ABSTRACT
Marginal cost pricing in electricity means a tariff structure such that the cost to any consumer of changing the level or pattern of his consumption equals the cost to the electricity supply industry of his doing so. This chapter examines the case for marginal cost pricing, the complications introduced by financial constraints and the question of short-run versus long-run marginal costs. Marginal cost pricing, subject to any appropriate adjustments for non-optimalities, may yield a revenue which provides a surplus in relation to accounting cost which is too high or too low. If the case for marginal cost pricing is accepted, the question remains whether it is long-run marginal cost or short-run marginal cost that is relevant. Where a margin of capacity is planned to provide against risks, it should be possible to meet the unforeseen demand without raising the price of peak power.
