The cost of electricity interruptions in Portugal: Valuing lost load by applying the production-function approach

Abstract

Despite the fact that the current level of energy supply security in Europe is quite satisfactory, new challenges present a potential risk of jeopardising the current state of affairs. Among others, key challenges are related to the strengthening of the market framework (in the context of deregulation and unbundling as imposed by EU directives) and the increasing penetration of renewable energy sources in the generation mix (with inherently greater variability). Under these circumstances, assessing the value of lost load (VoLL) is useful to support energy decision-making, including benefit-cost analysis and the design of suitable regulatory frameworks. This paper develops VoLL estimation using a macroeconomic technique, namely the production-function approach. The VoLL determines the foregone value added due to electricity outage. The production-function method is applied to the Portuguese case and an average VoLL of 5.12 €/kWh is found. The paper also presents the VoLL results obtained for various economic sectors as well as households. Moreover, the temporal variation of the VoLL along typical weekdays and weekend, in winter and in summer, and for the most relevant sectors (manufacturing, retail services, and households) is demonstrated and discussed.