The economic impact of microgrids

Installing a microgrid within a regulated electricity market will sometimes, but not always, provide an economic benefit to customers, investors and utilities involved, according to US research.

“Two major challenges facing electricity systems today are the need to provide enhanced reliability and the difficulty of building new generation and distribution capacity to serve load centres,” said Chiara Lo Prete, assistant professor of energy economics, Penn State University.

“Part of the energy community has argued that microgrids could address these issues. Microgrids are able to operate in island mode and may allow faster power restoration after a blackout. There are also fewer site limitations for microgrids, which may reduce the need for grid expansion.”

The researchers examined several scenarios for adding a microgrid to a regulated network served by a vertically integrated utility, where the utility company generates, transmits and distributes electricity.

Because this market is regulated, the researchers analysed the effect of adding a microgrid from the point of view of the energy regulator. Based on a snapshot of energy and capital costs today, the researchers modelled a variety of scenarios to investigate different contexts for installing a microgrid. Their results, reported in Applied Energy, illustrate that microgrids may increase or decrease a network’s economic efficiency depending upon cost assumptions.

For example, when microgrid capital costs were three times today’s costs, adding a microgrid to a network reduced regulated electricity rates for both utility and microgrid customers. The economic efficiency would increase, but the private investor was less likely to invest due to the increased start-up costs. If this were the case, an energy regulator would need to provide an incentive to the investor to build the microgrid, as that would enhance the network’s economic efficiency.

Another scenario examined the effect of increased utility fixed costs — for example, due to higher transmission or distribution costs. Here, installing a microgrid increased utility customers’ electricity payments. The private investor would make more money and microgrid customers would have a reduced total energy bill. The researchers calculated that, overall, the microgrid would decrease the economic efficiency of the network when utility fixed costs were higher.

“It’s not necessarily that a microgrid always does or doesn’t make sense — it really depends on costs and other characteristics of the network, including retail price regulation,” said Lo Prete. “There are situations where a regulator should intervene to offer incentives so that all parties can benefit if a microgrid is added. It is also important to note that the benefits of introducing a microgrid don’t just apply to microgrid customers and investors who decide to develop a distributed network. Our analysis shows that utility customers who are not served by the microgrid may reap most of these benefits.”