Electricity Marginal Cost Pricing
Applications in Eliciting Demand Responses
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Packed with case studies and practical real-world examples, Electricity Marginal Cost Pricing Principles allows regulators, engineers and energy economists to choose the pricing model that best fits their individual market. Written by an author with 13 years of practical experience, the book begins with a clear and rigorous explanation of the theory of efficient pricing and how it impacts investor-owned, publicly-owned, and cooperatively-owned utilities using tried and true methods such as multiple-output, functional form, and multiproduct cost models. The author then moves on to include self-contained chapters on applying estimating cost models, including a cubic cost specification and policy implications while supplying actual data and examples to allow regulators, energy economists, and engineers to get a feel for the methods with which efficient prices are derived in today’s challenging electricity market.
Key Features
- A guide to cost issues surrounding the generation, transmission, and distribution of electricity
- Clearly explains cost models which can yield the marginal cost of supplying electricity to end-users
- Real-world examples that are practical, meaningful, and easy to understand
- Explans the policy implications of each example
- Provide suggestions to aid in the formation of the optimal market price
Readership
Power Engineers, Electrical Engineers, Energy Engineers, Energy Economist, Environmental Engineers, Mechanical Engineers, and Industrial Engineers
Table of Contents
- Preface
Acknowledgements
1. Introduction
Introduction
Competitive Paradigm
Marginal Cost Pricing Doctrine
A Brief Overview of the United States Electric Market
Objective Functions: The Players
Reducing Carbon Emissions
Regulation of Investor-Owned Electric Utilities in the United States
Internalizing the Cost of Reducing Carbon Emissions
Optimal Rate/Tariff Design and Tax Credits to Promote Efficient Use of Energy and a Reduction in Carbon Emissions
Tariff Design and Rate-Making Issues
Conclusion
2. The Theory of Natural Monopoly and Literature Review
The Natural Monopoly Conundrum
Defining Natural Monopoly
Economies of Scale
Efficient Industry Structure
Conclusion
3. U.S. Electric Markets, Structure, and Regulations
Introduction
The U.S. Electric Industry Structure
Deregulation
Market Participants
Vertically Integrated Model
Industry Restructuring and the Competitive Electric Market
Regulation of the Electric Utility Industry
Looking Forward: Renewable Resources and Generating Technologies
Future of the Electric Industry
4. The Economics (and Econometrics) of Cost Modeling
General Cost Model
The Econometrics of Cost Modeling: An Overview
A Brief History of Cost Models and Applications to the Electric Industry
Conclusion
Appendix
5. Cost Models
Introduction
Determination of an Appropriate Objective Function: A Brief Overview of the Literature
Rural Electric Cooperatives
Differences between Coops and IOUs
Literature Review: Cost Studies on Rural Electric Cooperatives
Data
Review of the Literature: Cost Function Estimation in the Electric Utility Industry
Nerlove’s Cobb–Douglas Cost Model
Further Considerations
End of Section Exercises: Basic Cost Model versus Nerlove Cost Model
Flexible Functional Forms
Translogarithmic Cost Function
Cost-Share Equations
A Priori Expectations
Discussion of Estimation Results: Single-Output Translog Cost Equation
Substitution Elasticities among Inputs: Hicks–Allen Partial Elasticities of Substitution
Price Elasticities
Homotheticity
End of Section Exercises: Translogarithmic Cost Function
Multiproduct Cost Functions
Literature Review
Multiproduct Cost Models
Multiproduct Cost Concepts (Revisited)
Product-Specific Economies of Scale
Quadratic Cost Functions
A Properly Specified Quadratic Cost Function
Reasons That the Quadratic Form Is the “Best” Suited for Modeling Industry Structure
End of Section Exercises
Cubic Cost Models
Multiple-Output Models
More Complex Multiple-Output Models
Other Issues
Measures of Efficiency for Multiple-Output Models
Ray Cost Output Elasticity
Degree-of-Scale Economies
Product-Specific Economies of Scale
Economies of Scope
Cost Complementarity
Conclusion
End of Section Exercises: Multiple-Output Cost Models
Appendix: Generalized Method of Moments (GMM)
