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Strategic analysis framework for evaluating distributed generation and utility strategies

G.W. Ault, J.R. McDonald and G.M. Burt Abstract: A strategic analysis framework for evaluating distributed generation and distribution utility strategies is presented. The framework is based on the idea of evaluating all distributed generation issues across many scenarios to encapsulate the breadth of uncertainties stemming from independent distributed generation in regulated distribution networks. A distributed generation value function is proposed to enable distribution system planners and strategists to gauge the aggregate impact of distributed generation on all parts of the distribution business. This enables the distribution company to formulate its response to distributed generation by testing prospective strategies using the range of generation market, power network and utility business models proposed. The results from a case study based on the UK situation shows the potential value of distributed generation (both positive and negative) to distribution network operators. The case study also demonstrates the application of the proposed strategic analysis framework and the value of the results produced.


In liberalised electricity markets four key strategic issues relating to distributed generation (DG) are high on the agenda of any distribution company:

I . How much distributed generation will appear in the distribution networks? 2. What effect will the distributed &eneration have on the technical performance of the network? 3. What effect will the distributed generation have on the financial performance of the utility? 4. What changes in technical design or commercial practice will be effective within a distribution utility distributed generation strategy'?
This paper focuses on the third issue of distribution utility financial implications from distributed generation.

influence diagrams is described in [2]. Models for the analytical functions have been successfully realised using standard power system analysis software tools and other analytical software. The third key aspect of the evaluation of distributed generation is the impact on the distribution business finances, and Section 3 focuses on the method proposed for utility financial analysis.

Distributed generation financial value analysis

Distributed generation strategic analysis frame-


Developments in the assessment of distributed generation from a strategic viewpoint have been described in recent publications by the authors [I, 21. A method of integrated market, engneering and financial evaluation of the impact of distributed generation on distribution companies is proposed to address the key issues outlined in the Introduction. Fig. 1 illustrates the proposed approach [l] for modelling the impact of distributed generation on distribution networks and businesses. The factors addressed in these analytical functions are shown in Figs. 2 4 . The development and application of the
0IEE. 2003
/E Proreedinijr online no. 20030374 doi: lO.lO49jipgtd2M30374
Publication date: 191h May ZW3. Paper firs1 received Zlst December 2MI and in revised form 18th November 2002 The authors are wilh the Institute for Energy and Enrironmcnt, Royal College Building. Unirersity of Stialhclyde. Glasgow GI IXW. UK

It is proposed that distributed generation financial implications for distribution businesses are assessed using a linear value function incorporating each of the components of distributed generation impact on distribution businesses. The inputs to the value function are the costed effects of the impact of distributed generation on the distribution network. The costed impacts of distributed generatiqn are calculated using a set of unit costs and details of the regulatory policy. The set of unit costs are based on standard plant costs (e.g. f/km cable and line costs and f/unit switchgear costs) and the relevant aspects of regulatory policy (e.g. efficiency driver in price control formula to value losses).

3.1 Capital expenditure expression

The total capital expenditure, C,, in year I can be expressed as the summation of the individual capital expenditure budget items (I),

cc, =


=(~c.cRR,) (CC.LRR1) +

+ (cC.EH.9) + ( c C . N C t ) + (cC.Nt) + (cC.fplt) f ( C C . A R t ) + ( c C . N D I )

where: CC,



is the capital investment in year

is the capital cost item relating to generation related reinforcement


IEE Proc.-Gener. Tmmm. Drtlrib.. Yo/. lJ0. No. 4, July 2033

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analysis distributed generation economics

energy market characteristics

distributed generation penetration


distribution network characteristics power system analysis generator technical characteristics

i .. s

! 0z
! g

n : .m

! I

ia, e !
distributed generation impact on distributed network

; E : E

: E . regulatory policy

unit costs

fin anc ia I analysis

; z
i -

distributed generation impact on distribution business

Fig. 1 Strategic analysisframework for distributed generution


Cc. EHS,
G P l f



D ~

is the capital cost item relating to load related reinforcement is the capital cost item relating to environmental, health and safety is the capital cost item relating to new connections is the capital cost item relating to performance improvement is the capital cost item relating to power quality improvement is the capital cost item relating to asset replacement is the capital cost item relating to network diversions.

where: CO* CO PEn,

CO.R E A CO. N T ~ M CO. IT! CO. rnc

3.2 Operational expenditure expression The total operational expenditure in year f can be expressed
as the summation of the individual operational expenditure

is the operational cost in year r is the operational expenditure item ing to personnel is the operational expenditure item ing to repairs is the operational expenditure item ing to maintenance is the operational expenditure item ing to information technology is the operational expenditure item ing to transport.


