Pricing is a particularly important tool, especially to achieve long-run changes. However, energy supply systems usually require large capital investments with long lead times and lifetimes. Therefore, once the investment decision is made, usually on the basis of the conventional least-cost method of meeting demand by subsector, with due regard for inter-fuel substitution possibilities, there is a lock-in effect with respect to supply. Thus prices should be related to the long-run planning horizon. On the demand side also, many energy conversion devices (e.g., motor cars, gas stoves, electric appliances, and machines) are expensive relative to average income levels and have relatively long lifetimes, thus limiting the ability of consumers to respond in the short run to changes in relative fuel prices.

The objectives of energy pricing are closely related to the general goals of energy policy noted in chapter 1, but they are more specific. First, the economic growth objective requires that pricing policy should promote the economically efficient allocation of resources, both within the energy sector and between it and the rest of the economy. In general terms, this implies that future energy use would be at optimal levels, with the price (or the consumer's willingness to pay) for the marginal unit of energy used reflecting the incremental resource cost of supply to the national economy. Relative fuel prices should also influence the pattern of consumption in the direction of the optimal or least-cost mix of energy sources required to meet future demand. Distortions and constraints in the economy necessitate the use of shadow prices and economic second-best adjustments, as described in the next section.