Estimation of Long Run Marginal Cost

Project by Link Economics Group

infrastructure pricing nz

Long Run Marginal Cost estimation for an electricity distributor, 2022-23

The Electricity Authority has encouraged electricity distribution businesses in New Zealand to set prices that reflect economic cost. To assist with developing cost-reflective price signals, a network engaged Link Economics to prepare a Long Run Marginal Cost (LRMC) model and estimates.

We reviewed relevant economic literature and examples of where LRMC has beem estimated and used to set prices. We then developed a methodology and worked with the network to determine data requirements. Drawing on information from the Asset Management Plan on capital expenditure that is planned to provide for growth, and forecasts of growth in demand, we prepared a range of estimates of LRMC that can be used to inform the network’s future peak price signals.

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