environmentallegislation generation fuel sources

network Sewices


\ \


generation capital cost generationOaMcost

n ~ n a r r l i " "k ~ s l i n n


generator connectioncost generating ""it life

renewable potential

generation rate of return

c /
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Fig. 2 InJtuence dkgram for disrrihured generation penetration


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dislribuled generation penetration

generation control

Fig. 3 hfluence diagram /or distributed generation impuct on distribution network

generation impact an

Fig. 4 Influence diagram for distributed generation impact on dktribution business


3.3 Revenue expression

The total revenue in year f can be cxpressed as the summation of the individual revenue items (31,


= (Rust)

+ (Rcfxu) + (RRm)+ ( R E Y U S ~ )


should also be noted that the derivative terms are utilised to illustrate the changes on parameters resulting from distributed generation and not that R,, Cc, and CO,, are known mathematical functions. If we expand the expressions for revenue, capital expenditure and operational expenditure and use A to represent the differential terms, then (6) becomes


R Rwt


is the revenue in year f is the revenue item relating to regulated use of system charges is the revenue item relating to connection charges is the revenue item relating to rechargeable works is the revenue item relating to excluded use of system revenues.


ARRUS~ ARco.w f ARRwi A R m s -ACC.GRRI A ~ C . L R- ACc..wst - A ~ C N C < R~ -dCC.m - A c C . P p r - ACC.aRi - A CO., - A GRER - A Co.,wm - A C m n


3.5 Utilising the financial performance impact expressions

Equation (7) is effectively a linear value function with each A term representing the f magnitude of all the factors from the distributed generation impact that cause a change in that A component. Some of the items in (7) either cancel each other out or can be neglected due to their marginal impact on the function, E,,, as a whole. For example, the parameter ARCON,could cancel out the parameter ACo since the revenue collected to cover distributed generation connections may be exactly equal to the capital expenditure on new connections depending on the utility connection charging policy. These terms and the values they represent are all matters of utility strategy and therefore must remain in the expression to enable full characterisation of the impact of distributed generation and utility policy. In any case there may be a difference in the timing of the collection of connection revenues from the actual expenditure which may produce interesting conclusions relating to the connection revenue process for the distribution utility. The expression in (7) will be shown to he worthwhile in evaluating the whole impact of distributed generation on the utility business if the change in each of the budget items can be assessed. The case study presented in Section 4 quantifies a number of the budget items within the distributed generation value function. Some means must be found for assessing the impact of distributed generation on all the budget items if a comprehensive evaluation of distributed generation is desired. The case study does not go as far as to quantify all the effects of distributed generation on distribution utility finances.
Case study: distributed generation in the UK

Some smaller revenue items have been excluded from the expression.

3.4 Distributed generation influences in distribution utility financial expressions

The simple expression relating profit to revenue and expenditure is stated in (4),
P ~ j t = Rt - (CO Cot) i (4) where profit, is the utility in year I . It should be noted that tax, debt and depreciation have been deliberately excluded from these expressions as they do not add anything to the analysis of distributed generation under current regulatory and legislative mechanisms. If it is now assumed that some scenario of distributed generation growth and siting in the distribution network will have a particular effect on revenue and expenditure, we must formulate an expression which will capture the changes in distribution utility profitability directly attributable to distributed generation. If we also assume that each of the items in revenue and expenditure are functions of distributed generation in some way, then let us differentiate (4) with respect to distributed generation (DG):

-d ( R 0



where: DG dIdDG,



This case study will demonstrate the use of the analysis framework for DG evaluation and also the use of the DG financial value function. The case study is based on one distribution area in one UK distribution company network. A brief description of the case study is presented here but it is acknowledged that a full description of the models and data used would be lengthy and would not contribute much to the discussion.

is distributed generation scenario s is the rate of change in profit for distributed generation scenario s.

