| The deregulation of electricity industries provides incentives for microgrids, entities that use small-scale distributed generation (DG) to meet local energy loads, to evolve independently of the centralised grid. We examine the impact of start-up costs on the operating costs and policies of DG given stochastic electricity and fuel prices by formulating a stochastic dynamic programme for the microgrid, which minimises its expected discounted cost, and solving it using least-squares Monte Carlo simulation. The microgrid's expected cost saving from using gas-fired DG relative to meeting its electric load via off-site purchases is the implied DG option value. Numerical examples indicate that although start-up costs do not significantly increase operating costs, they have a profound impact on the optimal DG operating schedule as the microgrid must incorporate not only current, but also future, expected start-up costs into its decisions. Consequently, the microgrid hesitates to turn DG units on, preferring to wait until the electricity price exceeds the natural gas generating cost by a significant margin. We demonstrate that ignoring this tradeoff results in drastically higher expected costs and fewer self-generation opportunities. Hence, optimal control policies are crucial as the loss in value from operating DG sub-optimally may deter the formation of microgrids. |
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