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

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 decentralisation of the energy supply. We do this by comparing the social benefits of decentralised and centralised models, 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 simulating the optimal prices of the electricity and gas inputs. The external benefits are estimated by applying the “ExternE” methodology, one of the most recent and accurate approaches in this field. The paper rejects 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 of the environmental policies focusing on the reduction of green-house gas emissions.