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Customers Interrupted

Utilities that are short on capacity and operate in a stable regulatory environment may be able to extract value from interruptible rates.
Fortnightly Magazine - October 1 2003

(LOLP).

Table 1 is the result of performing a LOLP sensitivity analysis that evaluates several nonfirm service options. The first column of the table indicates the total number of days a nonfirm customer may be interrupted during the year. In the next three columns, the maximum hours per interruption vary. In the final three columns, the notice period varies from one to four hours. Any departure from the ideal nonfirm service derates the system reliability contribution and lowers the value to the utility. For example, assuming a utility is offering nonfirm service with maximum interruptions of 40 days, 4 hours per interruption, and 1 hour notice, the capacity equivalence is .5290 (.5577 x .9486 = .5290).

This approach illustrates that the most desirable nonfirm service option from the utility viewpoint is an interruptible rate with no notice, no restrictions upon hours of interruption per incident, and ability to interrupt frequently during peaking periods. Under these conditions, 1 kW of nonfirm saves 1 kW of capacity, and the value is the full avoided capacity cost (capital or contractual cost) attributed to reliability.

Economic dispatch is the second factor considered in deriving the equivalent capacity. If the number of hours that a supply-side option can be called is limited, the economic dispatch availability could be limited. It is unlikely that the load dispatchers will be able to determine the optimum usage of an interruptible rate that limits the number of hours of nonfirm service severely. For example, if an interruptible rate is limited to 100 hours of nonfirm service and the utility faces an unusually warm summer, it could exhaust its hours of interruptions by calling too many interruptions early. Another situation under the same scenario is that the utility holds hours in reserve in case things get worse, with the result that misses opportunities. One method of determining the equivalent values for various economic dispatch scenarios is to perform LOLP sensitivity analysis based on the number of allowable interruptible hours and potentially missed opportunities.

The Financial Value of Capacity

Utilities face markets that recently have gone through a boom-and-bust cycle. The nature of these markets makes long-term price commitments risky. In addition, the utility's capacity position changes yearly, which contributes to the dynamic value of capacity. Even with these constraints, the nature of an interruptible tariff requires a utility to establish a standing price for nonfirm power.

The avoided capacity cost is the change in a utility's capacity cost at the generation level due to an increment of capacity supplied by a qualifying resource. The comparable resource for nonfirm power is peaking capacity. EPRI's 2001 Demand Trading Toolkit notes that "the primary indicator of the value can be assessed through displaced agreements into which the energy company would have entered." In AmerenUE's situation, contracts or physical plants for supplying peaking capacity would be approximately "equivalent." The interruptible rate must be at least as reliable as the power from the utility's resource. If it is not, the "equivalence" factor discussed above should be used for discounting.

Below are several supply-side, peaking options that can