Method of Capacity Compensation for Independent
Distributed Generation in Distribution Network
within the Context of Smart Grid
Zeng Ming
Research Center of Energy and Electricity Economics
North China Electric Power University
Beijing, 102206, China
tkhbdldx2006@yahoo.com.cn
Li Chen
Research Center of Energy and Electricity Economics
North China Electric Power University
Beijing, 102206, China
tkhbdldx2006@yahoo.com.cn
AbstractOne of the characteristics of smart grid is the large-
scale access of distributed generation to distribution network,
thus encouraging distributed generation investments is of great
significance to the construction of smart grid. A method of
economic compensation for independent distributed generation
investment in the distribution network is presented. First of all,
the reliability incremental value for the customers at different
load points and the saving value of distribution network
expansion investment for distribution companies, after the
incorporating of distributed generation, are concerned; and then,
the capacity compensation charge of the customers at different
load points and the distribution company is calculated
respectively based on the benefit from the employment of
distributed generation. This method provides a price signal for
independent distributed generation investors in the distribution
network and also stimulates investors for corresponding
investment, and plays a guiding role in choosing the right
location and capacity of distributed generation. Finally, based on
a simplified distribution system, the article verifies the rationality
and feasibility of the capacity compensation method studied.
Keywords-smart grid; distribution network; distributed
generation; capacity compensation
I. INTRODUCTION
In recent years, the construction of smart grid has become a
consensus in international power industry. One of the
characteristics of smart grid is the large-scale access of
distributed generation (DG) to distribution network.
At present, there are two different investment modes of the
grid-connected distributed generation, one is invested by the
distribution companies; the other one is by independent
investors. If the distribution companies directly invest in a
large number of distributed generations, they will be faced with
high debt payment pressure and operation& maintenance
Project Supported by National Science Foundation of China(NSFC)(
7067104170771039); Project Supported by Beijing Education Commission
cooperation.
978-1-4244-4813-5/10/$25.00 2010 IEEE
Tian Kuo
Research Center of Energy and Electricity Economics
North China Electric Power University
Beijing, 102206, China
tkhbdldx2006@yahoo.com.cn
Li Na
Research Center of Energy and Electricity Economics
North China Electric Power University
Beijing, China
tkhbdldx2006@yahoo.com.cn
pressure. Thus the distributed generation invested directly by
distribution companies is still very limited. As a result, the
advantages of DG are not fully taken to ensure the long-term
development and smooth operation of the distribution network.
Therefore, it is necessary to stimulate independent investors to
invest in DG in the distribution network.
Literature [2-4] analyzed the optimum planning question of
the distribution network taking the impact of distributed
generation into account, and then determined the best location
and volume of distributed generation in distribution network.
Although the results of the research on these optimum planning
questions can provide independent investors with certain guide
information, they failed to form an effective economic
stimulation mechanism to encourage independent investors to
make DG investment in accordance with the optimal planning
provided. Therefore, within the context of smart grid, it is
necessary to establish an effective capacity compensation
method to motivate independent DG investors to make
investment in the principles of optimal planning for the
distribution network considering the influence of DG.
In the context of smart grid, the incorporation of DG into
the distribution network can bring two benefits. First, it can
improve the reliability at each load point near the DG, which
mainly benefit the users at these load points; secondly, DG
which located at the appropriate place can defer the investment
in expansion of the distribution network, which will benefit
distribution companies. This paper firstly proposes a
quantitative method to calculate the two benefits mentioned
above, then on the principle of who benefits, who pays,
designs a capacity compensation mechanism, in order to
incentive independent DG investments under the overall
planning of distribution network.
 II. INCREMENTAL RELIABILITY VALUE OF LOAD POINTS
Through the island running [1, 5], DG can guarantee the
power supply of each load point and thus improve the
reliability.
In this paper, the power supply reliability at different load
points is evaluated by using Expected Energy Not Serve
(EENS). Therefore, the incremental reliability value IRVi of
load LPi at load point i can be calculated as follows:
IRVi = ( EENS Bi EENS Ai ) li (1)
Where, EENSAi is the EENS index at load point LPi after the
access of DG, EENSBi is the EENS index at load point LPi
before the access of DG, li is the average power cut loss at load
point LPi (the loss differs as the users demand for reliability
varies).
Since the EENS at different load point equal to the average
load demand multiplied by expectations of the average
blackout time in a year at this load point, EENSAi and EENSBi
can be calculated as follows:
EENS Bi = Lav,iU C,i (2)
EENS Ai = Lav,iU L,i (3)
Where Lav,i is the average load demand at load point i,
which is equivalent to the annual peak load of LPi multiplied by
load factor, UC,i and UL,i are expectations of the average
blackout time before and after the access of distributed
generation respectively.
