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Variable Load Pricing in the Face of Loss of Load Probability

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  • Joseph Vardi
  • Jacob Zahavi
  • Benjamin Avi-Itzhak

Abstract

In contrast to traditional methods which impose capacity costs on peak customers only, it is shown that, depending upon the design criterion employed in planning for the capacity expansion of the power system, off-peak marginal cost prices should also be imputed with some marginal capacity costs. Taking the loss of load probability (LOLP) design criterion as an example, we establish this conclusion formally, and suggest an algorithm to apportion accurately marginal capacity costs to various periods. The algorithm is then extended for power systems planned to meet a given loss of energy probability (LEOP) design target. Provisions to incorporate random deviations of customer's demand and maintenance requirements in the calculation process are also suggested.

Suggested Citation

  • Joseph Vardi & Jacob Zahavi & Benjamin Avi-Itzhak, 1977. "Variable Load Pricing in the Face of Loss of Load Probability," Bell Journal of Economics, The RAND Corporation, vol. 8(1), pages 270-288, Spring.
    • Handle: RePEc:rje:bellje:v:8:y:1977:i:spring:p:270-288
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    Citations

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    Cited by:

    1. Porat, Yigal & Irith, Rotlevi & Turvey, Ralph, 1997. "Long-run marginal electricity generation costs in Israel," Energy Policy, Elsevier, vol. 25(4), pages 401-411, March.
    2. Roques, Fabien A., 2008. "Market design for generation adequacy: Healing causes rather than symptoms," Utilities Policy, Elsevier, vol. 16(3), pages 171-183, September.
    3. C.K. Woo & Brian Horii & Ira Horowitz, 2002. "The Hopkinson tariff alternative to TOU rates in the Israel Electric Corporation," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 23(1), pages 9-19.
    4. Mark W. Gellerson & Shawna P. Grosskopf, 1980. "Public Utility Pricing, Investment, and Reliability under Uncertainty: A Review," Public Finance Review, , vol. 8(4), pages 477-492, October.
    5. Sreedharan, P. & Miller, D. & Price, S. & Woo, C.K., 2012. "Avoided cost estimation and cost-effectiveness of permanent load shifting in California," Applied Energy, Elsevier, vol. 96(C), pages 115-121.

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