Modeling optimal time-differential pricing of electricity under uncertainty : revisiting the welfare foundations

Time-of-day (peak-load) pricing of electricity is an indirect form of load management that prices electricity according to differences in the cost of supply by time of day and season of year. It reflects the costs in a more accurate manner than do the traditional block rate structures, as it logically stems from the marginal cost pricing theory, yet is compatible with the historical accounting costs. It has long been argued and advocated that the sale of electricity and other services, in which periodic variations in demand are jointly met by a common plant of fixed capacity, should be at time-differential tariffs. Despite a very rich tradition of modeling, theoretical refinements in peak load pricing have not attracted much attention of late. The present study seeks to model seasonal time-of-day pricing of electricity for two types of power systems – pure hydro and hydro-thermal under four structural welfare assumptions – first-best, second-best, monopoly and constrained monopoly, in conditions of both determinism and uncertainty. Keywords: Time-differential pricing, first best, second best, monopoly, uncertainty JEL Classification: C6, D4, L94, Q4.