Distributed Renewable Power Generation and Implications for Capacity Investment and Electricity Prices

52 Pages Posted: 8 May 2018 Last revised: 4 Sep 2019

See all articles by Alexandar Angelus

Alexandar Angelus

Texas A&M University - Department of Information & Operations Management

Date Written: December 6, 2018

Abstract

Renewable energy generation at the point of consumption (i.e., distributed generation) reduces consumer's electricity expenditure, and eliminates the cost, complexity, and inefficiency associated with power transmission and distribution. In this paper, we address the problem of how a consumer should invest in distributed renewable power generation to minimize the total expected cost of meeting his electricity demand. In contrast to the existing literature that focuses on grid-connected, large-scale investments in renewable power generation in the wholesale electricity market, we address investment in stand-alone, distributed renewable energy by an an individual consumer who participates in a regulated retail electricity market. We formulate an infinite-horizon, continuous-time model in which the utility moves first, and announces a retail electricity rate. Each consumer then acts strategically in deciding if, when, and how much distributed renewable generation capacity to install. We determine the structure of the consumer’s optimal stopping time for this investment decision, and the resulting optimal capacity of his installed distributed generation. We evaluate the impact of the investment in distributed renewable generation on the revenue received by the consumer's electric utility, and arrive at the structure of the pricing policy that maximizes that revenue. Using our results, we quantify the benefit to the consumer from using the optimal investment policy derived in our paper instead of the traditional rules for investing in renewable power generation, as well as the potential benefit available to the utility from following the optimal pricing policy derived in our paper.

Keywords: distributed generation; capacity; renewable energy; electricity pricing; stochastic optimization

Suggested Citation

Angelus, Alexandar, Distributed Renewable Power Generation and Implications for Capacity Investment and Electricity Prices (December 6, 2018). Mays Business School Research Paper No. 3172207. Available at SSRN: https://ssrn.com/abstract=3172207 or http://dx.doi.org/10.2139/ssrn.3172207

Alexandar Angelus (Contact Author)

Texas A&M University - Department of Information & Operations Management ( email )

430 Wehner
College Station, TX 77843-4218
United States

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