DISTORTIONS IN ELECTRICITY PRICING IN THE UK: A COMMENT
| Date | 01 August 1985 |
| DOI | http://doi.org/10.1111/j.1468-0084.1985.mp47003006.x |
| Author | Ian S. Jones |
| Published date | 01 August 1985 |
OXFORD BULLETIN OF ECONOMICS AND STATISTICS, 47,3 (1985)
0305-9049 $3.00
DISTORTIONS IN ELECTRICITY PRICING IN
THE UK: A COMMENT
Ian S. Jones
I. INTRODUCTION
The Bulk Supply Tariff (BST) at which electricity is sold by the Central
Electricity Generating Board (the CEGB) to a set of Area Electricity
Boards in England and Wales for local distribution is described by the
electricity supply industry as a long-run marginal cost (LRMC) based
tariff. The prime objective of the structure of charges it embodies, it is
said, is to indicate to consumers 'when electricity is cheap and when it
is dear', whilst fulfilling the industry's statutory obligation to show 'no
undue preference to particular consumers or classes of consumer. The
tariff also raises the revenue necessary to meet whatever financial obli-
gations are placed on the industry by government.
A recent paper in this BULLETIN by Slater and Yarrow (1983) ex-
amined the structure of the BST. It concluded that the 1980/81 BST
embodied significant departures from the correct principles of LRMC
pricing, which might result in a serious misallocation of resources. This
note assesses the validity of these conclusions.
II. THE BST
Until very recently, there have been two main components to the BST':
Energy of kWh charges which account for about 75 per cent of
the revenue raised by the tariff. These are based on the (short-run)
marginal fuel and other variable works or operating costs of
meeting an increment of demand from the CEGB's existing gen-
erating and transmission plant.
Demand or capacity charges, which until 1984/85 raised most of
the remaining 25 per cent of revenue and are intended to repre-
sent the costs of meeting a permanent increase in demand re-
quiring an increase in generating and/or transmission capacity.
Until 1984/85 the balance of BST revenue was raised by a service charge based on the
costs to the CEGB of providing bulk supply points to the Area Boards. In the 1984/85 tariff,
however, a portion of the CEGB's system overheads is to be recovered by an extended system
service charge and the amount of overheads recovered through the basic capacity charge is
reduced accordingly. Unlike the capacity charge, which is 'forward-looking', the system service
charge is based on the historic demands of Area Boards in 198 2/83. The CEGB recognises that
the introduction of this element represents a move away from marginal cost-based pricing, See
CEGB (1984B).
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