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Abstract

The problem of efficiently pricing electricity has been of concern to economists and policymakers for some time. A fundamental hurdle in the efficient pricing problem is that electricity is a non-storable commodity with a highly variable demand. Although variations in demand are in fact cyclical, with relatively well known patterns, the effects of peaking demand on required reserve margins and overall system cost and reliability can be significant. Today the problem is compounded by environmental and cost barriers to traditional capacity expansion responses. A natural solution has been to suggest tariffs which in some way smooth demand and thus reduce the need for excessive reserve margins. Time-of-use pricing, marginal cost pricing and peak-load pricing are all variations of this approach, and have been treated extensively in the literature. These principles usually involve some type of differential pricing with the implicit goal of shifting demand away from the peak.

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