Estimating the option value of a non-firm electricity tariff

J. MOORE, Chi Keung WOO, B. HORII, S. PRICE, A. OLSON

Research output: Contribution to journalArticles

10 Citations (Scopus)

Abstract

We estimate the option value of a non-firm electricity tariff commonly used by a local distribution company (LDC) in its electricity demand response program. This option value captures the benefit that a LDC enjoys from not serving an end-use load during high-price hours in a wholesale electricity market. It is conservative in that it does not include the cost savings in meeting the LDC's resource adequacy requirement or deferring transmission and distribution (T&D) investments necessary for delivering reliable service. Illustrated by a Northern California example, our two-pronged approach entails (a) a set of summer monthly market price regressions to forecast daily spot price distributions that incorporate uncertainty in natural gas price and weather; and (b) a simulation exercise to quantify the tariff's value under a specific design. The results indicate that a non-firm service tariff can have varying option value estimates that are highly sensitive to the tariff's design, and that an incentive payment based on the option value alone is likely insufficient to attract customer participation in a non-firm service program. Copyright © 2009 Elsevier Ltd. All rights reserved.
Original languageEnglish
Pages (from-to)1609-1614
JournalEnergy
Volume35
Issue number4
DOIs
Publication statusPublished - Apr 2010

Citation

Moore, J., Woo, C. K., Horii, B., Price, S., & Olson, A. (2010). Estimating the option value of a non-firm electricity tariff. Energy, 35(4), 1609-1614. doi: 10.1016/j.energy.2009.04.013

Keywords

  • Demand response
  • Electricity economics
  • Option valuation

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