On the Design of an Insurance Mechanism for Reliability Differentiation in Electricity Markets

TL;DR

This paper proposes an insurance-based resource adequacy mechanism for electricity markets that aligns consumer reliability preferences with system reliability, incentivizes infrastructure investment, and manages extreme scarcity effectively.

Contribution

It introduces a novel insurance scheme tailored for flexible, variable-generation power systems, addressing limitations of traditional adequacy mechanisms.

Findings

Differentiates load by usage for better scarcity management

Incentivizes generation investment aligned with consumer preferences

Enhances overall reliability outcomes for consumers

Abstract

Securing an adequate supply of dispatchable resources is critical for keeping a power system reliable under high penetrations of variable generation. Traditional resource adequacy mechanisms are poorly suited to exploiting the growing flexibility and heterogeneity of load enabled by advancements in distributed resource and control technology. To address these challenges this paper develops a resource adequacy mechanism for the electricity sector utilising insurance risk management frameworks that is adapted to a future with variable generation and flexible demand. The proposed design introduces a central insurance scheme with prudential requirements that align diverse consumer reliability preferences with the financial objectives of an insurer-of-last-resort. We illustrate the benefits of the scheme in (i) differentiating load by usage to enable better management of the system during times of extreme scarcity, (ii) incentivising incremental investment in generation infrastructure that is aligned with consumer reliability preferences and (iii) improving overall reliability outcomes for consumers.