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Using Distributed Resources to Manage Risks Caused by Demand Uncertainty

Abstract:
This paper presents a method to calculate the cost of satisfying transmission and distribution (T&D) system capacity needs as a function of investment modularity and lead-time. It accounts for the dynamic nature of demand uncertainty, the decision-maker's risk attitude, and the correlation between costs and firm profits. Results indicate that the modularity and short lead-times associated with the distributed resources can increase their attractiveness in comparison to long lead-time, large-scale T&D investments. Results also suggest that distributed resources can operate as a type of "load growth insurance" if demand growth is positively correlated with profits (so that costs are incurred when profits are high) and if the distributed resource costs are part of a larger portfolio that cannot be diversified.

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Energy Specializations: Energy Modeling – Sectoral Energy Demand & Technology; Electricity – Distributed Generation; Electricity – Policy and Regulation

JEL Codes:
Q55 - Environmental Economics: Technological Innovation
L94 - Electric Utilities
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General

Keywords: Electric utilities, distributed generation transmission, investment, risk

DOI: 10.5547/ISSN0195-6574-EJ-Vol18-NoSI-4


Published in Volume 18, Distributed Resources: Toward a New Paradigm of the Electricity Business of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.