined in the Exam

•

Have only the practice quiz, candidate answer sheet,

Preparation Handbook.

calculator (see the ERP Preparation Handbook for a listing of GARP-approved calculators), and writing

It is strongly suggested that Practice Quizzes be taken after a candidate completes their review of the core readings pre-

instruments (pencils, erasers) available. •

Minimize possible distractions from other people, cell

ceding each quiz (please see the 15- and 20-week reading

phones, televisions, etc.; put away any study material

plans outlined in the ERP Exam Preparation Handbook for

before beginning the practice exam.

more information). Practice Quizzes include explanations of

•

Allocate two minutes per question for the practice quiz

the correct answer for each question so that candidates can

and set an alarm to alert you when a total of 20

better understand their incorrect replies and identify areas

minutes have passed.

of weakness that need reinforcement. 3. After completing each ERP Practice Quiz •

Calculate your score by comparing your answer sheet with the practice exam answer key.

•

Use the practice quiz Answers and Explanations to better understand the correct and incorrect answers and to identify any topics that require additional review. Consult the referenced core readings to continue your preparation for the exam.


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Energy Risk ® Professional(ERP ) Examination Practice Quiz 2 Answer Sheet


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Energy Risk ® Professional(ERP ) Examination Practice Quiz 2 Questions


1.

How do the economics of a nuclear power plant compare to a fossil-fuel power plant? a.

Though capital costs for a nuclear plant are high, tax incentives and credits put them on a par with fossil fuel plants.

b. c.

Fossil fuel and nuclear power plants have roughly the same per kilowatt costs. Fossil fuel plants are cheaper to build, but have higher ongoing fuel costs than nuclear.

d.

Fossil fuel plants are cheaper to build, maintain and fuel, but nuclear power plants typically have higher nameplate capacities.

2.

What has the greatest influence on the day-to-day variations in demand for electricity? a. b. c. d.

3.

Generation constraints Weather

What can be said about the setting of electricity prices in a deregulated power market structured as a zonal system with six independent power zones? a. b. c. d.

4.

Economic factors Fuel costs

One system-wide price is used for all six zones, regardless of constraint issues. Constraint can cause the system use two, but no more than two, different prices among zones. A separate price can be used for each of the six zones, but the price is the same for all points within a zone. Points within a zone may use different prices depending on constraint issues.

A system operator has the following four generation plants available for dispatch to her power grid. Plant A

Cost/MWh USD 25

Capacity (MW) 500

B C D

USD 40 USD 30 USD 45

100 150 300

Using a merit order pricing curve, how many megawatts can the system operator dispatch while maintaining the equilibrium price below USD 35/MWh? a. b. c. d.

525 MWs 650 MWs 700 MWs 750 MWs


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5.

The value of congestion in a competitive electricity market is calculated by subtracting ___________ from the import price of electricity.

6.

a.

The lowest generation bid price

b. c.

The day-ahead price The export price of electricity

d.

The transmission line rental charges, feed-in tariffs and other related expenses

Sam is the operator of a large electric generation facility in a deregulated regional market. Why would Sam most likely participate in a day-ahead auction, but not in a real-time auction? a. b. c. d.

Sam operates a coal-fired generation plant. Real-time auctions are highly volatile. Real-time auctions are open only to power marketers, not power plants. Sam’s bid was not selected for the day-ahead auction therefore he was not eligible to participate in the real-time auction.

7.

Smyth Power Ltd. is a power marketer for several electric power distributers in the western region of the United States. The state of Arizona is offering tax credits as an incentive for the construction of wind generation facilities. Why would tax incentives not be an economic benefit to Smyth Power Ltd.? a. b. c. d.

8.

Tax credits are unlikely to match the construction costs of the wind farm. Tax credits are available only to the owner of the wind farm. Tax credits are available only for electricity sales into deregulated markets. Tax credits are available only if the wind farm generates at least 51% of its nameplate capacity.

What best describes the role of a Regional Transmission Operator (RTO) in a deregulated ele ctricity market?

c.

The RTO is the parent company for wholly-owned power plants. The RTO manages financial market activities like day-ahead auctions. The RTO manages the physical operation of the electric grid like dispatch orders.

d.

The RTO is an independent legal entity responsible for balancing the physical and financial operation of

a. b.

the electric grid.

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9.

What has been a major factor in the development of biofuel markets in the United States and Brazil? a. b. c. d.

10.

