Estimating the option value of a non-firm electricity tariff

J. Moore*, Chi-Keung WOO, B. Horii, S. Price, A. Olson

*Corresponding author for this work

    Research output: Contribution to journalJournal articlepeer-review

    12 Citations (Scopus)


    We estimate the option value of a non-firm electricity tariff commonly used by a local distribution company (LDC) in its electricity demand response program. This option value captures the benefit that a LDC enjoys from not serving an end-use load during high-price hours in a wholesale electricity market. It is conservative in that it does not include the cost savings in meeting the LDC's resource adequacy requirement or deferring transmission and distribution (T&D) investments necessary for delivering reliable service. Illustrated by a Northern California example, our two-pronged approach entails (a) a set of summer monthly market price regressions to forecast daily spot price distributions that incorporate uncertainty in natural gas price and weather; and (b) a simulation exercise to quantify the tariff's value under a specific design. The results indicate that a non-firm service tariff can have varying option value estimates that are highly sensitive to the tariff's design, and that an incentive payment based on the option value alone is likely insufficient to attract customer participation in a non-firm service program.

    Original languageEnglish
    Pages (from-to)1609-1614
    Number of pages6
    Issue number4
    Publication statusPublished - Apr 2010

    Scopus Subject Areas

    • Civil and Structural Engineering
    • Building and Construction
    • Pollution
    • Mechanical Engineering
    • Industrial and Manufacturing Engineering
    • Electrical and Electronic Engineering

    User-Defined Keywords

    • Demand response
    • Electricity economics
    • Option valuation


    Dive into the research topics of 'Estimating the option value of a non-firm electricity tariff'. Together they form a unique fingerprint.

    Cite this