Title: The coordination of centralised and distributed generation,
Abstract: In this paper, we analyse the interaction between centralised carbon emissive
technologies and distributed intermittent non-emissive technologies. A
representative consumer can satisfy his electricity demand by investing in
distributed generation (solar panels) and by buying power from a centralised
firm at a price the firm sets. Distributed generation is intermittent and
induces an externality cost to the consumer. The firm provides non-random
electricity generation subject to a carbon tax and to transmission costs. The
objective of the consumer is to satisfy her demand while minimising investment
costs, payments to the firm, and intermittency costs. The objective of the firm
is to satisfy the consumer's residual demand while minimising investment costs,
demand deviation costs, and maximising the payments from the consumer. We
formulate the investment decisions as McKean-Vlasov control problems with
stochastic coefficients. We provide explicit, price model-free solutions to the
optimal decision problems faced by each player, the solution of the Pareto
optimum, and the laissez-faire market situation represented by a Stackelberg
equilibrium where the firm is the leader. We find that, from the social
planner's point of view, the high adjustment cost of centralised technology
damages the development of distributed generation. The Stackelberg equilibrium
leads to significant deviation from the socially desirable ratio of centralised
versus distributed generation. In a situation where a power system is to be
built from zero, the optimal strategy of the firm is high price/low
market-share, but is low price/large market share for existing power systems.
Further, from a regulation policy, we find that a carbon tax or a subsidy to
distributed technology has the same efficiency in achieving a given level of
distributed generation.