Ample supplies of domestically-grown corn to use as an ethanol feedstock. Large-scale public demand for renewable vehicle fuels. Government incentives and tax credits during the industry’s early years. Government mandates to use ethanol in fleet vehicles like buses.

Which best describes a reason why geothermal energy could be implemented rather than wind and solar technology? a.

The earth’s geothermal heat source is vast and easily accessible.

b. c.

Unlike wind and solar, geothermal energy is readily available regardless of geography. Geothermal energy can be used to provide base load power.

d.

Wind and solar are more impacted by proposed carbon taxes than geothermal energy.


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Energy Risk ® Professional(ERP ) Examination Practice Quiz 2 Answers


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d.

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Energy Risk ® Professional(ERP ) Examination Practice Quiz 2 Explanations


1.

How do the economics of a nuclear power plant compare to a fossil-fuel power plant? a.

Though capital costs for a nuclear plant are high, tax incentives and credits put them on a par with fossil fuel plants.

b. c.

Fossil fuel and nuclear power plants have roughly the same per kilowatt costs. Fossil fuel plants are cheaper to build, but have higher ongoing fuel costs than nuclear.

d.

Fossil fuel plants are cheaper to build, maintain and fuel, but nuclear power plants typically have higher nameplate capacities.

Correct answer: c Explanation: While nuclear power plants have higher capital costs than fossil-fuel plants, and have high initial fuel costs, because the nuclear fuel at a plant may last for years and the nuclear plant will likely be in operation for decades, fuel costs for a nuclear plant become relatively small, once the plant is put into operation. Nuclear fuel costs are typically much smaller than the fuel cost at a fossil-fuel plant when compared on a levelized basis. Reading reference: Tom Fogarty and Robert Lamb, Investing in the Renewable Power Market , Chapter 14.

2.

What has the greatest influence on the day-to-day variations in demand for electricity? a. b. c. d.

Economic factors Fuel costs Generation constraints Weather

Correct answer: d Explanation: Weather is considered the single largest factor in affecting day-to-day variations in demand for electricity — for example, people using more air conditioners on an unexpectedly hot day, making d the correct answer. Note that answers b and c would be factors affecting supply not demand. Reading reference: Davis Edwards, Energy Trading and Investing, Chapter 4.1.


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3.

What can be said about the setting of electricity prices in a deregulated power market structured as a zonal system with six independent power zones? a.

One system-wide price is used for all six zones, regardless of constraint issues.

b. c.

Constraint can cause the system use two, but no more than two, different prices among zones. A separate price can be used for each of the six zones, but the price is the same for all points within a zone.

d.

Points within a zone may use different prices depending on constraint issues.

Correct answer: c Explanation: Answer c is correct; in a zonal system, each zone may set its own price, but that price is then used for all points within a zone. Note: though a zonal system could have two distinct prices, in this scenario a zonal system may have six distinct prices, not only two; answer b is the description of a postage stamp system with market splitting. Reading reference: Chris Harris, Electricity Markets: Pricing Structure and Economics , Chapter 7.

4.

A system operator has the following four generation plants available for dispatch to her power grid. Plant

Cost/MWh

Capacity (MW)

A B C D

USD 25 USD 40 USD 30 USD 45

500 100 150 300

Using a merit order pricing curve, how many megawatts can the system operator dispatch while maintaining the equilibrium price below USD 35/MWh? a.

525 MWs

b. c.

650 MWs 700 MWs

d.

750 MWs

Correct answer: b Explanation: The merit order curve involves selecting power producers beginning with the least expensive producer and proceeding to the next least expensive until the required system capacity is reached. The market equilibrium price is set by the most expensive power plant used to meet the system capacity. The merit order curve would dispatch the least expensive plants first. Plant A would be dispatched for up to 500 MW at USD 25 and then Plant C would be dispatched for up to an additional 150 MWs at USD 30. At this point, the equilibrium price would be USD 30. Any additional energy needs would require dispatching Plant B at USD 40/MW, which would set the price above USD 35. Therefore, up to 650 MWs could be dispatched to keep the price below USD 35/MWh. Reading reference: Davis Edwards, Energy Trading and Investing, Chapter 4.2.

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5.

The value of congestion in a competitive electricity market is calculated by subtracting ___________ from the import price of electricity. a.

The lowest generation bid price

b. c.

The day-ahead price The export price of electricity

d.

