An Insurance Paradigm for Improving Power System Resilience via Distributed Investment

TL;DR

This paper proposes an insurance-based framework to incentivize distributed energy investments, aiming to enhance power system resilience against climate-induced extreme events and improve consumer welfare.

Contribution

It introduces a novel insurance paradigm that aligns outage risk with locational incentives, addressing regulatory gaps and promoting distributed energy resources.

Findings

Framework can improve resilience in large-scale systems

Aligns incentives with outage risk at different locations

Potential to enhance consumer welfare

Abstract

Extreme events, exacerbated by climate change, pose significant risks to the energy system and its consumers. However there are natural limits to the degree of protection that can be delivered from a centralised market architecture. Distributed energy resources provide resilience to the energy system, but their value remains inadequately recognized by regulatory frameworks. We propose an insurance framework to align residual outage risk exposure with locational incentives for distributed investment. We demonstrate that leveraging this framework in large-scale electricity systems could improve consumer welfare outcomes in the face of growing risks from extreme events via investment in distributed energy.