Abstract
A disconnect between real world financing and technical modeling remains one of the largest barriers to widespread adoption of microgrid technologies. Simultaneously, the optimal design of a microgrid is influenced by financial as well as technical considerations. This paper articulates the interplay between financial and technical assumptions for the optimal design of microgrids and introduces a design approach in which two financing structures drive an efficient design process. This approach is demonstrated on a descriptive test case, using well accepted financial indicators to convey project success. The major outcome of this paper is to provide a framework which can be adopted by the industry to relieve one of the largest hurdles to widespread adoption, while introducing multiple debt financing models to the literature on microgrid design and optimization. An equally important outcome from the test case, we provide several points of intuition on the impact of varying financing terms on the optimal solution.
Highlights
Microgrids are a burgeoning energy and power technology, which offer unique economic and resilience opportunities by taking advantage of several value streams1
The objective function minimizes the equivalent annual cost (EAC) of the net present cost required to operate the microgrid over a defined project length (PL) (in Appendix A, we prove that for the simplified financing scheme it is equivalent to minimizing total annual costs (TACs) for an undefined project length) by optimally sizing multiple energy sources considering their optimal operation in each time step study duration
A single large sum can create challenges with meeting the debt service coverage ratio (DSCR) constraint, and we do not discuss this approach further in the paper. Note this approach relies on five key financial inputs to the model: (i) the length of the project (PL), (ii) the loan repayment term (LT), (iii) the interest rate on financed capital (IntRate), (iv) the discount rate applied to future cash flow (DiscRate), and (v) the percentage of capital expenses financed (c)
Summary
Microgrids are a burgeoning energy and power technology, which offer unique economic and resilience opportunities by taking advantage of several value streams (see Ref. 2 for multiple microgrid definitions). While both authors provide a novel repeatable approach to the design process, the lack of discussion on how project financing is secured in these approaches, and where in the design cycle it fits, renders it incomplete for some stakeholders This conclusion is supported by Ref. 16 which showed that under different financing models (self-financing, PPA, and “Joint-venture”), the optimal design (i.e., selection of assets) and expected returns in the form of annual cost reductions will change drastically. While both investment firms and microgrid developers recognize the need for a standard design methodology, there is a form of causality dilemma when it comes to project finances. Previous studies have not discussed how financing is involved in each step of the design process
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