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Energy prices in the presence of plant indivisibilities

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  • Fischer, Ronald
  • Serra, Pablo

Abstract

In several countries (Chile, Bolivia, Argentina and Peru, among others), power plants are dispatched according to merit order, i.e., based on the marginal operating costs of the plants. In this scheme, the plant with the highest marginal cost sets the spot price at which firms trade the energy requires to fulfill their contracts. The model assumes that plants can operate at any level up to capacity, whereas real power plants have minimum operating levels. This implies that a low cost plant might have to reduce its supply in order to accommodate the minimum operating level of a more expensive power plant. This paper derives the welfare maximizing price rules in this case and shows that the standard peak load pricing rules no longer apply.

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Bibliographic Info

Article provided by Elsevier in its journal Energy Economics.

Volume (Year): 25 (2003)
Issue (Month): 4 (July)
Pages: 303-314

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Handle: RePEc:eee:eneeco:v:25:y:2003:i:4:p:303-314

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  1. Johnson, Raymond B. & Oren, Shmuel S. & Svoboda, Alva J., 1997. "Equity and efficiency of unit commitment in competitive electricity markets," Utilities Policy, Elsevier, vol. 6(1), pages 9-19, March.
  2. Hung-po Chao, 1983. "Peak Load Pricing and Capacity Planning with Demand and Supply Uncertainty," Bell Journal of Economics, The RAND Corporation, vol. 14(1), pages 179-190, Spring.
  3. Oren, Shmuel S & Smith, Stephen S & Wilson, Robert B, 1985. "Capacity Pricing," Econometrica, Econometric Society, vol. 53(3), pages 545-66, May.
  4. Crew, Michael A & Fernando, Chitru S & Kleindorfer, Paul R, 1995. "The Theory of Peak-Load Pricing: A Survey," Journal of Regulatory Economics, Springer, vol. 8(3), pages 215-48, November.
  5. Paul L. Joskow, 1976. "Contributions to the Theory of Marginal Cost Pricing," Bell Journal of Economics, The RAND Corporation, vol. 7(1), pages 197-206, Spring.
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Cited by:
  1. M. Soledad Arellano & Pablo Serra, 2004. "Spatial Peak-load Pricing," Documentos de Trabajo 199, Centro de Economía Aplicada, Universidad de Chile.
  2. José Pablo Arellano, 2004. "Principios para Tarificar la Transmisión Eléctrica," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 41(123), pages 231-253.
  3. M. Soledad Arellano & Pablo Serra, 2003. "Principios para Tarificar la Transmisión Eléctrica (Principals for the price fixing of electricity transmission)," Documentos de Trabajo 170, Centro de Economía Aplicada, Universidad de Chile.

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