Flexible investment under uncertainty in smart distribution networks with demand side response: Assessment framework and practical implementation

Classical deterministic models applied to investment valuation in distribution networks may not be adequate for a range of real-world decision-making scenarios as they effectively ignore the uncertainty found in the most important variables driving network planning (e.g., load growth). As greater uncertainty is expected from growing distributed energy resources in distribution networks, there is an increasing risk of investing in too much or too little network capacity and hence causing the stranding and inefficient use of network assets; these costs are then passed on to the end-user. An alternative emerging solution in the context of smart grid development is to release untapped network capacity through Demand-Side Response (DSR). However, to date there is no approach able to quantify the value of 'smart' DSR solutions against 'conventional' asset-heavy investments. On these premises, this paper presents a general real options framework and a novel probabilistic tool for the economic assessment of DSR for smart distribution network planning under uncertainty, which allows the modeling and comparison of multiple investment strategies, including DSR and capacity reinforcements, based on different cost and risk metrics. In particular the model provides an explicit quantification of the economic value of DSR against alternative investment strategies. Through sensitivity analysis it is able to indicate the maximum price payable for DSR service such that DSR remains economically optimal against these alternatives. The proposed model thus provides Regulators with clear insights for overseeing DSR contractual arrangements. Further it highlights that differences exist in the economic perspective of the regulated DNO business and of customers. Our proposed model is therefore capable of highlighting instances where a particular investment strategy is favorable to the DNO but not to its customers, or vice-versa, and thus aspects of the regulatory framework which may need altering. The case study results indicate that DSR can be an economical option to delay or even avoid large irreversible capacity investments, thus reducing overall costs for networks and end customers. However, in order for the value and benefits of DSR to be acknowledged, a change in the regulatory framework (currently based on deterministic analysis) that takes explicit account of uncertainty in planning, as suggested by our work, is required. (C) 2016 The Authors. Published by Elsevier Ltd.