Signaling future or historical distribution grid costs via tariffs? A welfare analysis of long-run incremental cost pricing

Niels Govaerts, Kenneth Bruninx, Hélène Le Cadre, Leonardo Meeus and Erik Delarue

Utilities Policy, 2023, vol. 82, issue C

Abstract: The economic efficiency of distribution network tariffs may be enhanced by applying marginal cost pricing principles. This paper investigates the Long-Run Incremental Cost (LRIC) methodology, a marginal cost-based approach that has been applied in Great Britain since 2012. The long-term social welfare achieved under a coincident peak tariff set according to three different methods, i.e., LRIC, traditional historical cost-based allocation, and a theoretical benchmark, is analytically derived. The resulting social welfare is compared for a range of key system characteristics and the underlying mechanisms are discussed. The results provide evidence that LRIC is more efficient than historical cost-based allocation.

Keywords: Distribution network charges; Long-run incremental cost; Electricity distribution (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:juipol:v:82:y:2023:i:c:s0957178723000498

DOI: 10.1016/j.jup.2023.101537

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