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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: D11: Consumer Economics: Theory, D12: Consumer Economics: Empirical Analysis, Q41: Energy: Demand and Supply; Prices, D81: Criteria for Decision-Making under Risk and Uncertainty, L95: Gas Utilities; Pipelines; Water Utilities, L94: Electric Utilities, Q42: Alternative Energy Sources

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 bi-monthly journal of the IAEE's Energy Economics Education Foundation.


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