Peak-Load Pricing with Different Types of Dispatchability

Abstract

We extend the theory of peak-load pricing by considering that the production with different technologies can be adjusted within their capacity at different speeds. In the established analysis, all production decisions can be made after the random variables realize. In our setting, in contrast, some decisions are made before, others after. We consider fixed load and three types of capacities: partially dispatchable capacity needs to be scheduled ahead of actual production, non-dispatchable capacity produces randomly, and highly-dispatchable capacity can instantly adjust. If capacities differ in their dispatchability, some standard results of peak-load pricing break down, e.g., less capacity types will be employed. Either a system with partially dispatchable technologies only, or a system dominated by non-dispatchable technologies and supplemented by highly-dispatchables occurs, where non- and highly dispatchable technologies could be substitutes or complements. For the latter system capacity decisions cannot be decentralized by markets because costs recovery is not possible.

Keywords: peak-load pricing, dispatchability, reliability, flexibility, costs recovery, market design

JEL Classification: D60, L94, L97, L98, Q21, Q40