these costs are usually small and their allocation will not
greatly affect the results.
E. Analysis of Hydroelectric Generation [31], 15.51
Next, we .briefly mention several specific issues which arise
in the analysis of hydro systems, and when seasonal variations
in LRMC are important. Generally, in an all hydro system the
LRMC of generating capacity would be based on the cost of
increasing peaking capability (i.e., additional turbines, penstocks,
expansion of powerhouse etc.), while incremental energy
costs would be the costs of expanding reservoir storage.
When there is significant spilling of water (e.g., during the wet
season), incremental energy costs would be very small (e.g.,
O&M costs only), and at times when demand does not press
on capacity, incremental capacity costs may be ignored. However,
if the system is likely to be energy constrained and all
incremental capacity is needed primarily to generate more
energy because the energy shortage precedes the capacity constraint
for many years in the future, then the distinction between
peak and off-peak costs, and between capacity and
energy costs, tends to blur. In an extreme case, because hydro
energy consumed during any period (except when spilling)
usually leads to an equivalent drawdown of the reservoirs, it
may be sufficient only to levy a simple kilowatt-hour charge at
all times, e.g., by applying the AIC method to total incremental
system costs.
In a mixed hydro-thermal system, an important general
guideline is that if the hydro is used to displace thermal plant,
during a rating period then the running cost of the latter is the
relevant incremental energy costs. If pumped storage is involved,
the marginal energy costs or value of water used would
be the cost of pumping net of appropriate losses. Also, if the
pattern of operation is likely to change rapidly in the future
(e.g., shift from gas turbines to peaking hydro as the marginal
peaking plant, or vice versa), then the value of the LRMC
would have to be calculated as a weighted average, with the
weights depending on the share of future generation by the
different types of plant used.
IV. ADJUSTINGST RICTL RMC
Once strict LRMC has been calculated, the first stage of
tariff setting is complete. In the second stage, the actual tariff
structure which meets economic second best, social, financial,
political and other constraints must be derived by modifying
strict LRMC, and this topic is dealt with below. This process
of adjusting LRMC will, in general, result in deviations in both