Peak Load Pricing and Capacity Planning with Demand and Supply Uncertainty

The peak load pricing problem has been discussed quite extensively in the literature. Central to the problem is the choice of output capacity and price for a basically nonstorable commodity such as electricity. This article considers both uncertain demand and uncertain capacity simultaneously in a simple model and generalizes earlier analyses, notably in two respects. First, we examine the demand uncertainty in a more general framework within which previous specifications of demand uncertainty can be seen as special cases. Second, we take explicit account of the random availability of the installed capacity. New insights are obtained and discussed in this article.