Instead of using the word profit, which may become misleading, the term financial impact will be used. The symbol FDGwill replace the differential term forproj?t in (5). Therefore, (5) becomes

Expressing (6) in words: the financial performance impact of distributed generation on a distribution utility is the change in revenues due to distributed generation minus the change in capital expenditure due to distributed generation minus the change in operational expenditure due to distributed generation. This expression forms a basis for analysing the financial impact of distributed generation on a distribution utility. It

Case study network details

To provide an idea of the magnitude and scope of the case study distribution area, Table 1 shows the quantities of primary plant assets in the case study network. The assumed maximum demand and annual energy consnmption levels at the load points (assumed to be connected at the 1 I kV side of primary 33/11kV substations) for three study periods are shown in Table2. The distribution network demand level in the case study amounts to 7.7% of the average UK distribution company [4].
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Table 1: Nelwork asset details for case study network

Asset Priman/ substations 132-33kV transformers 33-11 kV transformers 132kV 33kV 33kV Ouantiv

Table 3 Distributed generation technology details (as used in case study)

Generator wpe Capacitv IMWl 0.25 1.5 25 17.5 50 1.8


35 47.7 1.1 59.9 161.1

Fuel cell Wind (onshore) Municipal waste Energy crop Gas turbine (large) CHP gas engine CHP gas turbine

OH circuit lkm)

132 kV UG circuit lkml

OH circuit lkml UG circuit lkm)


Table2 Annual load details for case study network (assuming 1.2% annual load growth)
Load feature Maximum demand power IMW) Maximum demand reactive power IMVAr) Annual energy demand IMWh) 2003 299.1 2008 317.4 64.5 1649787 2013 336.9 68.5 1751 144


Fig. 5 illustrates the network topology assumed to sit within an average distribution network.


Distributed generation scenarios

Three separate years are simulated and four scenarios of DG penetration are studied in each year based on two

different methods of conducting the energy market analysis (see Fig. 6). One distributed generation scenario (DG case A) is based on a UK government prediction of DG growth, while the other three distributed generation scenarios (DG cases B , C and D) are based on economic models of distributed generation technologies and models of investor behaviour in developing projects with those technologies. Case 0 is a zero distributed generation reference case. Table 3 shows standard package sizes for the distributed generation technologies considered in the case study. A national scenario for generation is produced and scaled down to regional and then local network levels based on the relative proportions of energy demand. The generators are sited on the network by selecting the most likely locations for each technology. It is acknowledged that this method of siting the generation may spread the units and hence the

Fig. 5

Case study network one-line diagram


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problems when in reality distribution companies experience problem clusters due to several developers recognising and acting on strong signals to locate in a vastly reduced number of areas within their network. The analysis within this case study focuses on a subset of three of the major issues relating to DG impact, namely: capacity fault level electrical losses. Reinforcement deferral is analysed under the capacity issue, switchgear upgrading is analysed under the fault level issue and annual energy losses are analysed under the electrical losses issue. The analytical functions outlined for the analysis framework in Fig. 1 (i.e. energy market analysis, power system analysis and utility financial analysis) are implemented using standard power system analysis tools and mathematical tools with extensive use of additional code to facilitate the integration and automation of the analytical modules.
5 Case study: results and analysis

The results of the application of the strategic analysis framework to the case study are presented in this section. Table 4 details the results of the utility financial analysis for DG case A only, and shows the value of losses, generation connection charge, deferred capacity reinforcement and switchgear upgrades for three study years. It can be seen that the generator connection charge is equal in magnitude hut opposite in sign to the cost of switchgear upgrades. This reflects the present policy of deep connection charges to distributed generators covering the costs of upgrading the existing network. The value of deferred capacity reinforcement rises in each year for DG case A as the capacity of connected generation increases over the three study years with the concomitant benefit in deferred investment. It can he seen that the aggregated annual distributed generation value (F& increases over the study period. By the final study period (year 2013, the dominant source of value from distributed generation is deferred capacity reinforcement. This pattern is matched in the other three cases (DG cases B, C and D). This can be explained by the relatively large value of deferring expenditure on replacement circuits (whether overhead or underground). The results of the distributed generation value function for all four distributed generation cases and the zero distributed generation case (case 0) are illustrated in Fig. 6. Fig. 6 shows the trajectories of the value function across the study years. For three cases (DG case A, B and 2) the annual value of distributed generation to the host distribution company increases with increasing generation capacity as time progresses.