According to the equation UC,i=C,irC,i and UL,i=L,irL,i ,we
have:
EENS Bi = Lav ,i C ,i rC ,i (4)
EENS Ai = Lav ,i L ,i rL ,i (5)
Where C,i and rC,i is the failure rate and the average fault
repair time for load point LPi before the access of distributed
generation, respectively, L,i and rL,i is the failure rate and the
average fault repair time for load point LPi after the access of
distributed generation, respectively.
Note that the failure rate and the average repair time r are
the typical indices of the reliability assessment on distribution
network. Therefore, the value of C,i and rC,i in (4) can be got
through minimal cut sets method. In addition, the value of L,i
and rL,i in (5) can be got according to the method mentioned in
[1]. In summary, substituting (4) and (5) into (1), we have
IRVi = Lav ,i ( C ,i rC ,i L ,i rL ,i ) li (6)
III. VALUE SAVED FROM DISTRIBUTION NETWORK
EXPANSION INVESTMENT
Access of a distributed generation with appropriate volume
at the right place in distribution network can postpone the
expansion investment in distribution network caused by the
increasing load, which will bring economic benefit to its
owners. In the distribution network, the distribution lines
capacity limit is Clim and the peak load is Cpeak, transmission
capacity margin is obtained by Cstan=Clim-Cpeak. As the load
increasing, the peak load in distribution lines arrives at
C peak
( C peak < Clim ). Then the distribution companies access the
DG to the network at an appropriate location. Set some or all of
its capacity CDG (where CDG = C peak
C peak ) as reserve capacity
for load shaving during peak load periods. This part of capacity
can offset the negative impact caused by the load growth on
distribution network reliability and maintain the existing
transmission capacity margin Cstan, and then avoid the
expansion investment in distribution network in a certain
period.
From the perspective of the entire system, as the load is
growing, it is necessary to increase system capacity
simultaneously to maintain the same level of reliability. Thats
to say, for each additional 1MW load, the distribution system
need to increase 1MW transmission capacity. According to the
concept of long-term incremental cost, the average annual
amount of investment for each additional 1MW transmission
capacity in distribution system can be measured using unit
investment cost (UIC). With the expansion of distribution
system, the operation and maintenance cost for distribution
network will increase accordingly. In the long run, the average
annual operation cost for each additional 1MW transmission
capacity in a distribution system can be measured using unit
operation cost (UOC).
Assume that the peak load in distribution lines increase
from Cpeak to C peak
( C peak < Clim ) as the users load grows.
Then, in order to maintain the original transmission capacity
margin to keep the reliability of distribution system,
distribution network need to expand the capacity by
Cexp ( Cexp = C peak C peak ). Thus, if there is no DG in
distribution system, the annual system expansion cost for
distribution companies is as follows:
COSTexp = (UIC + UOC ) Cexp
(7)
= (UIC + UOC ) ( C peak
C peak )
After the access of independent distributed generation, the
value (Investment Saving Value, ISV) saving from annual
expansion investment in distribution network can be obtained
as follows:
ISV = COSTexp = (UIC +UOC ) ( Cpeak
Cpeak ) (8)
IV. DESIGN OF THE CAPACITY COMPENSATION MECHANISM
FOR INDEPENDENT DG IN THE DISTRIBUTION NETWORK
A. Compensation for independent distributed generation
investor
In line with the overall planning of distribution network,
two kinds of benefit can be obtained from the access of
distributed generation. On one hand, improve the load point
and system reliability indices; on the other hand, put off the
expansion investment in distribution network and save money
for distribution companies. Therefore, the users at different
load points and distribution companies are the direct
beneficiaries of the introduction of independent distributed
generation. Thus, we can compensate the independent
distributed generation investors with the benefit obtained by
users and distribution companies so as to inspire independent
investors to invest in the construction of DG.
Taking the two cases, with and without the access of
distributed generation, into account, we can get that, on a single
feeder, the credit for reliability improvement (CRI) which is
paid to investors of new DG, equals to the sum of reliability
incremental value at different load points, that is
N Charge paid by distribution companies to the investors of
CRI = IRVi (9)
i =1
Where N is the total number of load points on a single feeder
which are affected by the new distributed generation. In
combination of (6), the following equation can be obtained:
N DCC) should be:
CRI = Lav ,i (C ,i rC ,i L ,i rL,i )li (10)
i =1
Study the impact of the access of independent DG on
distributed network expansion investment. Over a period of
time (in this period, there is no expansion in the distribution
independent DG solely; if there is no interruptible load
contract between distribution companies and users, then SFi=1,
and the users should bear all the compensations for investors.
It should be noted that the above compensation is paid on an
annual basis, so we do not have to calculate the compensation
per MW.
