Erp Practice Quiz 2

Energy Risk Professional (ERP®) Examination 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

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Energy Risk Professional Examination (ERP®) Practice Quiz 2

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 ERP Candidates gauge their level of preparedness to take

1. Complete ERP Core Readings prior to taking each 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

It is strongly suggested that Practice Quizzes be taken after

instruments (pencils, erasers) available.

listing of GARP-approved calculators), and writing a candidate completes their review of the core readings pre-

•

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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1

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

Energy Risk Professional Examination (ERP®) Practice Quiz 2

a.

b.

c.

d.





✓

✘

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Correct way to complete

1.





Wrong way to complete

1.

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3

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

Energy Risk Professional Examination (ERP®) Practice Quiz 2

1.

What demand factors should be included within a spatial load forecast for a power grid? a. b. c. d.

2.

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

3.

Postage stamp Nodal Electrical basis Zonal

A _________ is widely considered to be the safest. a. b. c. d.

5.

Economic factors Fuel costs Generation constraints Weather

Which of the following is not a method for setting electrical rates for end-use customers on a power grid? a. b. c. d.

4.

Expected average load demand on the grid only Expected maximum load demand on the grid only Both expected average and expected maximum load demand on the grid Neither expected average nor expected maximum load demand on the grid

Pressurized Light-Water Nuclear Reactor Pebble Bed Modular Nuclear Reactor Pressurized Heavy-Water Nuclear Reactor Boiling Water Nuclear Reactor

“Capacity” in the electricity market is best described as what? a. b. c. d.

The operating boundary of a generation plant. The amount of energy available relative to a forward schedule or contract. The total ability of a system to produce or transport energy. Capacity means different things to different industry stakeholders, the term cannot be easily defined.

© 2012 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.

5

Energy Risk Professional Examination (ERP®) Practice Quiz 2

6.

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

7.

Smyth Power Ltd. is a power marketer for 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.

6

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.

Tax Tax Tax Tax

credits credits credits credits

are are are are

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

Independent System Operators (ISOs) and Regional Transmission Organizations (RTOs) are types of Transmission System Operators (TSOs) that distribute electricity within regional electric markets. Which of the following statement(s) is/are correct? I. II.

ISOs function within a single state, but their operations fall under federal jurisdiction. RTOs may operate across state lines, but their operations are exempt from federal jurisdiction.

a. b. c. d.

Statement I only Statement II only Both statements Neither statement

© 2012 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.

Energy Risk Professional Examination (ERP®) Practice Quiz 2

9.

The two countries with the most advanced ethanol production and distribution systems are the United States and Brazil. Which statement about the ethanol markets in the United States and Brazil is correct? a. b. c. d.

10.

The United States enjoys a competitive advantage over Brazil in ethanol production. Most Brazilian ethanol is used for industrial purposes and not sold to the public. Imports of Brazilian ethanol to the United States are constrained by tariffs. High domestic demand in both countries makes ethanol export unrealistic.

Armin is the CEO of a manufacturing plant. He is told his plant needs to reduce its greenhouse gas (GHG) emissions by 25 tons per year. The plant has equipment installed that can remove up to 35 tons of GHG emissions at a cost of EUR 75/ton. Gary runs a neighboring plant that must reduce its emissions by 30 tons, at a cost of EUR 120/ton. Given this information, what is the most cost-effective strategy for Armin to reduce his plant’s emissions? a. b. c. d.

Cut back on production Switch to a lower-pollution fuel Buy emission credits from Gary’s plant Sell emission credits to Gary’s plant

© 2012 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.

7

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

Energy Risk Professional Examination (ERP®) Practice Quiz 2

a.

b.

c.

d.



1.



2.



3.



4.



5.



6.



7.



8.



9.



10.

Correct way to complete

1.









✓

✘

Wrong way to complete

1.

© 2012 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.

9

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

Energy Risk Professional Examination (ERP®) Practice Quiz 2

1.

What demand factors should be included within a spatial load forecast for a power grid? a. b. c. d.

Expected average load demand on the grid only Expected maximum load demand on the grid only Both expected average and expected maximum load demand on the grid Neither expected average nor expected maximum load demand on the grid

Correct answer: c Explanation: Spatial load forecasts estimate both the expected average load and maximum demands on the power grid, this is necessary so that enough generated capacity can be prepared to meet any possible demand during the forecasted period. Base load is typically established from historical demand records and is a known quantity. Reading reference: Energy Trading and Investing, Edwards; Chapter 4.1, page 245.

2.

Which has the greatest influence on 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: Energy Trading and Investing, Edwards, Chapter 4.1, page 250.

3.

Which of the following is not a method for setting electrical rates for end-use customers on a power grid? a. b. c. d.

Postage stamp Nodal Electrical basis Zonal

Correct answer: c Explanation: Answer “c” is not a method for setting rates, thus is the correct answer. In this context, “Electrical basis” is a made up term. Reading reference: Electricity Markets: Pricing Structure and Economics, Harris, Chapter 7, pages 249-52.

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11

Energy Risk Professional Examination (ERP®) Practice Quiz 2

4.

A _________ is widely considered to be the safest. a. b. c. d.

