The Value of Lost Load (VoLL) in European Electricity Markets: Uses, Methodologies, Future Directions

Abstract

This paper reviews the uses and estimation methodologies for the Value of Lost Load (VoLL) in European electricity markets. VoLL is defined by the Clean Energy Package as a €/MWh estimate of the maximum electricity price that customers are willing to pay (WTP) to avoid an outage. As European energy markets continue to strive to improve competition, quality, reliability and efficiency, while integrating greater shares of renewable energy, estimating key market parameters such as the VoLL becomes increasingly important. Recent EU regulation is to be adopted requiring regulators and Transmission System Operators to estimate and publish VoLL based on a clear and transparent methodology. The `correct' method of VoLL estimation should depend on what VoLL will be used for. Despite this, little has been done to summarize the uses of VoLL. This paper fills that gap. Literature review and review of regulations show many uses of VoLL, including calculating reliability standards, back-stop pricing when demand exceeds supply in energy, balancing, capacity markets, and reserves markets. Different uses of VoLL suggest different values even within a single use, such as setting reliability standards and levels of investment; there are likely differences in the `correct' VoLL between TSO and DNO levels, as the drivers of reliability and nature of lost load will be fundamentally different. The correct estimation method should depend on the use. The existing literature shows a wide range of methods for estimating VoLL, including surveys of WTP, Choice Experiments, and production function techniques. These different approaches have led to a wide range of estimated values and may have potential biases. We review the estimates and potential biases of existing methods. Studies show a range of VoLL estimates from €1,500 to €22,940/MWh, while one MS uses a VoLL of circa €19,500 for reliability but a VoLL of €3,500 for reserve-repricing. Other studies have shown VoLL likely varies by numerous customer characteristics, including time-of-day, season, customer type, duration, and frequency. Future directions are emerging for VoLL research and we synthesize these with our findings. Market power and the use of price-cap-mitigation tools should be considered when estimating VoLL and whether prices should be allowed to reach VoLL. Customer demand-side participation interacts with VoLL estimates used to set capacity prices (CP). Likely outage causes and Loss of Load Expectation (LOLE) modelling will also have real implications as the standard relation where LOLE=CP/VoLL will not always hold. Finally, different VoLLs and quality levels may have important fairness implications.