Investment Decisions and Long-Term Planning Under Electricity Spot Pricing

This paper is a follow-up of previous work on optimal spot pricing of electricity [3]. The issue of long-term planning in the electric utility industry as it relates to the adoption of socially optimal spot pricing is considered. Optimal investment conditions are derived and an algorithm is developed which allows integration of these conditions into long-term planning. The proposed algorithm is an extensionl of Bootht-aleriaux probabilistic production costingand thus exhibits high computational efficiency. It provides the building block forincorporating spot pricing into a number of mathematical programminaf methodologies currently used in generation expansion planning studies. The algorithm's usefulness to produce optimal spot price forecasts that may induce socially efficient investments in non-utility-owned generation and to facilitate empirical studies on the income distributional impact of spot price implementation is also discussed.