Appendix: Proofs
6. Case Study
Introduction
Theory of Efficient Pricing
Study Design
Reasons that Cooperatively-Owned Utilities Are Different
Literature Review
Estimating Cost Models
Data
Cost Models
Estimation Results
Efficiency Measures
Discussion of Figure 6.4—Average Incremental Cost and Marginal Cost
General Implications of Estimation Results
Conclusion
Appendix A: Panel Data
Appendix B: Heteroscedasticity-Consistent Covariance Matrix Estimation
7. Case Study
Cobb–Douglas Cost Model
Elasticities of Substitution for Cobb–Douglas
Translogarithmic Cost Function
Substitution Elasticities for the Translog Form: Hicks–Allen Partial Elasticities of Substitution
Price Elasticities
Generalized Leontief Cost Function
Empirical Estimation
Iterated Zellner-Efficient Estimator
Generalized Leontief Cost Function—Elasticities
Quadratic Cost Model
Nonlinear Quadratic Cost Model
Elasticities
Morishima Elasticities of Substitution
Conclusion
Appendix: Quasiconcavity in Input Prices
8. Efficient Pricing of Electricity
Introduction
Theory Of Efficient Prices
Debate on the Optimal Pricing of Electricity: A Brief History
Rate Design
More About Rate Design: In Theory
Overview of Rate Design Process
Efficient Public Utility Pricing
Ramsey Prices: A Second-Best Option4
Ramsey Pricing—The Second-Best Option
Another Option: Average Cost Pricing
Two-Part Tariffs
Two-Part Tariff with Different Customer Classes
Multipart Tariffs
Nonuniform Pricing: Block Rates
Time-of-use Rates
A Brief History of Time-Of-Use Pricing
Real-Time Pricing
Understanding Electric Utility Customers
Assessment of Rate Structure Options
Conclusion
9. Price and Substitution Elasticities of Demand: How Are They Used and What Do They Measure?
Introduction
Price Elasticity of Demand
A Brief Review of the Literature: Energy Demand, Elasticities Of Demand In Energy Markets, And Functional Forms
Price And Substitution Elasticities
Dynamic Models
Structural Models
Expenditure System Models
Econometric Issues: Identification and Systems Bias
Simultaneous Equations
Consistent Parameter Estimation
More Advanced Estimation Methods
Additional Econometric Issues (Berndt, 1991)
A Brief Survey of the Literature: Price Elasticity of Demand
Substitution Elasticities
Federal Legislation
Technology—the “Smart Grid”—How It Works
Elasticities
More Complex Models: Price And Substitution Elasticities Using Constant Elasticity of Substitution Model
Overview of Results—Faruqui And Sergici Study
Conclusion
For Interested Readers
Recommended Reading
10. Time-of-Use Case Study
Introduction
The Electricity Crisis: Summer 2000
Chapter Overview
Literature Review
Effect of Time-Of-Use Pricing On Peak Utility Load
Recent Experience in California
The California Debacle: A Decade Later
Using Real-Time Pricing to Estimate Price Elasticity of Demand
Further Implications of the Residential Responsive Pricing Pilot
Peak-Load Pricing
Substitution Elasticities
Elasticities of Substitution
Conclusion
Recommended Reading
References
Index
Product details
- No. of pages: 366
- Language: English
- Copyright: © Butterworth-Heinemann 2012
- Published: February 2, 2012
- Imprint: Butterworth-Heinemann
- eBook ISBN: 9780123854667
- Hardcover ISBN: 9780123851345
About the Author
Monica Greer
Monica Greer is a Senior Quantitative Analyst based in Kentucky, United States. Her role includes forecasting market shares for appliances, performing analysis and deriving price elasticities for clients. Previously, she was a Senior Business Consultant and Economist, and a Senior Economist for the Louisville Gas and Electric Company, managing impacts of various carbon-related policies on customer demand and performed load research and analysis. Monica is also currently an Adjunct Faculty member of the Department of Economics at Bellarmine University in Kentucky and taught previously at Jefferson Community College, University of Kentucky, and Indiana University. Monica earned a PhD in economics from the University of Kentucky, an MA in economics from Indiana University, and a BBA in finance from the University of Kentucky. She was awarded into the University of Kentucky Honors Program, has published two books, both with Elsevier, and has published several journal articles and provided presentations.
Affiliations and Expertise
Senior Quantitative Analyst, Kentucky, USA
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