Value of lost load estimation for the South Korea's manufacturing sector—finding the gap between the supply and demand side

Abstract

This study evaluates the value of lost load (VoLL) for the manufacturing sector in South Korea, focusing on the gap between the state-preference method and the production-side approach. The two methods are different in that the former measures the value of stable electricity in the view of consumer goods, while the latter calculates it in the view of producer goods. This study utilized an own-developed production side approach and the contingent valuation method (CVM) as a state-preference method. With data from a survey of 1023 firms, empirical research found the gap between the VoLLs by estimation methods, deriving production side VoLL that is six times higher than CVM results. This study presumes that this gap is mainly sourced from the weak recognition of respondents on the importance of electricity security owing to the absence of outage experience. Additional logit results also supported the hypothesis. Although the production side VoLL is more appropriate, CVM results are notable, being related to the public acceptability of the increases in electricity tariff. Therefore, it is recommended to reduce the gap between the two methods by improving the recognition of a stable electricity supply to secure flexible resources in the electricity market. It ultimately facilitates the construction of a compensation system of flexible resources.