OPTIMAL PRODUCTION WITH UNCERTAIN INTERRUPTIONS IN THE SUPPLY OF ELECTRICITY - ESTIMATION OF ELECTRICITY OUTAGE COSTS

In this paper we develop a model to measure expected electricity outage costs in the industrial and commercial sectors. Four sources contribute to the costs of outage in these sectors: foregone profits (output), possible reduction in productivity due to the outage, damage to materials, and payments to labor during the outage. The beginning and duration of the electricity outage are random variables with known distribution functions. Thus, the business customer maximizes his expected profits, taking into account his ability, or lack of ability, to respond to the random electricity outage. The model is applied, assuming a quadratic production function, to eleven industrial branches in Israel. The estimates indicate a large variation in customer preferences for reliability.