Insurance Contract for High Renewable Energy Integration

TL;DR

This paper proposes a contract-theoretic approach to designing insurance for renewable energy users, jointly optimizing insurance and renewable planning to reduce social costs and improve reliability amid renewable variability.

Contribution

It introduces a novel joint optimization framework for insurance contracts and renewable energy planning, addressing private user preferences and non-convex problem challenges.

Findings

Optimal insurance contracts reduce social and user costs.

Benefits are maximized at medium electricity prices with low user heterogeneity.

The approach outperforms no-insurance benchmarks.

Abstract

The increasing penetration of renewable energy poses significant challenges to power grid reliability. There have been increasing interests in utilizing financial tools, such as insurance, to help end-users hedge the potential risk of lost load due to renewable energy variability. With insurance, a user pays a premium fee to the utility, so that he will get compensated in case his demand is not fully satisfied. A proper insurance design needs to resolve the following two challenges: (i) users' reliability preference is private information; and (ii) the insurance design is tightly coupled with the renewable energy investment decision. To address these challenges, we adopt the contract theory to elicit users' private reliability preferences, and we study how the utility can jointly optimize the insurance contract and the planning of renewable energy. A key analytical challenge is that the joint optimization of the insurance design and the planning of renewables is non-convex. We resolve this difficulty by revealing important structural properties of the optimal solution, using the help of two benchmark problems: the no-insurance benchmark and the social-optimum benchmark. Compared with the no-insurance benchmark, we prove that the social cost and users' total energy cost are always no larger under the optimal contract. Simulation results show that the largest benefit of the insurance contract is achieved at a medium electricity-bill price together with a low type heterogeneity and a high renewable uncertainty.