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 (sic)2.80 on average for every household, and (sic)33.10 on average for every SME firm. The total costs to Dutch society are almost (sic)50 million. (C) 2009 Elsevier Ltd. All rights reserved.