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An insurance mechanism for electricity reliability differentiation under deep decarbonization

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  • Billimoria, Farhad
  • Fele, Filiberto
  • Savelli, Iacopo
  • Morstyn, Thomas
  • McCulloch, Malcolm

Abstract

Securing an adequate supply of dispatchable resources is critical for keeping a power system reliable under high penetrations of variable generation. Strategic reserves have been used by a range of jurisdictions to procure investment in additional generation reserves given the missing money problem in energy only market designs. Given the growing flexibility and heterogeneity of load enabled by advancements in distributed resource and control technology, strategic reserve procurement needs to be able to reflect the different preferences of energy consumers. To address this challenge this paper develops an insurance risk mechanism for the procurement of strategic reserves 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) incentivizing incremental investment in generation infrastructure that is aligned with consumer reliability preferences and (iii) improving overall reliability outcomes for consumers.

Suggested Citation

  • Billimoria, Farhad & Fele, Filiberto & Savelli, Iacopo & Morstyn, Thomas & McCulloch, Malcolm, 2022. "An insurance mechanism for electricity reliability differentiation under deep decarbonization," Applied Energy, Elsevier, vol. 321(C).
    • Handle: RePEc:eee:appene:v:321:y:2022:i:c:s0306261922007000
    DOI: 10.1016/j.apenergy.2022.119356
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    Cited by:

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    3. Keppler, Jan Horst & Quemin, Simon & Saguan, Marcelo, 2022. "Why the sustainable provision of low-carbon electricity needs hybrid markets," Energy Policy, Elsevier, vol. 171(C).
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    5. Han Shu & Jacob Mays, 2022. "Beyond capacity: contractual form in electricity reliability obligations," Papers 2210.10858, arXiv.org.
    6. Liu, Bing & Sun, Huimin & Xiao, Siqing, 2024. "Potential of pension funds and insurance companies for investment in resources: Policies for sustainable transition," Resources Policy, Elsevier, vol. 89(C).
    7. Liang, Chen & Zeng, Bo & Lei, Yueyi & Wang, Yuan, 2025. "Market-government dual-driven framework for reliability-centric planning of a computation-energy integrated system with data centers," Applied Energy, Elsevier, vol. 396(C).
    8. Dimanchev, Emil & Gabriel, Steven A. & Reichenberg, Lina & Korpås, Magnus, 2024. "Consequences of the missing risk market problem for power system emissions," Energy Economics, Elsevier, vol. 136(C).
    9. Farhad Billimoria & Paul Simshauser, 2023. "Contract design for storage in hybrid electricity markets," Working Papers EPRG2304, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
    10. Savelli, Iacopo & Hepburn, Cameron & Morstyn, Thomas, 2024. "A blueprint for energy systems in the era of central bank digital currencies," Technological Forecasting and Social Change, Elsevier, vol. 207(C).

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