The Impact of Government Subsidy on Renewable Microgrid Investment Considering Double Externalities

Abstract

Since microgrids require public support to make economic sense, governments regularly subsidize renewable microgrids to increase their renewable energy market penetration. In this study, we investigated the optimal subsidy level for governments to correct the market failure of microgrids and analyzed the impacts of regulation on the interaction between a microgrid and a distribution network operator (DNO). Specifically, we proposed economic rationales for government subsidies for microgrids regarding public interest benefits in relation to double externalities (learning spillover effect and environmental externality). We incorporated the double externalities into a three-echelon game model in an electricity supply chain with one regulator, one microgrid, and one DNO, in which the regulator decides the subsidy level to achieve maximal social welfare. We found that the double externalities and double marginalization caused underinvestment in microgrid capacity in the scenario without government intervention. The government could choose the appropriate subsidy level to achieve the system optimum, which led to a triple win for the microgrid, the DNO, and the social planner. Our analytical results also showed that the microgrid gained more benefits from regulation than the DNO. The microgrid may offer a negative wholesale price to the DNO in exchange for more opportunities to import electricity into the grid, especially when the investment cost is sufficiently low. Our study suggests that supporting microgrids requires a subsidy phase-out mechanism and alternative market-oriented policies with the development of the microgrid industry.The smart energy management system and storage devices enable microgrids to manage intermittent renewable energy and realize real-time power balancing within the system.Microgrids can provide cooling, heating, and electricity at the same time (e.g., the combined cooling, heating, and power, CCHP, system), which satisfies multidimensional service requirements [1].Since microgrids can operate either grid-connected or islanded, they are more flexible, controllable, and reliable than distributed generation systems [2]. This helps to reduce the effects of major power disruption events and buffer the impact of intermittent renewable energy generation on power grids, which increases the opportunities for microgrids to access the power network.Microgrids can provide differentiated services for sensitive users who may require higher power quality and a more resilient energy system (e.g., hospitals and data centers) [3].The market practice of combining battery swap stations for electric vehicles and microgrids provides a possible channel to efficiently shift the peak electricity load [4].China realized that its energy structure heavily relied on thermal power for its rapid economic growth, which limited high-quality development and green innovation in Chinese industry. China is devoted to supporting the efficient utilization of renewable energy and making efforts to deepen power system reform. The...

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