Distributed Generation versus Centralised Supply: a Social Cost-Benefit Analysis

Abstract

This paper attempts to verify whether we are moving towards a new paradigm of the network energy industry (electricity and natural gas), based on a wide decentralis ation of the energy supply. We do this by comparing the social benefits of decentralised and centralised mod els, simulating ideal situations in which any source of allocative inefficiencies is eliminated. This comparison focuses on assessing internal and external benefits. The internal benefits are calculated by simu lating the optimal prices of the electricity and gas inputs. The external benefits are estimated by applying the Extern methodology, one of the most recent and accurate approaches in this field. The paper reje cts the hypothesis that we are moving towards a new paradigm and points out how the considerable interest in the deployment of distributed generation (DG) is probably due to market distortions, in some cases, enforced by market reforms. In this respect, the paper reflects upon the real effectiveness of such reforms as well as the overall efficiency.