Priority pricing in electricity supply: An application for Israel

It is well known that in the event of a shortage in generation capacity, it is inefficient if the electricity utility cuts off customers randomly. It is preferable to set up a market in service priority in which customers who have a greater need pay more for the right not to be cut off. We use an econometric model of outage costs in Israel to calculate the menu of priority rates by season and time of day. Top priority rates range from zero, when the loss-of-load probability (LOLP) is zero, to 8 cents (US) per kWh when the LOLP is greatest.