Implementation of Priority Insurance in Power Exchange Markets

Abstract

Traders in a power exchange can use insurance to hedge against losses from curtailment by the system operator. If the system operator is liable for these reimbursements then its incentives encourage efficient real-time dispatch. This paper reviews the details of implementing such a scheme when third-party insurers offer insurance in an auxiliary competitive market, or the power exchange operates as a mutual insurance association of the traders. Because higher reimbursements entail higher service priorities, the actuarial premium for pure insurance must be accompanied by a surcharge for service priority. The amount of this surcharge can be inferred from the price of pure insurance. The Appendix shows that omission of this surcharge distorts traders' incentives in the power exchange.