Distributed Backup Power and the Changing Economics of Grid Reliability

Maintaining grid reliability while managing costs has emerged as a critical challenge for regulators of a rapidly changing electricity sector. The traditional model of centralized reliability planning is being challenged by the availability of distributed backup power systems. This paper documents increased adoption of residential battery systems and a gradual decline in U.S. grid reliability. It also synthesizes recent economic research on how the widespread availability of backup power systems, such as batteries and generators, affects the relationship between grid reliability and consumer welfare. This research finds that backup systems reduce the economically efficient level of grid reliability. This reduction can, in turn, benefit households who do not adopt these systems by reducing their electricity bills. Drawing on insights from the economics literature on innovation and public choice, this paper explores the implications of backup power systems for reliability planning and cost allocation policies. JEL Classification: Q40, Energy: General; L94, Electric Utilities; L51, Economics of Regulation; H40, Publicly Provided Goods: General; O33, Technological Change: Choices and Consequences; Diffusion Processes