In this report, an economic model of customer adoption of distributed energy resources (DER) is developed. It covers progress on the DER project for the California Energy Commission (CEC) at Berkeley Lab during the period July 2001 through Dec 2002 in the Consortium for Electric Reliability Technology Solutions (CERTS) Distributed Energy Resources Integration (DERI) project. CERTS has developed a specific paradigm of distributed energy deployment, the CERTS Microgrid (as described in Lasseter et al 2002). The primary goal of CERTS distributed generation research is to solve the technical problems required to make the CERTS Microgrid a viable technology, and Berkeley Lab's contribution is to direct the technical research proceeding at CERTS partner sites towards the most productive engineering problems. The work reported herein is somewhat more widely applicable, so it will be described within the context of a generic microgrid (μGrid). Current work focuses on the implementation of combined heat and power (CHP) capability. A μGrid as generically defined for this work is a semiautonomous grouping of generating sources and end-use electrical loads and heat sinks that share heat and power. Equipment is clustered and operated for the benefit of its owners. Although it can function independently of the traditional power system, or macrogrid, the μGrid is usually interconnected and exchanges energy and possibly ancillary services with the macrogrid. In contrast to the traditional centralized paradigm, the design, implementation, operation, and expansion of the μGrid is meant to optimize the overall energy system requirements of participating customers rather than the objectives and requirements of the macrogrid.