Electricity pricing Optimal operation and investment by industrial consumers

Abstract

This paper describes ongoing research in the areas of economically efficient electricity pricing and industrial consumer response. A new electricity pricing theory is described that incorporates future uncertainty and intertemporal linkages between decisions. It indicates that electricity prices should contain two terms — short-run marginal cost plus a term that reflects how each particular decision is likely to affect future global welfare. We explore a practical implementation using spot prices and forward contracts plus financial instruments for risk sharing and decision coordination, and a procedure for developing long-term pricing policy. The operation of industrial plant has been investigated and models developed to optimize plant behaviour in response to spot prices and forward contracts for electricity. These models are described and results of simulation studies discussed. The studies illustrate the economic efficiency and risk sharing advantages of this advanced tariff structure compared with a conventional time-of-use tariff.