Customer Service, Executive Insight, Smart Grid

Valuing Lost Load: How the Economics Have Changed

“Using our framework, we estimate that the national cost of power interruptions is about $80 billion annually, based on the best information available in the public domain. However, there are large gaps in and significant uncertainties about the information currently available.”

– Kristina Hamachi LaCommare and Joseph H. Eto, Berkeley National Laboratory, 2004

 

Each time the United States experiences a significant blackout, a flurry of studies are commissioned to estimate the value of lost load (VoLL).  Estimates generally calculate the value by type of end-user, assessing the cost to residential customers with surveys, commercial customers through lost business and industrial customers with higher costs, foregone production and lost sales opportunities. Extended outages include additional costs incurred by society through emergency response or other public support services.    The conclusion invariably is that outages cost hundreds of billions of dollars, depending on the extent and duration of the outage.  An alternative approach may be ready for prime time.

A New Purpose

Whereas previous calculations of VoLL were spurred by outages that already had occurred, the industry is beginning to consider a more forward-looking approach.  Competitive markets squeezing excess reserves out of the system, renewable integration with its unanticipated generation swings, and flat load growth causing utilities to scramble are just a few reasons why an accurate measure of VoLL is becoming increasingly important.  Forward-looking efforts attempt to calculate VoLL as a trade-off between a desired outcome and the potential costs versus benefits of such outcomes.  Broad ranges for VoLL that span hundreds of billions of dollars may not be very useful for understanding how an investment may impact costs associated with a slightly lower level of reliability.

Surveys

The traditional approach to estimating VoLL obtained information via customer surveys and stated preferences.  A formal survey takes a significant amount of time and money, but can be designed to elicit ratepayer preferences.  That said, a number of social experiments and studies have shown that stated preferences can be manipulated very easily through the survey approach via question format and the difference between willingness to accept (WTA) versus willingness to pay (WTP).  Regardless, these types of surveys are popular because they can be used to generate a high number.  A number of countries are using this approach to estimate the VoLL, including Australia, Germany and the United Kingdom.

Literature Search

Given the large body of work already in the public domain, many modern-day estimates of VoLL simply take advantage of the literature.  Instead of an end-user survey, new estimates perform a literature survey to obtain key parameters and then customize those values to reflect the specific characteristics of a region or utility service territory.  Texas recently used this approach.

Market-based Substitutes

Economic theory would price VoLL at the cost of the next best alternative.  Such alternatives were in short supply or extraordinarily expensive until relatively recently. Today, however, a number of commercial alternatives are available to backup system power.  Critical infrastructure buildings and universities generally have had backup generation.  Industrial users increasingly are investing in backup generation, reliability, resiliency, and security. For small users, commercialization is driving down costs for backup generators, distributed generation, energy storage and even fuel cells.  End-users that truly place a high value on reliability now have a number of options to make a direct investment to ensure continual supply.  The cost of these alternatives and adoption rates provide a measure of the value of lost load from the perspective of a WTP measure. 

Market Measures

Competitive electricity markets also are increasingly pricing VoLL for certain energy users. Wholesale capacity markets allow load to participate, providing a measure of the WTA less reliability via the clearing price paid for interruptible supply.  Bilateral contracts differentiate between firm and non-firm transportation and interruptible supply, pricing the value of certainty. Transmission line outages lead to higher locational marginal prices, which can be estimated using production cost models with nodal representation.  Lost opportunities for sales by interconnected jurisdictions are clearly priced by the markets in those jurisdictions.  Penalties assessed by NERC for failure to meet regulatory requirements for reliability also provide insight into the cost to a utility of not investing in reliability.

Key Take-away

Traditional measures of VoLL can be and should be augmented in the current environment where new technologies, transparent markets and regulatory requirements place a transparent price on alternatives.  Although such markets can be used to assess only a portion of the demand curve for reliability, they provide a sanity check against traditional approaches that utilize proven techniques for generating high values.

 About the author: Tanya Bodell is the Executive Director of Energyzt, a global collaboration of energy experts who create value for investors in energy through actionable insights. Visit www.energyzt.com. She can be reached at: [email protected] or 617-416-0651.