Ambiguities and nonmonotonicities under prosumer power Optimal distributed energy resource investment in a deregulated electricity industry

Prosumers adopt distributed energy resources (DER) to cover part of their own consumption and to sell surplus energy. Although individual prosumers are too dispersed to exert operational market power, they may collectively hold a strategic advantage over conventional generation in selecting DER capacity via aggregators. We devise a bilevel model to examine DER capacity sizing by a collective prosumer as a Stackelberg leader in an electricity industry where conventional generation may exert market power in operations. At the upper level, the prosumer chooses DER capacity in anticipation of lower-level operations by conventional generation and DER output. We demonstrate that exertion of market power in operations by conventional generation and the marginal cost of conventional generation affect DER investment by the prosumer in a nonmonotonic manner. Intuitively, in an industry where conventional generation exerts market power in operations similar to a monopoly (MO), the prosumer invests in more DER capacity than under perfectly competitive operations (PC) to take advantage of a high market-clearing price. However, if the marginal cost of conventional generation is high enough, then this intuitive result is reversed as the prosumer adopts more DER capacity under PC than under MO. This is because the high marginal cost of conventional generation prevents the market-clearing price from decreasing, thereby allowing for higher prosumer revenues. Moreover, competition relieves the chokehold on consumption under MO, which further incentivises the prosumer to expand DER capacity to capture market share. We prove the existence of a critical threshold for the marginal cost of conventional generation that leads to this counterintuitive result. Finally, we propose a countervailing regulatory mechanism that yields welfare-enhancing DER investment even in deregulated electricity industries.