A contribution to peak load pricing : theory and application

Abstract

The present paper attempts at a contribution to peak load pricing,
\nin both theory and application. The general result from the traditional
\ntheory that charges the off-peak consumers marginal operating costs
\nonly and the peak users marginal operating plus marginal capacity costs,
\nsince it is the on-peakers who press against capacity, has already been
\ncalled into question in the literature. It has also been shown that the
\nequity norms are violated in the traditional peak load pricing, whereby
\noff-peak users pay no capacity charges, but are supplied output out of
\nthe capacity, ‘bought/hired’ by the on-peakers. Theoretical attempts at
\nmodification have proved that the traditional conclusion holds only for
\nhomogeneous plant capacity (e.g., in one plant case), and in economic
\nloading of two or more plants, the off-peak price also includes a part of
\ncapacity costs. This paper, however, shows that if the off-peak period
\noutput is explicitly expressed in terms of capacity utilisation of that
\nperiod, the result will be an off-peak price including a fraction of the
\ncapacity cost in proportion to its significance relative to total utilisation.
\nThis would appear as a general case, irrespective of the nature of
\ngeneration technology, that is, even when there is only one plant. We
\nalso give an illustration by estimating marginal costs and peak load
\nprices using time series data on the Kerala power system. Where the data
\nare incapable of yielding the required statistically determined long-run
\nrelationship among the variables under study, we propose a simple and
\nviable method of using discrete ratio of increments in lieu of a marginal
\nvalue.
\nJEL Classification: C22, D40, L94
\nKey words: Peak, off-peak, pricing, capacity utilisation, marginal
\ncosts, Kerala