An insurance mechanism for electricity reliability differentiation under deep decarbonization

An Insurance Paradigm for Improving Power System Resilience via Distributed Investment

“…The central precept of this line of work involves an insurance contract between an energy consumer and an insurance agency which provides economic compensation for electricity interruption in exchange for an upfront premium. The application of insurance schemes to incentives for backup generation was investigated in [23], [24] and [7]. A key result of [23] was that, under full insurance, an individual's economic incentives to install onsite backup generation to minimise premia will supplant the utility's incentive to mitigate compensation liabilities.…”

“…[24] uses an agent-based model that confirms that insurance contracts converge to theoretical optima under bounded perception of risks and losses. The authors in [7] establish that a compensatory insurance scheme can improve consumer outcomes in the presence of reliability externalities. More recently, [25] establishes that priority service Pareto dominates both ex-ante time-of-use pricing and integrated resource planning under supply uncertainty.…”

“…The objective function ( 23) is a maximisation of the convex combination of the mean and CVAR (c i ) of the insurer's profits (the first and second term). In addition, the insurer must also bear the costs associated with reserving capital to meet potential losses [7]. This is represented in the third term of the objective function as a product of the reserved capital (φ i ) and the annualized cost of capital (γ).…”

“…While wholesale energy markets can in theory ensure a reliable system [4] a range of recent works identify incompleteness in liberalized market architectures that can leave systems and communities vulnerable to extreme events [5]- [7]. Administrative contracting too can distort the fuel mix towards resources that are particularly vulnerable to weather extremes [8], [9].…”

Why the sustainable provision of low-carbon electricity needs hybrid markets

“…18 This calls for a profound rethink of traditional approaches to ensuring security of supply (e.g. Newbery et al, 2018;Joskow, 2019;Duenas-Martinez et al, 2021;Billimoria et al, 2022;Wolak, 2022). First, (peak) demand net of VRE infeed is more variable and exhibits steeper ramps.…”