DG case D illustrates a situation where the value of ongoing capacity deferral is effectively exhausted. This case has the smallest capacity of distributed generation connected in each of the study years (of the four DG cases). The initial value of the generation in the network is high due to the initial rate of connection in response to economic signals. Location also plays a role in the initial high value of network reinforcement deferral with some of the better sites for achieving deferral used early in the study period. As the load levels grow later in the study period the need for capacity upgrades starts to outstrip the capacity deferral effect of the distributed generation and the value of this component falls quite dramatically in the third study year. Case 0shows what happens if no distributed generation is located in the network. The loss in value (and hence the negative trend) is due to increasing annual energy losses with increasing load. The effect of increasing energy losses is to decrease the money eamed by the distribution company under the efficiency driver in the distribution price control formula. For the purposes of comparison, Fig. 7 illustrates the results gained from an identical set of DG cases scaled to an altemative case study network. The magnitude of the load served by the distribution network in this altemative case study is -40% of the load in the main case study. The results illustrated in Fig. 7 show different patterns from the main case study with higher value evident in the earlier years of the study and a negative trend in the value arising from distributed generation. From detailed analysis, the reasons for these trends are similar to reasons already cited for the main case study: capacity reinforcement benefits depleting as load grows into the study period, and load growth related losses increasing as generation loss reduction benefits plateau or decrease (due to the mechanism of ten-year averaging in loss incentives). The value of distributed generation presented is theoretical, and this paper does not deal with the greater challenge of actually realising these benefits. Distributed generation value in the network also depends heavily on the regulatory and financial treatment of the generation. At times when the policy for distributed generation is changing rapidly (as evidenced by the recent regulatory consultation on embedded generation connection and use of system charging changes for distributed generation in the UK [5]) the distributed generation analysis framework would require to be revised in response to each policy change.

This paper has described the development of a comprehensive analysis methodology for evaluating the impact of distributed generation on distribution networks and businesses. The context for the development of the framework is liberalised electricity generation markets. A detailed influ-

Table 4 Distributed generation value function components for DG case A(numeric values in f000s)
Value function Component Distributed generation network impact Reduced losses Generator connection charge Deferred capacity reinforcement Switchgear upgrading Year 2003 Year 2008 Year 2013


205 1600 766 -1mo 97 1

400 1407 -400 1717


FG D t



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+DG case 'E


DG c a s e ' 0

DG case 'N DG case 'E

DG case '0

5 1


Fig. 7

Dirtributrd generation vulue (ulternutivr c u e study)



different cuses

ence model illustrating the many factors affecting the overall DG impact on distribution networks and businesses has been presented. This shows clearly the interrelation of the many issues at play in relation to distributed generation. A distributed generation value function has been derived to support studies of the financial effects of distributed generation and provide information for effective distribution utility decision making. The paper also presents results from application of the framework to a case study rebated specifically to the UK electricity industry. In general the net outcome in the three areas of losses, capacity and fault level is positive for the distribution companies. In one case it is shown that the benefits arising from distributed generation bast for some years before diminishing rapidly as load growth undermines the theoretical benefits of capacity reinforcement deferral. The framework provides a basis for distribution companies to test alternative courses of action to exploit any benefits that do arise from distributed generation and manage the potential downside in terms of increased costs or unfavourable outcomes from the regulatory process. The scenarios of distributed generation penetration into the case study networks do not reveal the full scale of the distributed generation impacts being reported by distrihution companies. In reality, the maximum possible capacity at any site is often installed by generation developers and this yelds a negative effect on energy losses and network capacity due to the high levels of exported energy to the distribution network from generation sites. In addition, concerns about increased operational costs due to distributed generation seem valid when staff and system costs to

manage more complex networks are factored into the discussion. However, taking a wider view of the aggregate impact of distributed generation through the use o the strategic f analysis framework presented in this paper enables full evaluation (across multiple criteria) of different scenarios for distributed generation growth and distribution utility responses. This paper has demonstrated the application of the analysis framework to a small number of distributed generation scenarios and a limited set of criteria but this has demonstrated the potential for expansion to the full set of distributed generation criteria and distribution company responses to distributed generation.



Ault. G.W., and McDonald, J.R.: 'Planning for distributed generation within distribution networks in restructured electricity markets'. IEEE PES Poww Enq, J , . 2000, 20. (2). pp. 52-54 2 Auk. G.W., Cruden, A., and McDonald, J.R.: 'Swifiwtion and
~~~~. ,

malung in distkbution utility investment planning'.'Praceedings of the Electric Utility Deregulation and Resiructunng, and Power Technologie Conference, DRPT2000, London 4 Office 01. Electricity Regulation: 'Reviews of pubtic elrct"city suppliers 1998 IO 2000-dist~ibution price control review consultation Paper'. May 1999 5 Office of Gas and Electricity Markets: 'Emhedded generation: prim controls, incentives and connection charging-a preliminary consultation dxument'. 58/01, September 2001