C. Charge paid by distribution companies
independent DG can be divided into two parts: value saving
from expansion investment in distribution network ISV ,
load charge shared by distribution company (LCDC).
Therefore, the charge paid by distribution companies to the
investors of independent DG (Distribution Company Charge,
DCC = ISV + i =1 LCDCi
N
N (15)
= (UIC + UOC ) CDG + (1 SFi ) Lav ,i ( C ,i rC ,i L ,i rL ,i ) li
i =1

network), the average capacity of DG that the distribution Noting that the above compensation is paid on annual basis,
companies can reserve for peak shaving is CDG. Derived from there is no need to calculate the compensation per MW.
what is said above, we can get the equation
V. ANALYSIS OF EXAMPLE

as CDG = C peak C peak . Substituting this into (8), we can see as
Based on the distribution network test system given in
follows:
literature [1], we can verify the method of compensation
ISV = (UIC + UOC ) CDG (11) charge calculation proposed in this article. As is shown in
figure 1, the test system consists of a seven-section feeder,
Therefore, the credit for expansion postponement (CEP) of seven load points and a distributed generation. The distributed
distribution network which is paid to investors of the new generation is incorporated in the SE4 of the feeder with a total
distributed generation should be equal to investment saving capacity of 2MW and it is consist of two independent
value (ISV) in expansion of distribution network, seeing as generating units, so that it has a lower output state.
follows:
CEP = ISV (12)
Thus, in combination with (11), we can obtain that: CEP=
(UIC+UOC) CDG.
To sum up, the total credit (TC) for investors of the new
distributed generation should be:
TC = CRI + CEP
N
(13)
= Lav,i ( C,i rC,i L,i rL,i ) li + (UIC + UOC ) CDG
i =1 Figure 1. Examples of the power distribution system containing distributed
generation
B. Load charge for reliability improvement at different load
points
According to the different data of the feeder and the
Since the incorporation of a new DG could improve the reliability parameters of the DG given in literature [1], we can
reliability at each load point, the failure loss of users at get reliability indicators of each load point before and after the
different load points falls off. So for the users at load point LPi, access of DG, as is shown in TABLE.
the load charge (LC) they need to pay to independent DG
investors is as follows:
TABLE I. RELIABILITY INDICATORS OF EACH LOAD POINT BEFORE AND
AFTER THE ACCESS OF DISTRIBUTED GENERATION
LCi = SFi IRVi
(14)
= SFi Lav ,i ( C ,i rC ,i L ,i rL ,i ) li LPi C,i rC,i L,i rL,i
1 0.065000 5.0 0.065000 5.0
Where SFi is sharing coefficient between distribution 2 0.195000 10.0 0.194089 9.93
companies and users at load point LPi. SFi can be defined with 3 0.390000 15.0 0.358395 13.38
a interruptible load contract signed by load users and 4 0.455000 20.0 0.126424 7.36
5 0.487500 25.0 0.158924 12.36
distribution companies and it can be any value between 0 and 6 0.552500 30.0 0.196555 13.15
1.If the contract is a full interruptible load contract, then SFi=0, 7 0.585000 35.0 0.174317 13.94
and the distribution company have to compensate investors of
 In addition, the compensation sharing coefficient at each additional compensation. This is equivalent to sending an
load point SFi, the average power cut loss li and the average economic signal to guide the rational DG volume.
load level at each load point Lav,i are shown in TABLE.
Based on the simple distribution network shown in Figure
1 (where DG is accessed in SE4 of feeder), we change the
TABLE II. OTHER INDICATORS AT EACH LOAD POINT location and volume of the DG to verify the economic signals
of the capacity compensation method.
LPi SFi li (ten thousand dollars/MW) Lav,i(MW)
1 1 0.155 0.310 First of all, we verify the economic signal effect of the
2 0.3 0.610 0.620 compensation method on the location of the distributed
3 0.9 0.263 0.930
4 0.5 0.461 0.310
generation. On the base of Figure 1, we assume that the
5 0 0.721 0.155 location of DG change (as shown in Figure 2, the real line
6 0.5 0.479 0.310 represents the original location, the dashed line represents the
7 0.5 0.380 0.155 changed location), while the access volume is still the same.
Using equations derived in this article, we can calculate Due to the changed location, the impact of the DG on load
the load charge of the users at each load point LCi and the load point reliability will change, which results in the change of the
charge shared by distribution company at each load point financial compensation. According to the quantitative method
LCDCi, the results shown in TABLE. of reliability value in this article, we can calculate the credit
for reliability improvement (CRI) when DG is at different
location, as well as the financial compensation (Total Credit,
TABLE III. THE LOAD CHARGE AND THE LOAD CHARGE SHARED BY
DISTRIBUTION COMPANY AT EACH LOAD POINT
TC), as shown in TABLE.
