Reliability Insurance Contract as a New Method for Reliability Adjustment in Electrical Distribution Network

Several regulation schemes such as Rate of Return (ROR) and Price Cap (PC) lack incentives for efficient investment. ROR lead to overinvestment and PC on the other hand lead to underinvestment. Regulator employs various forms of reward/penalty schemes (RPS) to cover inherent weaknesses in PC. Adding RPS allow utilities to make cost effective reliability improvements in response to changes in technology and costs but since this schemes result in consumers purchasing reliability and delivery as a single, optimal level of investment can’t be insured. To solve this problem, in the recent year, the Reliability Insurance Scheme (RIS) has been introduced which through it the reliability and delivery services are unbundled and so the efficient investment is insured. In this paper, firstly, the investment structure under RIS is compared to that of traditional regulatory schemes and, according to this comparison; the advantages of RIS are illustrated. In the second step, under RIS, the effects of free-riding and investment delay on the investment dynamics are evaluated and finally the centralized method for alleviating these effects is proposed.