Incentivizing Resilience Enhancement in Power Distribution Systems Through a Revenue-Cap Regulation and Penalty-Reward Model

The increasing severity and frequency of extreme weather events driven by climate changes have underscored the critical need for enhancing resilience in power distribution systems. This paper presents and assesses a practical regulatory structure designed to incentivize resilience enhancement in power distribution systems. The regulator, acting as the governing entity, seeks to enhance resilience through two well-established mechanisms: a revenue-cap regulation, which ensures cost recovery for the distribution system operator (DSO), and a penalty-reward model (PRM), which creates economic incentives for the DSO to enhance resilience through making effective investments to reinforce the distribution system infrastructure. Successful implementation of this regulatory structure requires addressing three key optimization problems. In the first problem, the regulator establishes the PRM by determining a standard resilience index, as a benchmark. Based on this PRM structure, the second problem involves calculating the DSO’s revenue cap to ensure cost recovery. The third problem pertains to the DSO’s efforts to exceed the resilience benchmark set in the PRM, with the aim of gaining economic benefits. The IEEE 33-bus and the modified IEEE 123-bus test systems are employed to evaluate the structure under realistic conditions, focusing on hurricanes. The results demonstrate the effectiveness of the regulatory mechanisms in providing economic incentives for the DSO and achieving an enhanced resilience index.