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Onsite Backup Generation and Interruption Insurance for Electricity Distribution

This paper extends recent work on interruption insurance for electric power by introducing onsite backup generation capacity as a supplementary form of interruption insurance. The basic model of interruption insurance as a mechanism for differential pricing is reviewed, the incentive for providing onsite backup generation capacity is demonstrated and the interaction between onsite backup generation and interruption insurance is analyzed. Two types of onsite backup, customer and utility owned, are discussed. It is shown that individuals' economic incentives to install onsite backup generation dominate the utility's incentive. Hence customer owned onsite backup decisions will pre-empt the utility's plan to mitigate compensation payments by providing onsite backup generation.

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Energy Specializations: Electricity – Local Distribution; Electricity – Distributed Generation; Electricity – Policy and Regulation

JEL Codes:
D44 - Auctions
L94 - Electric Utilities
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General

Keywords: Electric utilities, Load management, Backup generation, reliability

DOI: 10.5547/ISSN0195-6574-EJ-Vol12-No4-5

Published in Volume 12, Number 4 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.