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Signaling future or historical distribution grid costs via tariffs? A welfare analysis of long-run incremental cost pricing

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  • Govaerts, Niels
  • Bruninx, Kenneth
  • Le Cadre, Hélène
  • Meeus, Leonardo
  • Delarue, Erik

Abstract

The economic efficiency of distribution network tariffs may be enhanced by applying marginal cost pricing principles. This paper investigates the Long-Run Incremental Cost (LRIC) methodology, a marginal cost-based approach that has been applied in Great Britain since 2012. The long-term social welfare achieved under a coincident peak tariff set according to three different methods, i.e., LRIC, traditional historical cost-based allocation, and a theoretical benchmark, is analytically derived. The resulting social welfare is compared for a range of key system characteristics and the underlying mechanisms are discussed. The results provide evidence that LRIC is more efficient than historical cost-based allocation.

Suggested Citation

  • Govaerts, Niels & Bruninx, Kenneth & Le Cadre, Hélène & Meeus, Leonardo & Delarue, Erik, 2023. "Signaling future or historical distribution grid costs via tariffs? A welfare analysis of long-run incremental cost pricing," Utilities Policy, Elsevier, vol. 82(C).
    • Handle: RePEc:eee:juipol:v:82:y:2023:i:c:s0957178723000498
    DOI: 10.1016/j.jup.2023.101537
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    References listed on IDEAS

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