period, then the optimal marginal capacity costs may be allocated
among the different ratinpge riods in proportion to the
corresponding marginal outage costs. It has been suggested
that capacity costs should be allocated to different rating periods
in inverse proportion to LOLP, but this would be only
an approximation because aggregate reliability indices such as
LOLP are poor proxies for prorating outage costs.
D. Shadow Pricing
In the idealized world of perfect competition the interaction
of many small profit maximizing producers and welfare maximizing
consumers gives rise to market prices that reflect the
true economic costs, and scarce resources are efficiently allocated
[ 231. However, conditions are likely to be far from
ideal in the real world. Distortions due to monopoly practices,
external economies, and diseconomies (which are not internalized
in the private market), interventions in the market process
through taxes, import duties and subsidies, etc., all result in
market (or fiancial) prices for goods and services, which may
diverge substantially from their shadow prices or true economic
opportunity costs. For example, in a country where
subsidized diesel fuel is available for electricity generation, the
appropriate shadow price would be the import price rather
than the artificially low market price. Moreover, if there are
large numbers of poor consumers, pricing based only on strict
efficiency criteria may be socially and politically unacceptable.
Such considerations necessitate the use of appropriate shadow
prices (instead of market prices) of inputs to the electricity
sector, to determine the optimali nvestment program as well as
LRMC [30], (311.
111. CALCULATINGS TRICTL RMC
Strict LRMC may be defined practically as the incremental
cost of optimum adjustments in the system expansion plan
and system operations attributable to a small increment of
demand which is sustained into the future. The term longrun
incremental cost may also be used interchangeably with
LRMC, because the changes refer to small but finite variations.
LRMC must be structured within a disaggregated framework,
based chiefly on technical grounds. This structuring may include:
differentiation of marginal costs by time of day, voltage
level, geographic area, season of the year, and so on. The degree
of structuring and sophistication of the LRMC calculation
depends on data constraints and the usefulness of the results,
given the practical problems of computing and applying a complex
tariff; e.g., in theory, the LRMC of each individual consumer