Optimal blackouts: Empirical results on reducing the social cost of electricity outages through efficient regional rationing

The demand and supply of electricity must always balance. If supply falls short of demand, then price increases or voluntary demand reductions might help to maintain the balance in the system. Should these prove insufficient, then rationing is necessary. Rationing means interrupting the electricity delivery to certain areas or specific electricity users in order to preserve system stability. Since the cost of an interruption differs among electricity users, the social cost of different rationing mechanisms varies. This paper explores the cost difference between efficient regional rationing (minimizing social costs by rationing regions with low costs first) and random rationing (not taking into account social costs). For this the value of lost load calculations of De Nooij et al. [De Nooij, M., Bijvoet, C.C., Koopmans, C.C., (2007). The value of supply security: The costs of power interruptions: Economic input for damage reduction and investment in networks. Energy Economics, 29 (2), 277-295.] are refined. For the Netherlands, it is shown that efficient rationing can reduce social costs by 42 to 93%.