Microgrids not always beneficial

New research suggests that installing a microgrid within a regulated electricity market will not always provide economic benefit.

The US study, led by Chiara Lo Prete, assistant professor of energy economics at Penn State University, examined several scenarios for adding a microgrid to a regulated network served by a vertically integrated utility. In this type of network, the utility company generates, transmits and distributes electricity. This differs from other networks in which these responsibilities are split among different parties. Roughly half of US states today operate on such networks.

Many members of the energy community believe that microgrids could be the answer to capacity and reliability issues in existing networks.

"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 Lo Prete. "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.

"These types of networks are often viewed as economically inefficient because the price of electricity reflects the average cost of providing power," said Lo Prete. "We wanted to find out how adding a microgrid would affect prices, costs and benefits for everyone involved," he said.

As the energy market is regulated, researchers decided to analyse the effect of microgrids from the point of view of the regulator, which acts to enhance the sum of economic efficiency for all participants in the market including private investors, microgrid customers, utility companies and their customers. They developed models for a range of scenarios to investigate microgrid installations in different contexts and reported in a recent issue of the journal Applied Energy that microgrids may increase or decrease economic efficiency depending on varying cost assumption.

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 is 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," Lo Prete said.

Benjamin Hobbs, Johns Hopkins University, collaborated on this research and The National Science Foundation and the Harvard University Center for the Environment supported the work.