A fundamental look at the allocation of capacity charges

The underlying philosophy governing the allocation of power system capacity costs is often unclear, and could well be based on theory whose applicability to the electricity supply is questionable. This paper presents a simple model which provides the basis for a clear and fundamental discussion of the allocation of capacity charges. Various allocation philosophies are then tested against this model, yielding a range of arguably correct results. A proposed “shared-cost” approach is introduced as a means of achieving what would appear to be the fairest allocation of costs. This approach is then shown to be easily applicable to examples of increasing complexity. This “shared-cost” approach also has the desirable feature that the entire incremental cost of additional peak-time usage is allocated to the peak-time users