Discussion Papers

Matthias Wissner

Valuation and measurement of quality of service in the electricity supply industry

Nr. 309 / May 2008


Germany introduces an incentive regulation for gas and electricity from January 1st, 2009. In this process, a quality of supply regulation scheme will be introduced in the first or - at the latest - in the second regulation period, depending on data availability. To allow for an optimal reliability of supply, costs arising through the provision of a certain grid reliability must be compared to the monetary value of reliability for grid users. The utility values are particularly needed to weight and valuate quality of supply indices that will be part of the German regulation formula to calculate the Revenue-Caps.

Because reliability of supply has public good characteristics there is no market price established that reflects preferences of grid users for a certain quality of supply. Therefore, the value of reliability has to be identified indirectly. Mostly, it is not referred to the actual value of reliability, but to system costs and costs of energy not supplied that incur when an optimal level of reliability of supply is provided. This identification can be carried out by various methods. These can generally be divided into direct and indirect methods.

The indirect methods to which proxy methods (value added and labour costs, value of leisure time, electricity bill and consumption, back-up technology) and the consumer surplus method are counted, take easily accessible and high aggregated data as a basis. They often lack accuracy and plausibility, however. In contrast, direct methods tend to have a better data basis but higher investigation costs. These are insurance premiums, blackout analysis, direct costs and econometric methods, especially contingent valuation and conjoint analysis. Especially with econometric methods, potentially arising biases have to be accounted for when setting up the questionnaire.

In some European countries surveys to measure willingness to pay have been conducted already. In Italy, contingent valuation has been used to survey households and enterprises. The results of the survey have been included in the regulation formula when referring to quality of supply. In the UK, conjoint analysis has been used, however. Apart from reliability of supply, customer service was also part of the survey. A concrete implementation into the regulation scheme was not realised. In this discussion paper the practical approach of regulation authorities in the UK and Italy is described. Finally, the Norwegian quality regulation is highlighted as an example for the transfer of customer survey data into an actual regulation scheme.

[only a german version available]

Discussion Paper is available for download.

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