Using insurance to manage reliability in the distributed electricity sector: Insights from an agent-based model

• Published in: Energy policy 2020-04, Vol.139, p.111251, Article 111251
• Main Authors: Fuentes, Rolando, Sengupta, Abhijit
• Format: Article
• Language: English
• Subjects: Agent based models; Blackout; Blackouts; Business; Consumers; Customers; Distributed energy resources; Economic conditions; Electric industries; Electric power distribution; Electricity; Energy policy; Households; Insurance; Markets; Model testing; New business models; Penetration; Profiles; Reliability; Residential energy; Risk; Risk assessment; Utilities; Utilities of the future; Utility death spiral; Willingness to pay
• ISSN: 0301-4215; 1873-6777
• DOI: 10.1016/j.enpol.2020.111251

High penetration of distributed technologies would call for a different way to manage electricity reliability for semi-independent households. One option could be to allow customers to withdraw power from the grid when their home system fails. This behavior, however, could constitute an existential threat for utilities: if consumers use the network less, and continue to pay according to their usage, the utility might be unable to recover its costs. This paper investigates whether the creation of a reliability insurance market would help to deal with these concerns. We propose a business model where utilities offer insurance to semi-independent, yet risk averse households, against the prospect of a blackout, when a pay as you go system is no longer available. With the use of an Agent Based Model, we test if contracts from this market can converge into a theoretical optimal contract where bounded perception of risks and losses impact the price of insurance and potential revenues of utilities. We find that such a market could exist as consumers efficiently transfer all or a portion of their risk to the utility, based on their willingness to pay and risk profiles, which allows them to avoid blackouts at the margin. •DERs would allow customers to disconnect from the grid and by pass utilities services.•The issue of security of supply for self-sufficient households would remain.•We propose the utility can offer power of last resort to energy self-sufficient households.•We test the creation of a risk market using an Agent Based Model.•We show this enables reliability preferences to be internalized through the use of insurance.