Abstract

This paper studies how robust or sensitive Steiner’s peak load pricing results are to changes in certain assumptions. The peak-load problem deals with choosing the optimal pricing scheme leading to optimal output when there is a non-storable good whose demand fluctuates periodically at a uniform price. In the long-run planning point of view the problem also deals with optimal capacity of the system as opposed to short-run where the existing capacity is fixed an thus not subject to determination. I consider the peak-load problem for electric utilities. Steiner’s Peak load pricing results involves charging different prices for electricity in different time intervals aiming to mitigate the inefficiency of underutilized capacity over the cycle. The prices advocated by Steiner are set in accordance with long-run marginal costs and peak users bear all of the capacity cost. Relatively high price in the peak-demand period reduces the peak-demand and thus also the need for capacity investments for meeting peak demands. Comparatively, low price in the off-peak period is charged encouraging demand thereby making better use of existing capacity. Optimal capacity for the long-run planning point of view is simply found where capacity is equal to the peak load. However, this is