This paper addresses the costs and benefits associated with microgrid development relative to the costs and benefits of conventional generation interconnected to a bulk transmission and distribution grid. The costs and benefits are classified as: environmental (avoided environmental damage costs); economic (mainly employment multiplier effects); deferral or avoidance of transmission and distribution investment costs; and greater access to electricity supply that is highly reliable and resilient. Deficiencies due to the lack of relevant available data and of research on economic modeling of microgrids at the societal level are discussed. The context in which these costs and benefits are measured is the Israeli electricity market, which features a highly centralized, vertically integrated electricity company (Israel Electric Corporation, IEC) with some legacy distribution companies. Moreover, because Israel's transmission and distribution infrastructure investment have declined significantly over the past several years, the Israeli market provides a useful basis for analyses of microgrids as an alternative to such large-scale investments.
The analysis reveals that under reasonable assumptions reflecting the current state of microgrid technologies, microgrids may constitute a viable, cost-effective alternative to additional central- station generation requiring new investments in transmission and distribution infrastructure. Specifically, using reasonable assumptions regarding 10-MW incremental investments in a microgrid and in central-station generation with necessary transmission and distribution investments, the analysis indicates that, when considering the reliability, T&D investment deferral, local economic, environmental, and social costs and benefits of each alternative, the net benefits to the Israeli economy from selecting the incremental 10-MW investment in a representative Israeli microgrid may exceed $13,000,000 per year. However, when local economic benefits are not considered, the net benefits decline to approximately $260,000 per year. For perspective, generation capacity additions by the Israel Electric Corporation have averaged 166 MW from 2008 through 2018, reaching 13,775 MW of installed capacity by the end of 2018. Total annual capital investment has averaged approximately $1 billion since 2015, about $400 million of which has been in the generation sector. The paper concludes with future research directions, with an emphasis on integrating engineering analysis, scenario simulation, flexibility, and quantifying social/equity (“fairness”) effects of microgrids.
Over the past several years, microgrid development has been a significant topic for energy policy development (Hirsch, Parag, & Guerrero, 2018). While a large share of this development has taken place in developing countries with limited access to reliable energy supply, there is some progress being made in microgrid development in the OECD countries, particularly in North America (Sioshansi, 2018). This development depends in large part on a combination of technical, economic, and regulatory factors. In these OECD countries, regulators have attempted to prioritize microgrid development by using their existing sets of cost-benefit analytical tools. Such tools have been used to determine the prudency of utility investments (e.g., California Public Utilities Commission, 2018), but may be inadequate for evaluating microgrid projects at specific locations throughout such a utility's transmission and distribution systems. Consequently, in many OECD countries, policy tools have reinforced an existing bias toward larger centralized infrastructure rather than distributed systems, including microgrids (Levin & Thomas, 2016; Sioshansi, 2018). This paper attempts to provide a framework for assessing benefits and costs of microgrid integration, based on the current state of microgrid development. Notably, some of the benefits, such as improved resiliency, have not been defined well, making quantification difficult.