The option value of interruptible service contracts at electric & gas utilities
Utility-sponsored demand-side management (DSM) represents a wide range of flexible resource options that can be targeted to achieve specific utility load shaping objectives. Interruptible service contracts represent an important DSM resource option at electric and to a lesser extent, gas utilities. Interruptible service contracts (or ISCs) are primarily used to reduce demand during critical peak periods when demand exceeds capacity. There are several types of ISCs including contracts with large commercial and industrial customers that establish load shedding procedures that the utility can secure on short notice. More recently, technological advances in communication systems allow utilities to cycle residential appliances, most notably, air conditioning and water heating to a wide population of households that subscribe to appliance cycling programs. All of these programs represent flexible resource options that are negotiated between the utility and its customers. If the selection and implementation of ISCs is done on a voluntary basis by both the utility and its customers, then such contracts can lead to improvements in economic and system efficiency. This paper argues that interruptible service contracts are call options that give the utility the right, but not the obligation to curtail service to customers on short notice. The remaining sections of this paper examine the valuation of interruptible service options for electric and gas utilities, using options pricing methods from the field of finance. The remaining sections of this paper will illustrate how option pricing techniques can be used to estimate the value of decision-making flexibility such contracts provide.
- OSTI ID:
- 192135
- Report Number(s):
- CONF-940129-; TRN: 96:001037-0074
- Resource Relation:
- Conference: International symposium on distribution, automation and demand-side management, Orlando, FL (United States), 17-20 Jan 1994; Other Information: PBD: 1994; Related Information: Is Part Of Fourth international symposium on distribution automation and demand side management (DA/DSM 94); PB: 747 p.
- Country of Publication:
- United States
- Language:
- English
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