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Peak Load and Capacity Pricing lays out clear pricing strategies for understanding peak load and capacity pricing structures, further cementing electricity's role as an asset class with fixed and variable costs.



1. Introduction

In this book we consider the development of the theory and practice for the pricing of goods delivered by assets that do not run continuously, whether for demand reasons (periodic and/or stochastic) or production reasons (planned periodic cycling and/or technical availability). The focus is on electricity, and much of the analysis can be applied to other goods. The pricing of electricity at the peak is closely bound with the pricing of capacity.

Chris Harris

2. The Modeling Framework

For ease of comparison with the reference works, we have generally used the same nomenclature.

Chris Harris

3. The Framework and Development of Peak Load Pricing

In this chapter, we describe the simplest exposition of peak load pricing.

Chris Harris

4. Relaxing the Hard Capacity Constraint

Most authors in the canon have simplified plant costs by assuming a single variable cost up to a hard capacity limit at which variable costs become infinite. The cost of capacity then tends to have constant returns to scale. If we have decreasing returns to scale in operation, then the concept of capacity becomes harder to define. Since decreasing returns to scale in operation is a reality, we must attend to this.

Chris Harris

5. Modeling Capacity Using Derivatives

The development of peak load pricing theory, with something of a conclusion in the Chao framework of the early 1980s, had for its context a world of central planning for power generation and scheduling.

Chris Harris

6. Capacity Mechanisms

There are numerous ways to secure capacity. These are summarized below. The countries listed should be viewed as case examples to review rather than a strict categorization.

Chris Harris

7. The Power Complex

The modeling to this point has been based on the old-world paradigm of treating consumption as stochastic and inelastic and having an administered view of the value of lost load (VOLL).

Chris Harris

8. Final Comments

There remains a debate about the relative merits of peak load pricing, in which the covering of fixed costs is specifically recognized as a required uplift of price above variable costs, and variable cost pricing, which advocates market clearing at variable costs, in order to maximize economic efficiency at the margin.

Chris Harris


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