Pricing power outages in the Netherlands

In most Western countries, the power grid provides electricity more than 99% of the time. To maintain reliability at such high levels, energy companies have to continually invest in electric transmission- and distribution systems. Since customers of electricity cannot switch from one distribution network to another, no economic incentive exists that matches the supplied reliability to customer preferences. Either under- or over-investment in reliability may thus result. In order to introduce market-like incentives, the Dutch Energy Regulator introduced a regulatory system based on the (perceived) costs of power outages. An essential ingredient of the regulation is the cost of a power outage of a particular duration (i.e., 1 minute). This paper measures these outage cost by using conjoint analysis. We find that the social cost of the present Dutch level of reliability — that is, one outage of two hours every four years — is €2.80 on average for every household, and €33.10 on average for every SME firm. The total costs to Dutch society are almost €50 million.

Keywords: Electricity; Outages; Economic valuation; Conjoint analysis; Regulation of reliability; Yardstick competition; Network company

JEL classification codes: H23; L94; L98