Distributed Generation Investment by a Microgrid Under Uncertainty

TitleDistributed Generation Investment by a Microgrid Under Uncertainty
Publication TypeConference Paper
Year of Publication2006
AuthorsSiddiqui, Afzal S., and Chris Marnay
Conference Name19th Mini-EURO Conference Operation Research Models and Methods in the Energy Sector (ORMMES 2006)
Date Published06/2006
PublisherLBNL
Conference LocationPortugal
Keywordsdistributed energy resources (der), electricity markets and policy group, energy analysis and environmental impacts department
Abstract

This paper examines a California-based microgrid's decision to invest in a distributed generation (DG) unit that operates on natural gas. While the long-term natural gas generation cost is stochastic, we initially assume that the microgrid may purchase electricity at a fixed retail rate from its utility. Using the real options approach, we find natural gas generating cost thresholds that trigger DG investment. Furthermore, the consideration of operational flexibility by the microgrid accelerates DG investment, while the option to disconnect entirely from the utility is not attractive. By allowing the electricity price to be stochastic, we next determine an investment threshold boundary and find that high electricity price volatility relative to that of natural gas generating cost delays investment while simultaneously increasing the value of the investment. We conclude by using this result to find the implicit option value of the DG unit.

AttachmentSize
PDF108.69 KB