Literature review of long-run marginal cost pricing and long-run incremental cost pricing

Electricity markets developed as a result of the deregulation of electric power systems around the world. At privatisation, the industry was disaggregated into a number of individual businesses carrying out one or more of the newly defined industry functions. The idea was to introduce competition (where competition was deemed possible) and to regulate (where competition was not considered practicable). Network (transmission and distribution) provider as regulated businesses recover their costs by charging the users for the provision of the network facilities. This paper reviews the literature behind the long-run cost pricing methodologies which are increasingly favoured as they are considered to promote economic efficiency. Two pricing models, namely the National Grid's DC load flow ICRP model and Bath LRIC model, are studied in this paper.