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Forward-looking distribution network charges considering lumpy investments

Niels Govaerts, Kenneth Bruninx, Hélène Le Cadre, Leonardo Meeus and Erik Delarue ()
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Niels Govaerts: KU Leuven
Kenneth Bruninx: KU Leuven
Hélène Le Cadre: EnergyVille
Leonardo Meeus: Vlerick Energy Centre
Erik Delarue: KU Leuven

Journal of Regulatory Economics, 2021, vol. 59, issue 3, No 4, 280-302

Abstract: 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.

Keywords: Capital indivisibility; Coincident peak pricing; Electricity distribution; Forward-looking grid tariffs; Long-run marginal costs (search for similar items in EconPapers)
JEL-codes: D61 L51 L94 L97 Q41 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1007/s11149-021-09428-1

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