Long-run marginal electricity generation costs in Israel

Abstract

This paper presents two methods for calculating long-run marginal electricity generation costs based on the techniques used for long-term expansion planning. According to the first method, long-run marginal costs are calculated as incremental costs required to supply additional demands-peak, shoulder and off-peak demands, to each hourly demand group separately. These costs include the present value of capital, fuel and operation and maintenance (O&M) costs throughout the planning period. In the second method, the long-run marginal capacity cost element is calculated as an additional/reduced cost resulting from bringing forward/postponing generation capacity investments, in order to supply incremented/decremented demands in every hour throughout the planning period. The annualized marginal capacity cost is allocated among the hours according to the distribution of the unsupplied energy, and is added to the energy marginal cost to obtain the long-run marginal cost. Both methods are implemented through models used for long-term optimal generation system expansion planning. In addition, the second method uses a chronological simulation of generation system operation. A detailed case study of the Israeli electric generation system is also presented.