The Probabilistic Evaluation of Net Present Value of Electric Power Distribution Systems Based on the Kaldor–Hicks Compensation Principle

The decision to proceed with a distribution engineering expansion project is often preceded by some form of cost to benefit analysis. The Kaldor-Hicks compensation principle is a criterion that assists in this analysis by the evaluation of net present value over the expected project life. This paper discusses this principle applied to power distribution systems. A probabilistic formulation is proposed to capture uncertainty in cost and benefit data. In effect, the approach models ranges of value of project parameters. While the method does not determine whether to proceed with a given project, it does give a measure of the value of the engineering economic efficiency. The method is especially valuable for cases of “next generation” systems, and this is illustrated in this paper.