Economic Analysis of Investment in Power Systems

Publication | June 1991

Power systems consist of integrated networks of generation, main transmission and local distribution components. The intra and intertemporal dependence of these components make it desirable to take a systems approach to investment planning which should aim at maximization of net benefits. The process of maximization of net benefits for the power system as a whole can be viewed as consisting of four modules. First, given the existing power system configuration and the load and energy demands associated with an electricity tariff forecast, alternative system expansion plans and their costs can be simulated. Second, from the alternative system expansion plans the least-cost system expansion plan is determined along with the associated long-run marginal cost of supply. Third, given the energy demands used in determining the least-cost expansion plan, cost-benefit analysis is undertaken to judge the economic viability of the least-cost investment plan. Fourth, the marginal cost of supply is compared with the electricity tariff forecast to revise the latter on the basis of which a new load and energy demand forecast is prepared incorporating the tariff change. The process described above is repeated until an investment plan emerges where electricity tariff and long run marginal cost are equal. An efficient and economically viable power sector investment plan will evolve where the interaction of the demand forecast, investment decision and the accompanying long run marginal cost of supply is accounted for explicitly.


  • Introduction
  • A General Framework
  • Demand Forecast for Electricity
  • An Overview of Least-Cost Investment Program to Meet Demand Forecast
  • Power Development Plan
  • Benefit Analysis
  • Cost-Benefit Analysis: A Systems Approach
  • Conclusion

Additional Details

  • Energy

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