Pricing independent power production

Pricing the electricity traded between independent power producers and the interconnected power grid is a main determinant of the future development of independent generation in a region. Because a kWh varies in value depending on place, time and reliability of its supply, only a full marginal cost pricing system offers a first–best solution. In the real world of average cost pricing, two–part tariffs and transaction costs, a clear catalogue of problems involved and equitable solutions is necessary. Empirical evidence shows that a consensus on general pricing principles is mostly attainable, but that implementation of the principles is a source of severe conflicts. By discussing the Belgian experience in this field, we hope to have contributed in clarifying the subject.