The Benefit of a Long-run Incremental Pricing Methodology to Future Network Development

In 2005, University of Bath was commissioned by the UK´s gas and electricity markets watchdog - Ofgem to examine whether alternative charging methodologies would be more efficient at encouraging the economic development of the distribution network to the present methodologies used by the transmission and distribution networks. This paper presents the findings from the study, showing that an alternative Long-run incremental cost pricing developed by University of Bath can overcome many weaknesses in the current distribution charging arrangements, including the inability to reflect forward looking costs, lack of any distinction in the cost of siting at different locations, little recognition of the cost of reactive power flows, and inconsistency in the treatment between generation and demand.