Harvesting Solar Power Foments Prices in a Vicious Cycle : Breaking the Cycle with Price Mechanisms

Traditional electric grids can be improved in terms of competition, reliability and availability of transmission capacity by building microgrids. A microgrid is a group of local generators and consumers that primarily transact with each other, buy excess demand from the grid and sell excess supply thereto. It comes in a variety of sizes and costs depending on its size. Its gains and losses from transactions with the grid are related to demand and price dependency as well as its size. Finding the optimal capacity by considering demand randomness and dependency factors is a challenge. In this paper, we provide a profit maximization formulation for a microgrid and reveal the effect of demand and price dependency on the optimal capacity and investment decisions. Comparing the expected profits with and without this dependency, we find that the difference is related to a covariance term that can be negative, even when demand and price are positively correlated. We characterize the optimal microgrid capacity and reveal its relation to electricity price, demand distribution and their dependence as well as the Levelized cost of the microgrid. Empirically, we investigate the relationship between price and demand of electricity in different load ERCOT zones. This helps in identifying when dependence significantly affects the capacity decisions in practice