Optimal replacement strategies in network infrastructures under quality penalties

As a consequence of liberalization, electric utilities have developed different asset management strategies with the aim of reducing total maintenance costs by prolonging replacement cycles. A cost-minimizing network operator has to optimize the trade-off between costs for early replacement and quality penalties he faces in the case of outages (due to a resulting higher number of failures). The basic purpose of this paper is to identify the optimal decisions for a network operator under output-based quality regulation and to determine the main drivers for his decisions. In order to derive general insights, an analytical framework is chosen for this paper. This work builds on the foundations of optimal maintenance and replacement strategies as developed across Operations Research, Production Economics and Engineering Production Theory. As main results we are able to analytically derive optimal replacement strategies for network components depending on the characteristics of their failure distributions linked to the equipment’s cost, respective replacement cost, and quality penalties.