outages; SC is supply costs (i.e., system costs); OC is outage
costs (i.e., costs to consumers of supply shortages); D is demand;
and R is reliability.
In the traditional approach tosy stem planning both D and R
are exogenously fixed, and therefore NB is maximized, when
SC is minimized, i.e., least cost system expansion planning.
However, if R is treated as a variable:
d(NB)
dR
- ( S C + O C ) + - ( T B - S C - O C ) - - - = O
aR aD aR
-=- a a aD
is the necessary first-order maximization condition. Assuming
Therefore, as described earlier, reliability should be increased
by adding to capacity until the above condition is satisfied.
An alternative way of expressing this result is that since TB is
independent of R , N B is maximized when total costs: TC =
(SC + OC) are minimized. The above criterion effectively subsumes
the traditional system planning rule of minimizing only
system costs, but it raises new problems stemming from the
need to accurately estimate outage costs [ 271, [ 291.
Third, consider again the choice between SRMC and LRMC
for pricing. The SRMC may be defined as the cost of meeting
additional electricity consumption, (including the costs of
shortages) with capacity fixed. The LRMC is the cost of providing
an increase in consumption (sustained indefinitely into
the future) in a situation where optimal capacity adjustments
aD/aR = 0, yields: a(sc)/aR = - a(oc)/aR.
are possible. When the system is optimally planned and operated
(i.e., capacity and reliability are optimal), SRMC and
LRMC coincide. However, if the system plan is temporarily
suboptimal, significant deviations between SRMC and LRMC
will have to be carefully resolved. For example, in the post
1973 period many utilities are replacing oil fired plant with
coal fired units to realize fuel cost savings. This may result in
significant excess capacity, and low marginal capacity costs
in the short run, thus justifyinga reduction in demand charges
below the LRMC level. However, as peak demand grows and
the system approaches optimality again, the capacity charges
should rise smoothly towards LRMC. This transition could
become undesirably abrupt if the initial reduction in demand
charges was too large and demand growth was overstimulated.
Finally, if there are substantial outage costs outside thpee ak