Economic valuation of smart grid investments on electricity markets

Many countries are establishing regulatory guidelines to promote the integration of smart grid technologies with the aim of improving the efficiency of the power system. This paper analyzes how the investment costs of the different smart grid applications installed by network operators can be recovered in the short-term when a locational marginal pricing scheme is applied. This issue has been previously addressed in literature with simple economic models where the multilevel structure of the smart grid is not considered. As a key contribution, this paper presents a new social welfare optimization model considering implementation strategies with different expenditure levels in smart grid technologies where specific applications as renewable distributed generation, network automation, demand-response and reactive power management are explicitly considered. The proposed model has been implemented using a 3-node illustrative example and a 149000-node network under real-world conditions. Results show how a progressive implementation of smart grid applications can produce increased system efficiency and social welfare, in particular when demand-response is enabled. Results also show how the costs of demand-response applications applied in weak power systems are suitable to be recovered in the short-term with marginal revenues of the network provider.