Deferral of Traditional Investment Using Real Option Analysis Considering Distributed Generation Penetration in Radial Distribution Networks Under Uncertainty

Abstract

In the near future, Indonesian electric power systems will be strongly influenced by the penetration of Distributed Generation (DG) along with increasing electricity demand. This growth may cause capacity congestion, which is traditionally responded with new infrastructure investment by the utility. Alternatively, investment of DG has the potential to defer traditional investment. It also comes with some technical benefits. In distribution network planning, the suitable of investment decision must fulfil the economic (funding risk) and reliability (operational risk) criteria. Planning engineers have to deal with uncertainty of demand increase, financial risk, and ways to determine the timing, location, size and types of investment. This paper introduces DG (both non-renewable and renewable) benefits as an option to defer traditional investment using Real Option Analysis in radial distribution network. This combines two economical approach: Return per Risk Index (RRI) and Real Option Value (ROV). The uncertain conditions are simulated with Monte Carlo. Furthermore, the optimal power flow gives an assessment of the best investment option using DIgSILENT. It is found that RRI and ROV of gas internal combustion engine (ICE) power plant investment is higher (least risky investment) compared to Battery Energy Storage System (BESS) and traditional investment, respectively. This paper has shown that Real Option Analysis may provide flexibility options (pictured in decision tree and decision area) for utility in order to make decision on future investment, including the deferral of traditional investment while obtaining technical benefits as DG penetration impact as well.