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The Value of Lost Load



THE VALUE OF LOST LOAD Working Paper No. 214 October 2007 The Value of Lost Load Richard S.J. Tol* Corresponding Author: [email protected] ESRI working papers represent un-refereed work-in-progress by members who are solely responsible for the content and any views expressed therein. Any comments on these papers will be welcome and should be sent to the author(s) by email. Papers may be downloaded for personal use only. *The Economic and Social Research Institute, Dublin; Institute for Environmental Studies, Vrije Universiteit, Amsterdam, The Netherlands; Department of Engineering and Public Policy, Carnegie Mellon University, Pittsburgh, PA, USA The Value of Lost Load 1. Introduction The value of lost load is the average willingness to pay of electricity consumers to avoid an additional period without power. The value of lost load is a useful yardstick for decisions on the total capacity of the power supply (e.g., Sanghvi, 1983). In the efficient solution, the marginal cost of additional capacity, which is roughly equal to the wholesale peak price, is equal to the value of lost load. In a regulated market like the Irish, customers cannot express their willingness to pay, and suppliers cannot reveal their marginal costs. Therefore, the value of lost load has to be inferred. This is particularly relevant for Ireland as the electricity supply is rapidly expanding and being restructured, and the prospect of supply shortages is real (Bazilian et al., 2006; Lyons et al., 2007; Malaguzzi Valeri and Tol, 2006). There are three groups of methods for doing so, if the preferred method (based on preferences revealed in market behaviour) fails. The first alternative is based on stated preferences (e.g., Beenstock et al., 1998). It relies on surveys of customers, who answer hypothetical questions. This method is the most common one, but this may be

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