Distributed Generation in Electricity Networks. Benchmarking Models and Revenue Caps

The grid companies are obliged to connect new distributed generation plants that are built in their respective concession areas. In order to study the compensation that the grid companies get for accepting new DG plants, we analyze in depth how variations of one DG induced project affect the regulated revenue caps of a few grid companies. We found that the regulation model makes the project very lucrative, but that the second stage regression coefficient for distributed generation is sensitive to DG investments in the industry. This effect, together with the calibration of the efficiency scores, implies that a project undertaken by one company may have significant and unpredictable impacts on the revenue caps of other companies. The revenue effect, and hence the profitability, of a DG project undertaken by a particular company is therefore to a large degree dependent on how other companies in the industry act.

We also look at a possible future regulation model where more output variables are moved to the second stage, and we find that this change makes DG projects even more lucrative, but that the second stage coefficients now become less sensitive to changes in the industry. We also analyze the effect of changing some of the model parameters (e.g. rho - the weight on model costs in the yardstick formula), and we illustrate the revenue effects of investment contributions collected directly from the DG owners.