Long-Run Incremental Cost Pricing Based on Unused Capacity

Abstract

This paper proposes a novel approach for providing long-run incremental cost (LRIC) pricing in network charges. The proposed approach makes use of the unused capacity of an exiting network to reflect the cost of advancing or deferring future investment consequent upon the addition of generation or load at each study node on a distribution network. Compared with existing approaches to LRIC pricing, the proposed approach produces forward-looking charges that reflect both the extent of the network needed to service the generation or load, and the degree to which that network is utilized. The efficacy of the proposed LRIC approach has been validated by a comparison with the established investment cost related pricing (ICRP) method used for deriving transmission charges in Great Brain (GB). This paper draws on work undertaken in projects for Western Power Distribution and Ofgem (Office of Gas and Electricity Markets, U.K.). However, the views expressed in this paper are those of the authors.