From vertical to horizontal unbundling: A downstream electricity reliability insurance business model

Abstract Distributed energy resource technologies (DERs) allow consumers to generate, trade, reduce, and shift their electricity consumption, largely bypassing traditional utilities. DERs can reduce consumer reliance on the grid, and in the most extreme scenario self-sufficient consumers could disconnect from the grid and avoid all external charges. However, since most DERs delivers energy, but not reliable capacity, it would be in the interests of most of these consumers to stay connected to the networks, in the event their system fails. Such a ‘pay as you go’ price scheme would not reflect the opportunity cost of electricity firms' sudden idle infrastructure though. This paper proposes a market mechanism that can ameliorate these distortions. We flesh out a solution based on the creation of a market of risk, enabled by a reassignment of property rights, where utilities trade reliability insurance services to households to protect them against the failure of their own DER system. Creating such an insurance market would allow customers to reflect their preference for reliability and pay accordingly.