INTRODUCTION

PEAK LOAD PRICING

The Peak Load Pricing is the pricing strategy wherein the high price is charged for the goods
and services during times when their demand is at peak. In other words, the high price charged
during the high demand period is called as the peak load pricing.

This type of price discrimination is based on the efficiency, i.e. a firm discriminates on the basis
of high usage, high-traffic, high demand times and low demand times. The consumer who
purchases the commodity during the high demand period has to pay more as compared to the one
who buys during low demand periods.

The peak load pricing is widely used in the case of non-storable goods such as electricity,
transport, telephone, security services, etc. These are the goods which cannot be stored and hence
their production is required to be increased to meet the increased demand. Thus, the marginal
cost is also high during the peak periods as the capacity to produce these goods is limited. And,
hence, the price is set at its highest level with an aim to shift the demand or at least the
consumption of goods and services to attain a balance between demand and supply.

The reason for the higher prices charged at peak times has partly to do with elasticity of demand
(and in this sense, therefore, is price discrimination: i.e. charging different prices because of
different demand elasticities in different parts of the market). Demand is less elastic at peak
times. For example, many commuters have little option but to pay higher rail fares at peak times.

The theory of Peak Load Pricing has been a theme of wide discussion amongst economists for
many decades. It is considered a topic of great interest and controversial. The need for applying
different pricing strategy as PLP basically emerged in response to problems that face most public
utility, for instance non-storability, stochastic instability of demand and demand time varying
where capacity in public utilities is not uniformly utilized. Amongst economists, Peak Load
Pricing is known to be the golden solution for dealing with such problems. As it provides public
utilities with an indirect load management mechanism that meets the double objectives; which is
reducing growth in peak load, and decreasing the need for capacity expansion, through charging
customers in peak time a higher peak price, and hence shifting part of the load from the peak to
the base load plants which called valley filling and charging off peak customer a lower off peak
price, thus having some savings in used fuels during peak time
 Services where Peak-loading pricing is needed

1. Telecommunication
2. Electricity
3. Transport and services
4. Fuel
5. Hotels , and many more

Some of the services explained-

1 Telecommunication

The telecommunications operator builds his network with the capacity to serve the peak demand,
which generally occurs during business hours. As a result, network costs are caused by
peak demand and not demand during off-peak hours. To facilitate marginal cost pricing,
the operator would maximize profit by charging higher prices during peak hours and
lower prices during off-peak hours. The prices at the peak reflect the marginal costs of capacity
and the lower-off peak prices reflect only the marginal costs of off-peak usage, which are
generally close to zero in telecommunications. Peak-load pricing requires sophisticated
measurement of customer usage. This is rarely a problem in telecommunications, but requires
advanced metering technologies in energy and water. As a result, the cost of implementing these
advanced measurement technologies must be weighed against the welfare gains of metering.
Electricity

Electricity consumption peaks in daytime because all business establishments, offices and
factories come into operation. Electricity consumption decreases during nights because
most business establishments are closed and household consumption falls to its basic minimum.
In terai, demand for electricity peaks during summer season due to use of fans, ACs and coolers,
and it declines to its minimum level during winters.

Pricing of goods like electricity is problematic. The nature of the problem in a short-run setting is
depicted in the figure. The ‘peak-load’ and ‘off-load’ demand curves are shown by Dp and
DL curves, respectively. The short-run supply curve is given by the short-run marginal cost
curve, SMC. The problem is ‘how to price electricity’.

Peak-Load Pricing of Electricity

As shown in fig, electricity price is fixed in accordance with peak load demand op3 will be the
price and if it is fixed according to off load demand, price will be OP1. If a peak load price OP3
is changed uniformly in all seasons, it will be unfair because consumer will be charged for what
they do no consume. Beside, it may affect business activities adversely. If electricity production
is a public monopoly, the government may not find it advisable to change a uniform peak load
price.

On the other hand, if a uniform off load price OP1 is changed, production will fall to OQ2 and
there will be acute shortage of electricity during peak hours. It leads to breakdown and load
shedding during the peak load period, which disrupt production and make life miserable.

Alternatively, if an average of two prices, say P2 is charged, it will have the demerit of both peak
load and off load prices. There will be an excess production to the extent of AB during the off
load period, which will go waste as it cannot be stored. If production is restricted to OQ1, price
P2 will be unfair. And, during the peak load period, there will be a shortage to the extent of BC,
which can be produced only at an extra marginal cost of CD.
 STRATEGIES RESPONSE TO PEAK LOAD PRICING.

 During peak time periods, when demand is high, managers should charge a higher price
(PP).
 During trough time periods, when demand is low, managers should charge a lower price
(PT)
 Marginal cost often follows a cyclical pattern in which MC is high during peak periods
and low during trough time periods.
 Firms should equate marginal cost and marginal revenue separately in the two time
periods to determine the appropriate prices.
 NEED AND IMPORTANCE OF PEAK LOAD PRICING.
1. Peak load pricing would help balance capacity usage. .
2. Reducing growth in peak load.
3. Decreasing the need for capacity expansion, through charging customers in peak time a higher
peak price.
4. Shifting part of the load from the peak to the base load plants which called valley filling and
charging off peak customer a lower off peak price, thus having some savings in used fuels during
peak time.
5. Firms will be able to increase revenue.
6. Enables firms to stay in business for example by offering different prices in peak and off peak.
7. Firm will be able to attract more customers.
8. Peak load pricing results into consumer welfare by a more efficient distribution of use of
services between the peak and off peak periods and thus overcoming the problems of shortages
and surplus.