THE V ALUE OF DISTRIBUTED GENERATION IN A DEREGULATED MARKET

Abstract

Deregulation of energy markets and the establishment of a trans-
parent market such as the PJM Interconnection, LLC have allowed com-
panies that have generation assets located in that market, a means to cost
effectively manage market risks over a significantly longer period than
typical supply contracts. The value of on-site generation lies in its ability
to dispatch based on market conditions, therefore acting as a market
hedge for the purchase of electricity. This provides a collar on the price
of electricity for the life of the generator, unlike financial hedges, which
are limited in their term.
An analysis of the benefits of on-site generation as a hedge for the
market purchase of electrical power will be discussed for a project lo-
cated in the PJM market. A pro forma analysis demonstrates the behavior
of the generation project in various market conditions and is based on
actual data. The electric procurement strategy for the site includes mar-
ket based dispatch, which is simply a make/buy decision. When the cost
of power on the spot market is below the price to generate, then the
consumer buys. When the price exceeds the cost to generate, the equip-
ment is operated to supply the needs of the consumer. In this way, a cap
is placed on the price of power and corresponding futures (fixed price)
power contract premiums are avoided.