Second revenue stream for distributed generation in the presence of reliability insurance

In the short-run, distributed generation (DG) can compete with the centralized generation if the marginal generation cost of DG is lower than that of centralized generation plus marginal transmission cost. But in the long-run, since investment costs for most DG technologies are significantly higher than those of centralized generation, DG technologies cannot compete with the centralized generation. To enable DG to compete with the centralized generation, so many second revenue streams have been generated for DG based on the benefits DG can provide for generation or demand side. Current paper focuses on the generating new second revenue stream for DG based on the ability of DG in reducing the outage risk of customers. With reliability insurance contract, customers can determine their coverage levels according to their values for reliability services, and pay corresponding premiums to the DG. The DG is then required to reimburse customers for outages according to their outage cost. In the other words, reliability insurance contracts transfer outage risks from customers to the DG, which can take actions to manage reliability as opposed to customers who are passive recipients of reliability. In return for accepting reliability risk, DG is able to profit from improving the reliability. Current paper primarily introduces the concept of reliability insurance contract and in the presence of these contracts evaluates the revenue opportunities for DG. (C) 2014 Elsevier Ltd. All rights reserved.