Electricity Pricing; a Comprehensive Framework

This paper presents a framework for electric power pricing, reviews the basic theory of marginal cost pricing applicable to the power sector, and summarizes recent developments in the area. The adaptation of the theory for practical application in relation to the objectives of power pricing policy results in a two stage procedure for tariff setting. First, the strict long-run marginal costs (LRMC) of supply which meet the economic efficiency criterion are computed. Second, the strict LRMC is adjusted to arrive at an appropriate realistic tariff structure which satisfies various constraints, including economic-second best and social-lifeline rate considerations, financial Viability, and simplicity of metering and billing.