Distributed generation investment by a microgrid under uncertainty

Afzal S. Siddiqui and Chris Marnay

Energy, 2008, vol. 33, issue 12, 1729-1737

Abstract: This paper examines a California-based microgrid's decision to invest in a distributed generation (DG) unit fuelled by 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 a natural gas generation cost threshold that triggers DG investment. Furthermore, the consideration of operational flexibility by the microgrid increases DG investment, while the option to disconnect 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 generation 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 when two sources of uncertainty exist.

Keywords: Distributed generation; Real options; Optimal investment; Energy markets (search for similar items in EconPapers)
Date: 2008
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (23)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:energy:v:33:y:2008:i:12:p:1729-1737

DOI: 10.1016/j.energy.2008.08.011

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