Distributed Generation Investment by a Microgrid under Uncertainty

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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 ... continued below

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Marnay, Chris; Siddiqui, Afzal & Marnay, Chris August 11, 2008.

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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.

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37

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  • Journal Name: Energy: The International Journal

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  • Report No.: LBNL-872E
  • Grant Number: DE-AC02-05CH11231
  • Office of Scientific & Technical Information Report Number: 936748
  • Archival Resource Key: ark:/67531/metadc899453

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Office of Scientific & Technical Information Technical Reports

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  • August 11, 2008

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  • Sept. 27, 2016, 1:39 a.m.

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  • Jan. 4, 2017, 4:59 p.m.

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Marnay, Chris; Siddiqui, Afzal & Marnay, Chris. Distributed Generation Investment by a Microgrid under Uncertainty, article, August 11, 2008; Berkeley, California. (digital.library.unt.edu/ark:/67531/metadc899453/: accessed October 23, 2017), University of North Texas Libraries, Digital Library, digital.library.unt.edu; crediting UNT Libraries Government Documents Department.