Value of investment in a microgrid under uncertainty in the fuel price

This paper discusses investment strategies in a microgrid system consisting of cogeneration system and renewable power generation under uncertainty in the natural gas price. Although incentives for introducing distributed energy system increase these days, volatile natural gas prices make its investment in gas fuel distributed generation systems risky. Therefore, it is important to evaluate the risk under uncertainty and find flexible strategies which reduce the exposure to fuel price volatility. We take the real options approach to analyze investment decision. By varying the parameter of price volatility, we find that the optimal investment strategy depends on the level of uncertainty. As volatility increases, strategies with installation option of renewable power generation, here, photovoltaic generation, become attractive in terms of risk reduction.