to c, p3 becomes the optimal price corresponding to demand
0 3 and the SRMC line. Generally, the resulting large price
fluctuations over time will be unacceptable to consumers.
This practical problem may be avoided by adopting an LRMC
approach, and peak load pricing.
The basic static peak load pricing model shown in Fig. 3 has
two demand curves; for example, Dpk could represent the
peak demand during the x daylight and evening hours of the
day when electric loads are light. For simplicity, a single type
of plant is assumed with the SMC of fuel, operating, and maintenance
costs given by the constant a, and the LRMC of adding
to capacity (e.g., investment costs suitably annuitized and
distributed over the lifetime output of the plant) given by the
constant b. The diagram indicates that the pressure on capacity
arises due to peak demand Dpk, while the off-peak
demand Do, does not infringe on the capacity G. The optimal
pricing rule now has two parts corresponding to two distinct
rating periods (i.e., differentiated by the time of day); (i) peak
period price of ppk = a + b; and (ii) off-peak period price of
pop =a. The logic of this simple result is that peak period
users, who are the cause of capacity additions, should bear full
responsibility for the capacity costs as well as fuel, operating
and maintenance costs, while off-peak consumers only pay the
latter costs (see also Appendix).
C. Extensions of Simple Models
The simplified models presented so far must be extended to
analyze the economics of real-world power systems. First, the
usual procedure adopted in marginal cost pricing studies may
require some iteration as shown in Fig. 4. Typically, a deterministic
long-range demand forecast is made assuming some
given future evolution of prices. Then, using power system
models and data, several plans are proposed to meet this demand
at some fixed target reliability level (see below). The
cheapest or least cost system expansion plan is chosen from
these alternatives. Finally strict LRMC is computed on the
basis of this least cost plan and an adjusted LRMC tariff structure
is prepared. If the new tariff that is to be imposed on
consumers is significantly different from the original assumption
regarding the evolution of prices, however, then this firstround
tariff structure must be fed back into the model to
revise the demand forecast and repeat the LRMC calculation.
In theory, this iterative procedure could be repeated until
future demand, prices, and LRMC-based tariff estimates become