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Marginal Cost Pricing in Hydro-Thermal Power Industries: Is a Capacity Charge Always Needed?

Author

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  • M. Soledad Arellano
  • Pablo Serra

    ()

Abstract

This paper explores marginal cost pricing in hydro-thermal power industries. As in standard peak-load pricing for all-thermal electric systems, pricing consists of an energy charge and a capacity charge. However, the marginal cost of hydro generation now includes the value of water, which is determined endogenously. In turn, the capacity charge equals the marginal cost of increasing capacity which depends on the costs of both technologies and on the plant factor of hydro plants relative to the system’s load factor. Moreover, if the cost advantage of the hydro technology is sufficiently high, then the optimal total installed capacity is larger than the system’s maximum demand and henceforth the optimal capacity charge equals zero. JEL Codes: L11, L13, L51, L94.

Suggested Citation

  • M. Soledad Arellano & Pablo Serra, 2007. "Marginal Cost Pricing in Hydro-Thermal Power Industries: Is a Capacity Charge Always Needed?," Documentos de Trabajo 238, Centro de Economía Aplicada, Universidad de Chile.
  • Handle: RePEc:edj:ceauch:238
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    File URL: http://www.dii.uchile.cl/~cea/sitedev/cea/www/download.php?file=documentos_trabajo/ASOCFILE120070816161836.pdf
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    Cited by:

    1. Alexandre Janiak, 2008. "Welfare in models of trade with heterogeneous firms," Documentos de Trabajo 253, Centro de Economía Aplicada, Universidad de Chile.
    2. Viviana Fernández & Brian M. Lucey, 2008. "Emerging Markets Variance Shocks: Local or International in Origin?," Documentos de Trabajo 251, Centro de Economía Aplicada, Universidad de Chile.
    3. Alexandre Janiak, 2008. "A large firm model of the labor market with entry, exit and search frictions," Documentos de Trabajo 245, Centro de Economía Aplicada, Universidad de Chile.

    More about this item

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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