Comparing reliability insurance scheme to performance‐based regulation in terms of consumers’ preferences

Abstract

Reliability insurance contracts enable consumers to cover fully or partially the financial risk, which they face as a result of outages. These contracts allow consumers to determine their coverage levels according to their value for reliability service (i.e. cost incurred for outages), and pay corresponding premiums to the utility. The utility is then required to reimburse consumers for outages according to their outage cost. Consumer's outage cost is extremely dependent on the duration of outages and this dependency is well defined by function known as customer damage function (CDF). To enable consumers to fully cover reliability risks, utility should provide consumers with contracts, which allow them to select coverage levels according to their CDF. In this study, primarily, CDF-based insurance contracts are designed, and in following, with respect to these contracts, investment incentives provided by reliability insurance scheme are calculated and compared to incentives provided by performance-based regulation, especially in terms of consumers' preferences. Finally, by a numerical example, the effects of these incentives on the utility investment are illustrated.