Peak Load Pricing in the Electric Utility Industry

Abstract

In the electric utility industry cost minimization requires that heterogeneous electric generation technologies be used to produce electricity demands of different durations. In contrast to the conclusions of traditional peak-load pricing theory, the existence of a heterogeneous capital stock means that off-peak marginal cost prices almost always should include some marginal capacity costs, and that the profit maximizing regulated electric utility may set peak price above marginal cost and off-peak price below marginal cost in order to encourage the expansion of capital-intensive base load generating capacity.