The transmission line rental charges, feed-in tariffs and other related expenses

Correct answer: c Explanation: Answer d is correct; the value of congestion is derived by subtracting the export price of electricity from the import price — in simple terms, this is the value of selling electricity to a market where a higher price can be received rather than to a lower-value market. Reading reference: Sally Hunt, Making Competition Work in Electricity , Chapter 8.

6.

Sam is the operator of a large electric generation facility in a deregulated regional market. Why would Sam most likely participate in a day-ahead auction, but not in a real-time auction? a.

Sam operates a coal-fired generation plant.

b.

Real-time auctions are highly volatile. Real-time auctions are open only to power marketers, not power plants. Sam’s bid was not selected for the day-ahead auction therefore he was not eligible to participate in the real-time auction.

c. d.

Correct answer: a Explanation: Answer a is correct. Real-time auctions balance power demand during the actual delivery day; bids are typically for five-minute increments, meaning power plants must be able to turn off and on quickly. Coal-fueled plants take some time to “fire up,” meaning that the plant cannot be turned on quickly, so Sam would be unlikely to participate in the real-time auction. Real-time auctions are open to power plants, while a losing bid in the day-ahead auction does not prevent a generator from participating in the real-time auction. Reading reference: Davis Edwards, Energy Trading & Investing, Chapter 2.2.


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7.

Smyth Power Ltd. is a power marketer for several electric power distributers in the western region of the United States. The state of Arizona is offering tax credits as an incentive for the construction of wind generation facilities. Why would tax incentives not be an economic benefit to Smyth Power Ltd.?

b.

Tax credits are unlikely to match the construction costs of the wind farm. Tax credits are available only to the owner of the wind farm.

c.

Tax credits are available only for electricity sales into deregulated markets.

d.

Tax credits are available only if the wind farm generates at least 51% of its nameplate capacity.

a.

Correct answer: b Explanation: The correct answer is b. Tax credits for renewable energy projects are typically only available for the owner of the renewable power plant. As the power marketer, Smyth Power Ltd. is not the owner of the wind farm, but rather an outside company hired to sell their power on behalf of the owner, therefore Smyth Power Ltd. would realize no benefit from the offered tax credits. Reading reference: Geoffrey Heal, The Economics of Renewable Energy .

8.

What best describes the role of a Regional Transmission Operator (RTO) in a deregulated ele ctricity market? a. b. c. d.

The RTO is the parent company for wholly-owned power plants. The RTO manages financial market activities like day-ahead auctions. The RTO manages the physical operation of the electric grid like dispatch orders. The RTO is an independent legal entity responsible for balancing the physical and financial operation of the electric grid.

Correct answer: d Explanation: An RTO is an independent body that is responsible for both the operation of financial activities, like day-ahead auctions, and the physical operation of the electric grid, such as issuing dispatch orders to power plants. Reading reference: Davis Edwards, Energy Trading & Investing, Chapter 2.2.

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9.

What has been a major factor in the development of biofuel markets in the United States and Brazil? a. b. c. d.

Ample supplies of domestically-grown corn to use as an ethanol feedstock. Large-scale public demand for renewable vehicle fuels. Government incentives and tax credits during the industry’s early years. Government mandates to use ethanol in fleet vehicles like buses.

Correct answer: c Explanation: Answer c is correct. The ethanol industries in both the US and Brazil were the recipient of government subsidies and tax incentives, which helped to establish the ethanol industry in both nations. Reading reference: Govinda Timilsina and Ashish Shrestha, Biofuels: Markets, Targets and Impacts.

10.

Which best describes a reason why geothermal energy could be implemented rather than wind and solar technology?

c.

The earth’s geothermal heat source is vast and easily accessible. Unlike wind and solar, geothermal energy is readily available regardless of geography. Geothermal energy can be used to provide base load power.

d.

Wind and solar are more impacted by proposed carbon taxes than geothermal energy.

a. b.

Correct answer: c Explanation: Unlike wind and solar installations which produce energy only intermittently, geothermal energy can be produced continuously, making it a potential source of base load power. However, geothermal sources are only commercially viable today in areas of high seismic activity, such as Iceland and the Philippines, where hot rocks containing superheated water is present. Reading reference: Geoffrey Heal, The Economics of Renewable Energy .


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© 2013 Global Association of Risk Professionals. All rights reserved. 01-28-13

ERP Examination Practice Exam: Practice Quiz 2 Electricity and Renewable Energy

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