Private Risk and Social Resilience in Liberalized Electricity Markets

An insurance mechanism for electricity reliability differentiation under deep decarbonization

“…In the event that consumers are still required to be curtailed, consumers are curtailed in priority based on the VOLL indicated in their reliability insurance contracts (from lowest VOLL to highest VOLL). Ordinarily at this stage many markets resort to rotating/random load shedding (see [5,24,25]). 6.…”

“…Upper level objective function (1) subject to: Upper level primal constraints (2)- (5) Lower level KKT conditions ( 10)- (15) with complementarity constraints (10)-( 13), replaced by (16) Lemma 1 (17) and strong duality equality (18)…”

“…We use a tatonnement (trial and error) process, set out in Algorithm 2 to compute an equilibrium where different values of the insurance premium are trialled based on the insurance quantities sold and purchased by the IOLR and consumers respectively. The algorithm draws most heavily upon the work of Mays [5] and Hoschle [53] where a price is updated based on the differential between buy and sell quantities of the relevant contract. This approach is a variant of the Gauss-Seidel diagonalization method [53] and is used for contract balancing and price setting [5,32].…”

“…The algorithm draws most heavily upon the work of Mays [5] and Hoschle [53] where a price is updated based on the differential between buy and sell quantities of the relevant contract. This approach is a variant of the Gauss-Seidel diagonalization method [53] and is used for contract balancing and price setting [5,32]. Uniqueness and existence under such conditions remain an open issue, beyond simple cases.…”

“…This leads to the well-studied missing money problem where generators face a chronic shortage of revenue, while retailers avoid the full financial impact of lost load, resulting in underhedging of load and underinvestment in resource capacity [4]. This becomes increasingly challenging as markets become dominated by variable resources with zero or negligible short-run marginal costs [4], leading to a view among some that additional investment frameworks are required given incomplete energy markets [5,6].…”