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Intertemporal Allocation of Capital Costs in Electric Utility Capacity Expansion Planning Under Uncertainty

Author

Listed:
  • H. D. Sherali

    (Virginia Polytechnic Institute and State University)

  • A. L. Soyster

    (Pennsylvania State University)

  • F. H. Murphy

    (Temple University)

  • S. Sen

    (University of Arizona)

Abstract

This paper concerns marginal cost pricing in a capacity expansion problem for the electric utility industry. We develop a characterization of equipment selection and marginal capital cost allocation based on an optimal capacity plan, in the context of either a finite, discretely distributed stochastic demand forecast, or in the deterministic case of multiple users identified by temporal considerations. In either case, a two stage linear program with recourse is shown to result. The main purpose of this paper is to conduct an analysis in order to determine a marginal cost pricing strategy for sharing capital costs given an optimal capacity plan, and to provide insightful economic interpretations. Our results also generalize a special case previously studied to demonstrate how a marginal cost pricing strategy may result in some of the capacity costs being borne by off-peak users.

Suggested Citation

  • H. D. Sherali & A. L. Soyster & F. H. Murphy & S. Sen, 1984. "Intertemporal Allocation of Capital Costs in Electric Utility Capacity Expansion Planning Under Uncertainty," Management Science, INFORMS, vol. 30(1), pages 1-19, January.
  • Handle: RePEc:inm:ormnsc:v:30:y:1984:i:1:p:1-19
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    File URL: http://dx.doi.org/10.1287/mnsc.30.1.1
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    Cited by:

    1. Haugen, Kjetil K., 1996. "A Stochastic Dynamic Programming model for scheduling of offshore petroleum fields with resource uncertainty," European Journal of Operational Research, Elsevier, vol. 88(1), pages 88-100, January.
    2. Douglas T. Gardner & J. Scott Rogers, 1999. "Planning Electric Power Systems Under Demand Uncertainty with Different Technology Lead Times," Management Science, INFORMS, vol. 45(10), pages 1289-1306, October.

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