Investment and Upgrade in Distributed Generation under Uncertainty

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The ongoing deregulation of electricity industries worldwide is providing incentives for microgrids to use small-scale distributed generation (DG) and combined heat and power (CHP) applications via heat exchangers (HXs) to meet local energy loads. Although the electric-only efficiency of DG is lower than that of central-station production, relatively high tariff rates and the potential for CHP applications increase the attraction of on-site generation. Nevertheless, a microgrid contemplatingthe installation of gas-fired DG has to be aware of the uncertainty in the natural gas price. Treatment of uncertainty via real options increases the value of the investment opportunity, which then delays the ... continued below

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Siddiqui, Afzal & Maribu, Karl August 18, 2008.

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The ongoing deregulation of electricity industries worldwide is providing incentives for microgrids to use small-scale distributed generation (DG) and combined heat and power (CHP) applications via heat exchangers (HXs) to meet local energy loads. Although the electric-only efficiency of DG is lower than that of central-station production, relatively high tariff rates and the potential for CHP applications increase the attraction of on-site generation. Nevertheless, a microgrid contemplatingthe installation of gas-fired DG has to be aware of the uncertainty in the natural gas price. Treatment of uncertainty via real options increases the value of the investment opportunity, which then delays the adoption decision as the opportunity cost of exercising the investment option increases as well. In this paper, we take the perspective of a microgrid that can proceed in a sequential manner with DG capacity and HX investment in order to reduce its exposure to risk from natural gas price volatility. In particular, with the availability of the HX, the microgrid faces a tradeoff between reducing its exposure to the natural gas price and maximising its cost savings. By varying the volatility parameter, we find that the microgrid prefers a direct investment strategy for low levels of volatility and a sequential one for higher levels of volatility.

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31

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  • Journal Name: Energy Economics

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  • Report No.: LBNL-1027E
  • Grant Number: DE-AC02-05CH11231
  • Office of Scientific & Technical Information Report Number: 940779
  • Archival Resource Key: ark:/67531/metadc897655

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  • August 18, 2008

Added to The UNT Digital Library

  • Sept. 27, 2016, 1:39 a.m.

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  • Jan. 4, 2017, 5:52 p.m.

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Siddiqui, Afzal & Maribu, Karl. Investment and Upgrade in Distributed Generation under Uncertainty, article, August 18, 2008; Berkeley, California. (digital.library.unt.edu/ark:/67531/metadc897655/: accessed September 21, 2017), University of North Texas Libraries, Digital Library, digital.library.unt.edu; crediting UNT Libraries Government Documents Department.