A theory of electricity tariff design for optimal operation and investment

This study addresses the problem of balancing supply- and demand-side operation and investment activities. Existing theory is extended to cover electricity industry models with uncertainty in future conditions and intertemporal linking such as storage and investment. An optimal pricing structure which takes these into account is presented. It would induce participants (suppliers and consumers) to make profit-maximizing investment and operation decisions which are socially optimal. The structure contains two terms: a short-run marginal cost pricing as well as a new incentive term to account for the interaction of participants at different time points. A probabilistic forecast of pricing structures at future time is required. A justification of the result and three simple illustrative examples are given