Market Power and Distributed Solar Integration in Microgrids under Limited Regulation

TL;DR

This paper models how market power in decentralized microgrids affects household solar integration and finds that strategic regulation can significantly increase household benefits and renewable energy share.

Contribution

It introduces a bi-level game-theoretic model explicitly accounting for market power of private generators in microgrids, addressing a gap in prior techno-economic studies.

Findings

Price and feed-in-tariff caps boost household PV feed-in and economic surplus.

Higher generator budgets or PV penetration increase household benefits.

Renewable share can reach 100% with sufficient regulation and PV adoption.

Abstract

Decentralized electricity systems increasingly emerge where centralized grids fail to provide reliable supply. In such settings, privately operated neighborhood microgrids, often based on diesel generators, exhibit significant market power, limited regulatory oversight, and high environmental externalities. In parallel, households increasingly deploy off-grid solar photovoltaic (PV) systems to gain control over electricity supply. However, these systems suffer from curtailed excess generation during peak solar hours and unreliable access at other times. While prior studies have optimized microgrids in low-reliability grid contexts from a techno-economic perspective, they largely neglect the market power exerted by monopolistic private generators. This paper addresses this gap by developing a bi-level game-theoretic model that enables household-generated electricity to be fed into the microgrid while explicitly accounting for the market power of a neighborhood diesel generator company (DGC). The regulator sets price and feed-in-tariff caps to maximize household economic surplus (HES), while the DGC acts as a profit-maximizing agent controlling access and supply. The model is illustrated using high-resolution empirical data from Lebanon. Results show that: (i) price and feed-in-tariff caps substantially increase HES and consistently induce significant household PV feed-in to the microgrid; (ii) higher DGC budgets or greater PV-owner penetration lead to pronounced gains in HES; and (iii) the renewable energy share reaches 60% under base conditions and approaches 100% at sufficiently high budgets or PV-owner penetration levels, compared to 0% under the status quo.