A new way to model Value of Lost Load

Power cuts affect different types of customers in different ways, but currently this isn’t always reflected in the decision-making process of distribution companies. Electricity North West believes that investment decisions should include a customer dimension that reflects divergent customer needs, to deliver greater customer and societal benefit. The company has also consulted its customers and stakeholders, who endorse this view.

The UK energy regulator, Ofgem, uses VoLL to inform its policy decisions, such as network regulation and price control; while for the Transmission System Operators and regional electricity distributors, it acts as a price signal for adequate levels of supply security.The Value of Lost Load, or VoLL, is the estimated average value that business and domestic customers place on the reliability of their electricity supply. It represents the financial and social cost of unplanned supply interruptions – the value of loss, of course, can vary relative to the duration, season and time of day – but VoLL is the average estimate that customers would be willing to accept in compensation if they were to experience a power cut.

Research for Ofgem in 2013, by economics consultancy, London Economics, produced a headline VoLL value of £16,940/MWh, as the load-weighted average payment that domestic and small-to-medium business customers’ would be willing to
accept to experience an outage on peak winter workdays.

But, six years later, this figure is believed to have increased by almost 50 per cent – perhaps reflecting society’s changing expectations of the services it needs, and its greater dependency on electricity. A recent project by Electricity North West, involving 6,500 customer surveys, found that VoLL measured against similar criteria could now be as much as £25,300/MWh.

As VoLL figures provide a useful guide for energy suppliers and DNOs to determine the investments they need to make to deliver security of electricity supply, this increase will have a significant impact on their investment decisions. 

Delivering differentiation
Building on its research, Electricity North West is working with Frazer-Nash Consultancy and Impact Research on a follow up 18 month study. This National Grid ESO Network Innovation Allowance project, called VoLL 2, will produce a new segmentation model, utilising the values established for different customer groups by Electricity North West in its previous study. 

This previous work on VoLL highlighted that electricity network investment is currently driven by estimates that fail to recognise differentiations in customer need. The existing single VoLL approach assumes that the impacts of a loss of power are the same for all customers, and that they all attach the same value to their supply reliability. This, of course, isn’t the case. The current approach also assumes that VoLL remains fixed, which also isn’t the case. The research demonstrates how VoLL is increasing over time and this should be reflected in investment decision making for long-lived assets.

The company identified that using a uniform VoLL can significantly undervalue the needs of certain customer segments – such as the fuel poor, those in vulnerable circumstances and  those dependent on low carbon technologies, particularly early adopters of electric vehicles – while over-representing the needs of other groups.

The current model doesn’t take into account the effect that scale and duration can have on VoLL in different scenarios: for example, a short major outage that affects a whole town, versus a lengthy, more localised interruption, or high impact, low probability events that affect large regions.

By providing differentiation of VoLL by customer type, the new segmentation model will enable DNOs to target their investments more efficiently, based on a richer, more representative understanding of their customers’ needs. Through delivering a more nuanced understanding of VoLL, the model will inform smarter decision-making – for example, the value of proactive investment that aims to prevent or minimise the severity of unplanned interruptions. 

Research insights
Electricity North West has explored the practicalities and regulatory implications of a variable VoLL model, ahead of the next price control. The model’s development is being informed by key stakeholders, including dialogue with Ofgem, the Department of Business, Energy and Industrial Strategy (BEIS), other DNOs, specialist experts and relevant industry think tanks.

The statistical analysis and model development will consider how the range of variables that influence VoLL can be combined, and at what level of detail, to guide an investment decision – and how this understanding can be used to inform more accurate decision making tools. The study will also include further empirical customer research to deliver insights into the changes in VoLL on a community, relative to the scale (both in terms of area and number of customers affected) and duration of an outage. It will also explore attitudes to cost socialisation and fairness.

With its partners, Electricity North West will explore a number of issues that may impact on the model’s utilisation: from the stability and variability of the factors that influence VoLL; to how investment models should account for large scale one-off events. It will also pose key questions to groups of customers with shared experiences to gain insights on the perceptions of fairness and equity of a variable VoLL in informing investments.

For example, it will explore how the model could account for relatively low VoLL values, where customers’ own proactive steps have created greater resilience, or where there are higher levels of tolerance due to repeated exposure to supply interruptions. It will consider if all customer segments can accurately signal their true VoLL, and potential unintended societal consequences if they can’t recognise the wider impacts.

Working with Impact Research, a market research consultancy specialising in energy and utilities, the study will also test attitudes around social value and whether  investment decisions should be informed by those perceived to have the greatest need.

Taking a model approach
A key deliverable of the research is to gain an understanding of the distribution and scale of the financial benefits to customers that the segmentation model could deliver, including how it might impact affordability and quality of outcomes for different groups. For DNOs, the model will offer a clearer understanding of how VoLL is likely to change over time, putting investment decisions on long-lived assets into context. It could also inform decisions that accelerate the uptake of low carbon technologies.

A functional variable VoLL model is attractive because it does not involve a significant change in the way that DNOs assess the benefits of lost load mitigation. Rather, it allows them to refine their models to produce a more precise method for prioritising investment strategies, which focus on the impact of decisions.

Frazer-Nash is now developing a model that is scalable, transferable and able to inform the future decisions of DNOs across Britain. This new VoLL tool will allow Electricity North West and other network operators to put current and future customers at the centre of their investment decisions. By providing an effective tool that all DNOs can use without the need for new data flows, they will be empowered to take smarter investment decisions that reflect the needs of their customers; and to improve their strategies to mitigate the impact of lost load.

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