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

Renewable energy generation at the point of consumption (i.e., distributed generation) reducesconsumer's electricity expenditure, and eliminates the cost, complexity, and inefficiency associatedwith power transmission and distribution. In this paper, we address the problem of how aconsumer should invest in distributed renewable generation to minimize the total expected costof 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 electricitymarket, we address investment in stand-alone, distributed renewable energy by an individualconsumer 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 electricityrate. Each consumer then acts strategically in deciding if, when, and how much distributedgeneration capacity to install. We find the subgame-perfect Nash equilibrium of this dynamicStackelberg game by first deriving the consumer's optimal investment time and the resultingoptimal capacity of his installed distributed generation. Using those results, we quantify the ensuingcost savings to the consumer, which average over 22% across a range of model parameters.Next, we evaluate the impact of consumer's investment in renewable energy on the revenue ofhis electric utility, and arrive at the structure of the pricing policy that maximizes that revenue.We quantify the revenue increase available to the utility from following this revenue-maximizingpricing when serving either a single consumer or multiple heterogeneous consumers, and findthat it averages over 10% in our numerical studies