Pricing Residential Electricity in the Presence of Distributed Solar Energy Generation, Limited Consumer Response and Microgrids

Abstract

This dissertation studies pricing of electricity in residential electricity markets. Among all the sectors (residential, commercial, industrial, and transportation) of the USA power market, the residential sector is the largest, with total revenue reaching more than 187 billion dollars in 2019. However, at the same time, this market is challenging to manage for the utilities primarily due to the growing supply and demand variability. Generation (often via intermittent renewable resources) of electricity by consumers and supply of the excess generation to the (main) grid induces supply variability. Extreme weather events (climate change) and limited attention of consumers to these lead to demand variability. In response to these challenges, local electricity generation and its local consumption are emerging as potential strategies, which are implemented in the form of microgrids. A microgrid is built in addition to the existing grid and it executes electricity purchase/sell transactions with the grid. Pricing of electricity in the presence of these fundamental demand and supply changes is an important issue. This dissertation consists of three main chapters to address this issue. In Chapter 2, we provide a revenue maximization formulation for a regulated utility and reveal the interaction between rising optimal prices and growing solar power adoption. This interaction can significantly reduce the number of customers of a utility and is referred to as the utility death spiral in the power industry. We propose electricity pricing mechanisms to slow down and stop this spiral. In Chapter 3, we propose a novel framework that formalizes a household’s electricity consumption through setting appliances (e.g., an air conditioner) to various levels. Focusing on the consumption decision making process, we provide a theoretical foundation for analyzing a consumer’s limited capability in responding to changes in her ambient environment. In Chapter 4, we consider a microgrid’s capacity, its excess demand/supply and the resulting transactions with the grid. The microgrid’s profit is formulated by taking the statistical dependence between the market demand and price into account and also by ignoring this dependence. We reveal the differences between these two profits and the optimal microgrid capacities they lead to. Our results shed some light on why microgrid investments made without incorporating the dependence can be disappointing.