Distributed electric power systems of the future: Institutional and technological drivers for near-optimal performance

Viewing electric power distribution systems as complex engineering systems whose states and inputs are defined by both technical and nontechnical components of the system could help us understand challenges and lead to possible innovative solutions. In this setup, regulatory incentives, pricing, demand, and technological innovation are all endogenous feed-forward and/or feedback signals to the existing physical network and shape its evolution in both the short and long terms. We suggest that it is, indeed, possible to design technical, economic, and regulatory feed-forward and feedback signals keeping in mind the desired performance of the system. A particularly unique challenge is to enhance and operate the existing systems by incorporating distributed technologies (distributed generation or DG, active demand response, controllable wires) whose added value comes from just-in-time and right-location adjustments to the changing conditions. One way of interpreting the value of technologies of this type is to understand that they provide flexible and efficient responses by the end-user (DG and demand), therefore reducing the need for capacity reserve at the system level. Technical implementations and regulatory rules are not in place today to support systematic penetration of these technologies into the existing distribution systems. In this paper we stress the critical role of future load serving entities (LSEs) as aggregators and catalysts of customer choice at the value as one possible way forward. The LSEs would, through systematic protocols between themselves and the wholesale markets, on one side, and the customers whom they serve, on the other side, effectively implement incentives to induce near-optimal distribution system performance over long time horizons by investing in near-optimal technologies. These incentives must capture and compare both cumulative effects of real time decisions and the effects of longer-term investment decisions on near-optimal industry architecture. A non-traditional cost-benefit analysis which draws on temporal and spatial economies of scope is critical for ensuring penetration of what might be viewed as a rather costly disruptive technology. To illustrate the relevance of such analysis on incentives design, we provide numerical examples showing the objectives of the price-responsive demand and the objectives of the evolving distribution (local wire) companies under several regulatory rules. (C) 2006 Elsevier B.V. All rights reserved.