Pressurized Light-Water Nuclear Reactor Pebble Bed Modular Nuclear Reactor Pressurized Heavy-Water Nuclear Reactor Boiling Water Nuclear Reactor

Correct answer: b Explanation: Answer “b” is correct. PBMR's are considered the safest because the reactor design does not necessitate the use of neutron-absorbing control rods, whose absence during operations in other reactor designs might cause the reactors to go supercritical. Since the PBMR is gas-cooled, it will also avoid the Loss of Coolant Accidents (LOCA) like those at Three Mile Island and Chernobyl. Reading reference: Energy for the 21st Century: A Comprehensive Guide to Conventional and Alternative Sources, Nersesian, Chapter 8.

5.

“Capacity” in the electricity market is best described as what? a. b. c. d.

The operating boundary of a generation plant. The amount of energy available relative to a forward schedule or contract. The total ability of a system to produce or transport energy. Capacity means different things to different industry stakeholders, the term cannot be easily defined.

Correct answer: d Explanation: Answer “d” is correct; the term capacity will have different meanings to different sectors of the industry. For example, answers “a,” “b” and “c” each represent capacity to a different actor in the energy industry: plant operators, market traders and system planners, respectively. Reading reference: Making Competition Work in Electricity, Hunt, Chapter 8.

12

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Energy Risk Professional Examination (ERP®) Practice Quiz 2

6.

Sam is the operator of a large electric generation facility in a deregulated regional market. What is the most likely reason why Sam would 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.

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: Energy Trading & Investing, Edwards, Chapter 2.2, pages 95-96.

7.

Smyth Power Ltd. is a power marketer for 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.

Tax Tax Tax Tax

credits credits credits credits

are are are are

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

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, page 5.

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13

Energy Risk Professional Examination (ERP®) Practice Quiz 2

8.

Independent System Operators (ISOs) and Regional Transmission Organizations (RTOs) are types of Transmission System Operators (TSOs) that distribute electricity within regional electric markets. Which of the following statement(s) is/are correct? I. II.

ISOs function within a single state, but their operations fall under federal jurisdiction. RTOs may operate across state lines, but their operations are exempt from federal jurisdiction.

a. b. c. d.

Statement I only Statement II only Both statements Neither statement

Correct answer: d Explanation: While ISOs operate solely within one state and RTOs operate in several, the second part of both statements is incorrect: ISOs are exempt from federal jurisdiction, while RTOs are regulated by federal authorities; thus making both statements false and “d” the correct answer. Reading reference: Energy Trading & Investing, Edwards, Chapter 2.2, pages 93-94.

9.

The two countries with the most advanced ethanol production and distribution systems are the United States and Brazil. Which statement about the ethanol markets in the United States and Brazil is correct? a. b. c. d.

The United States enjoys a competitive advantage over Brazil in ethanol production. Most Brazilian ethanol is used for industrial purposes and not sold to the public. Imports of Brazilian ethanol to the United States are constrained by tariffs. High domestic demand in both countries makes ethanol export unrealistic.

Correct answer: c Explanation: Answer “c” is correct. Tariffs on imports of Brazilian ethanol prevent the market from freely operating in the United States. Brazilian ethanol actually enjoys a competitive advantage over American ethanol, which receives heavy government subsidies; most Brazilian ethanol is sold as E85 (85% ethanol/15% gasoline) motor vehicle fuel. Reading reference: Biofuels: Markets, Targets and Impacts, Timilsina and Shrestha.

14

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Energy Risk Professional Examination (ERP®) Practice Quiz 2

10.

Armin is the CEO of a manufacturing plant. He is told his plant needs to reduce its greenhouse gas (GHG) emissions by 25 tons per year. The plant has equipment installed that can remove up to 35 tons of GHG emissions at a cost of EUR 75/ton. Gary runs a neighboring plant that must reduce its emissions by 30 tons, at a cost of EUR 120/ton. Given this information, what is the most cost-effective strategy for Armin to reduce his plant’s emissions? a. b. c. d.

Cut back on production Switch to a lower-pollution fuel Buy emission credits from Gary’s plant Sell emission credits to Gary’s plant

Correct answer: d Explanation: Armin’s cost for reducing GHG emissions by 25 tons will be EUR 1,875 (25 tons * EUR 75/ton = EUR 1,875). Since Armin’s plant can reduce up to 35 tons of GHG emissions, he can sell 10 tons of credit to Gary’s plant — selling credts for 10 tons of emissions at EUR 100/ton would net Armin EUR 1,000, reducing his reduction cost to EUR 875, while also reducing Gary’s costs, since 10 tons of his emissions reduction would only cost EUR 100/ton rather than EUR 120/ton, making “d” the correct answer. Buying credits from Gary would be foolish since his reduction costs are higher than Armin’s; reducing production would cut into Armin’s profits, not a cost-effective strategy; and given the information in the question, there is no evidence that changing fuels would reduce Armin’s emission levels. Reading reference: Handbook of Commodity Investing, Fabozzi, Chapter 37, pages 845-846.

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About GARP | The Global Association of Risk Professionals (GARP) is a not-for-profit global membership organization dedicated to preparing professionals and organizations to make better informed risk decisions. Membership represents over 150,000 risk management practitioners and researchers from banks, investment management firms, government agencies, academic institutions, and corporations from more than 195 countries and territories. GARP administers the Financial Risk Manager (FRM®) and the Energy Risk Professional (ERP®) Exams; certifications recognized by risk professionals worldwide. GARP also helps advance the role of risk management via comprehensive professional education and training for professionals of all levels. www.garp.org.

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