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A Stochastic Model for the Measurement of Electricity Outage Costs

The measurement of customer outage costs has recently become an important subject of research for the electric utilities. This paper uses a stochastic dynamic model as the starting point in developing a market-based method for the evaluation of outage costs. Specifically, the model postulates that once an electricity outage occurs, all production activity stops. Full production is resumed once the electricity outage is over. This process repeats itself indefinitely. The business customer maximizes his expected discounted profits (the expected value of the firm), taking into account his limited ability to respond to repeated random electricity outages. The model is applied to 11 industrial branches in Israel. The estimates exhibit a large variation across branches.

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Energy Specializations: Energy Modeling – Other; Electricity – Markets and Prices

JEL Codes:
C59 - Econometric Modeling: Other
D42 - Market Structure, Pricing, and Design: Monopoly

Keywords: Electricity, Outage costs, Stochastic model, Israel, Electric utilities

DOI: 10.5547/ISSN0195-6574-EJ-Vol14-No2-8

Published in Volume 14, Number 2 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.