Marginal‐Cost Pricing: Its Rle in Conservation

Abstract

Marginal‐cost analysis is critical to a conservation program because all management decisions affecting conservation require a comparison of costs and benefits. Increasing production within existing facilities requires that the revenues derived from the additional sales be compared with the higher operations costs. Also, a decision to expand capacity requires a comparison between expected revenues and the capital and operations costs of the new facilities. An approach is presented for the design of water rates that combines economic theory with the practical aspects of integrated resource planning. Marginal‐cost savings are compared with changes in discretionary use, resulting in the calculation of a conservation surcharge. This surcharge is a strong conservation price signal that is relatively easy to administer and that results in economic efficiency.

A dynamic approach to PES pricing and finance for interlinked ecosystem services: Watershed conservation and groundwater management

“…2 In the context of public utilities, a conservation surcharge is generally understood to be a volumetric charge that integrates marginal and average costs in price structure design (see e.g. Mann and Clark, 1993). The charge is determined according to the avoided-cost principle, and demand-side conservation is induced by incorporating capacity expansion costs into the price for discretionary usage.…”

The use of levelised cost in comparing supply and demand side options

“…Integrated resource management by the electricity industry in the US in the 80's led to the development of the methodology for Least Cost Planning (LCP) (Beecher, 1995) The aim was to compare energy demand management programs with increased generation as sources of supply (Mieir et a/. 1983).…”

“…By which ever methodology, marginal cost is seen to increase as increasing demand uses up existing capacity and need for augmentation approaches. Water pricing reform has driven attempts to estimate the marginal cost of supplies, with economic efficiency theoretically maximised when the price of water from a network is set at the marginal cost (Mann and Clarke, 1993.;Warford 1994 ;Herrington 1987) Turvey (1969) described a method for calculating marginal capacity cost, where the cost numerator measured the change in present value due to moving the next planned capacity augmentation forward by a single year. The method uses a denominator that measures the volumetric increase in current demand that would require the planned capacity augmentation to be moved forward by a year (Mann and Clarke, 1993).…”

“…The discount rate for the numerator of AIC should be set at the opportunity cost of capital while the denominator should be discounted at a rate equal to the time preference for consumption. Further conjecture exists, as to what the output stream in AIC represents and whether after an augmentation this should equal the design capacity or some fraction of the design capacity in order to account for unused capacity (Mann and Clarke, 1993). Other authors have uses the terms 'water delivered' (Herrington 1987 ;UKWIR, 1996) and 'production stream' of water (Warford 1994) to describe the output stream in an AIC function.…”

“…Conjecture around the output stream of AIC can then be understood. Mann and Clarke, (1993), Warford (1994) and Herrington (1987) all proposed calculating AIC in order to inform the price of water. However under a marginal cost-pricing scenario with marginal cost estimated using AIC, calculating the AIC becomes complicated.…”