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Forward-looking distribution network charges considering lumpy investments

Author

Listed:
  • Niels Govaerts

    (KU Leuven
    EnergyVille
    Flemish Institute of Technological Research (VITO))

  • Kenneth Bruninx

    (KU Leuven
    EnergyVille)

  • Hélène Le Cadre

    (EnergyVille
    Flemish Institute of Technological Research (VITO))

  • Leonardo Meeus

    (Vlerick Energy Centre
    European University Institute)

  • Erik Delarue

    (KU Leuven
    EnergyVille)

Abstract

Many regulators are pushing for more cost-reflective distribution network charges to inform end users of the grid infrastructure costs their behavior causes. Since future investment costs can be avoided by reducing simultaneous peak loads, forward-looking, coincident peak charges are often proposed. Under the assumption of convex network costs, it has been shown that optimal charges signal long-run marginal network costs, triggering an optimal trade-off between network expansion and peak load reduction. In practice, however, network investments are lumpy, requiring engineering methods to estimate ill-defined marginal costs based on long-term peak demand forecasts. In this paper, we derive the optimal forward-looking network charge set by a social welfare maximizing regulator, endogenously considering investment lumpiness and uncertain consumer demand. While the optimal tariff still equals marginal network costs in essence, it now depends on a multitude of network- and demand-related parameters. Our results demonstrate that forward-looking network charges require accurate information on willingness to pay for peak demand, which currently is typically unknown to regulators.

Suggested Citation

  • Niels Govaerts & Kenneth Bruninx & Hélène Le Cadre & Leonardo Meeus & Erik Delarue, 2021. "Forward-looking distribution network charges considering lumpy investments," Journal of Regulatory Economics, Springer, vol. 59(3), pages 280-302, June.
  • Handle: RePEc:kap:regeco:v:59:y:2021:i:3:d:10.1007_s11149-021-09428-1
    DOI: 10.1007/s11149-021-09428-1
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    Cited by:

    1. 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).

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    More about this item

    Keywords

    Capital indivisibility; Coincident peak pricing; Electricity distribution; Forward-looking grid tariffs; Long-run marginal costs;
    All these keywords.

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • L97 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Utilities: General
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices

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