Time-of-day pricing of electricity – A model and application

The present paper attempts at a contribution to time-of-use pricing of electricity. The general result from the traditional theory charges the off-peak consumers marginal operating costs only and the peak users marginal operating plus marginal capacity costs. Theoretical attempts at modification have proved that the traditional conclusion holds only for homogeneous plant capacity (e.g., in one plant case), and in economic loading of two or more plants, the off-peak price also includes a part of capacity costs. This paper, however, shows that if the off-peak period output is explicitly expressed in terms of capacity utilisation of that period, the result will be an off-peak price including a fraction of the capacity cost in proportion to its significance relative to total utilisation. This would appear as a general case, irrespective of the nature of generation technology, that is, even when there is only one plant. We also give an illustration by estimating marginal costs and peak load prices using time series data on the Kerala power system.