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 therefore 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 could take explicit account of uncertainty in planning, as suggested by our work, is required