Three Approaches of Generation Price Regulation: Cost-Plus, Contracts and Marginal Cost. Application to Venezuelan Case

Abstract

At world-wide level, regulation of generation prices has diverse schemes, based on the physical and economic characteristics of the electrical system. This paper describes three main regulation approaches: Cost-Plus, Contracts and Marginal cost. In the Cost-Plus approach, the regulating organ determines the generation price with the costs incurred by the utility, and the profit allowed. In the contract approach, prices are determined between the generator and the client. The prices in this approach are the result of the negotiation, but it will reflect the opportunity cost in the electrical system. In the marginal cost approach, prices are determined by the additional unit cost for the electrical system. Marginal cost is determined in the generation unit dispatch, using the shadows prices of the optimization process. The paper shows a discussion on the advantages and disadvantages of the approaches; based on the prices volatileness, the capacity to transmit economical signals and the simplicity of the methodology. Finally, the paper shows the results of the application of the three approaches in the Venezuelan.