LPi LCi (ten thousand dollars) LCDCi (ten thousand dollars)
1 0 0
2 0.002575 0.006009
3 0.232167 0.025796
4 0.583753 0.583753
5 0 1.142494
6 1.03871 1.03871
7 0.531426 0.531426
We can learn from TABLE that, due to the reliability
improvement in distribution network, the compensation paid
to investors of independent DG is 57,000 dollars. Suppose that, Fig. 2 the simple distribution system example of DG at the different location
for distribution companies, the unit investment cost (UIC) is on Feeder
27,300 dollars per year per MW, the unit operating cost (UOC)
is 1,600 dollars per year per MW, and the average capacity
reserved for peak shaving which is designed by distribution TABLE IV. CRI AND TC WHEN DG IS ACCESSED IN DIFFERENT SECTIONS
OF THE FEEDER
company (CDG) is 2MW. Then we can obtain the
compensation paid by distribution company, due to the CRIten thousand TCten thousand
Location of DG
deference of expansion investment in distribution network, is dollars dollars
57,800 dollars. Thus, the total compensation (TC) paid to SE1 1.863 7.643
investors of independent DG equals to 114,970. SE2 2.019 7.799
SE3 4.582 10.362
If the investors change the location of DG on the feeder, SE4 5.717 11.497
the impact of DG on the reliability of each load point will SE5 5.813 11.593
change and thus the reliability value for distribution system SE6 5.960 11.740
SE7 5.801 11.581
differs. Therefore, we can see from the method of capacity
compensation in this article that, with the location change of We can see from the table above that, when the DG
DG on the feeder, the annual compensation for the DG volume remain unchanged, the access of DG in feeder SE6
investors will change correspondingly, which is equivalent to brings the maximum reliability value CRI for the entire
sending an economic signal to stimulate the correct location of distribution system. Therefore, from the perspective of the
DG. entire distribution system planning, SE6 is the best location for
independent DG. On the other hand, according to the capacity
In addition, the reserve capacity for peak shaving of DG is compensation method, we can see from TABLE that
designated by distribution companies, which is equivalent to investors can get the most economic subsidies (TC) when the
giving a standard volume for the planned DG. We can distributed generation is accessed at feeder SE6. Therefore,
conclude from the method of capacity compensation proposed from the perspective of independent investors, SE6 is the best
in this article that, on one hand, capacity investment is not place for the access of independent DG. This is equivalent to
economic for investors, if the capacity can not reach the providing an economic signal to guide the correct location of
standard, for it fails to maximize the compensation obtained independent DG, which will maximize the reliability value for
by investors; on the other hand, it is nonsense to invest beyond power distribution system and the economic compensation for
the capacity standard, for it can not provide the investors with investors.
 Then, we verify the economic signal effect of the
compensation method on the distributed generation volume.
Assume that the distributed generation is still in SE4 but the
accessed capacity reduced to 1MW (CDG=1MW), while the
reserve capacity for peak shaving designated by distribution
company is still 2MW. When the other conditions remain
unchanged, the total compensation (TC) for the distributed
generation investors is 86,070 U.S. dollars. As can be seen, the
compensation for the DG investors decreases due to the
reduction of the access capacity of DG. On the other hand,
assume that the location of distributed generation remains
unchanged, the access capacity increases to 3MW. As the
reserve capacity for peak shaving designated by distribution
companies is still 2MW, CDG still equals to 2MW. Thus, the
total compensation (TC) for the distributed generation
investors is still 114,970 U.S. dollars. As for the investors, the
economic subsidy is not increased, while the more capacity
investment means the more investment and operation&
maintenance costs need to pay, this will reduce the amount of
revenue. Therefore, to determine the distributed generation
capacity in accordance with the standards specified in
distribution company (from the perspective of entire system,
the capacity designated by distribution company is the optimal
capacity to maintain the reliability of the distribution system)
could enable investors to maximize their profit. This is
equivalent to sending an economic signal to guide the rational
building of independent DG volume.
VI. CONCLUSIONS
In this paper, we propose a capacity compensation method
for independent DG in power distribution network within the
context of smart grid. There are several advantages of this
method as follows:
(1) Quantify the reliability value brought by independent
DG to the users at different load points and the value saved
from expansion investment for power distribution company.
(2) Provide the economic compensation for independent
DG investors to inspire them to invest in accordance with the
unified planning of distribution network.
(3) Send an economic signal to guide the right location and
volume of the independent DG.
It is necessary to point out that this paper focuses on the
proposal of financial compensation ideas and algorithms for
the investors of independent DG, in the practical
implementation process, this method requires further
refinement based on the actual situation, or even to make the
necessary changes.
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