Variable Load Pricing in the Face of Loss of Load Probability

Joseph Vardi, Jacob Zahavi and Benjamin Avi-Itzhak

Bell Journal of Economics, 1977, vol. 8, issue 1, 270-288

Abstract: In contrast to traditional methods which impose capacity costs on peak customers only, it is shown that, depending upon the design criterion employed in planning for the capacity expansion of the power system, off-peak marginal cost prices should also be imputed with some marginal capacity costs. Taking the loss of load probability (LOLP) design criterion as an example, we establish this conclusion formally, and suggest an algorithm to apportion accurately marginal capacity costs to various periods. The algorithm is then extended for power systems planned to meet a given loss of energy probability (LEOP) design target. Provisions to incorporate random deviations of customer's demand and maintenance requirements in the calculation process are also suggested.

Date: 1977
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