Electric Power Systems Research 77 (2007) 1627–1636 Optimal DG placement in deregulated electricity market Durga Gautam, Nadarajah Mithulananthan ∗ Electric Power System Management, Energy Field of Study, Asian Institute of Technology, P.O. Box 4, Klong Luang, Pathumthani 12120, Thailand Received 19 August 2006; received in revised form 14 November 2006; accepted 16 November 2006 Available online 29 December 2006 Abstract This paper presents two new methodologies for optimal placement of distributed generation (DG) in an optimal power flow (OPF) based wholesale electricity market. DG is assumed to participate in real time wholesale electricity market. The problem of optimal placement, including size, is formulated for two different objectives, namely, social welfare maximization and profit maximization. The candidate locations for DG placement are identified on the basis of locational marginal price (LMP). Obtained as lagrangian multiplier associated with active power flow equation for each node, LMP gives the short run marginal cost (SRMC) of electricity. Consumer payment, evaluated as a product of LMP and load at each load bus, is proposed as another ranking to identify candidate nodes for DG placement. The proposed rankings bridges engineering aspects of system operation and economic aspects of market operation and act as good indicators for the placement of DG, especially in a market environment. In order to provide a scenario of variety of DGs available in the market, several cost characteristics are assumed. For each DG cost characteristic, an optimal placement and size is identified for each of the objectives. The proposed methodology is tested in a modified IEEE 14 bus test system. © 2006 Elsevier B.V. All rights reserved. Keywords: Distributed generation; Locational marginal price; Optimal power flow; Electricity market; Social welfare 1. Introduction DGs are considered as small power generators that comple- ment central power stations by providing incremental capacity to power system. Although DGs may never replace the central power stations, these can be an attractive option when constraints in transmission network prevent economic, or least expensive, supply of energy reaching demand. However, penetration and viability of DG at a particular location is influenced by tech- nical as well as economic factors. The technical merits of DG implementation include voltage support, energy-loss reduction, release of system capacity, and improve utility system reliability [1]. Economical merit, on the other hand, encompasses hedge against high electricity price. This incentive is enhanced with vertical unbundling of utilities and market mechanisms such as real time pricing. By supplying loads during peak load periods, where the cost of electricity is high, DG can best serve as a price hedging mechanism. DG can have a great value in a highly congested area where LMPs are higher than elsewhere. In such situation, it can serve ∗ Corresponding author. Tel.: +66 2 524 5405; fax: +66 2 524 5439. E-mail address: mithulan@ait.ac.th (N. Mithulananthan). the local load and effectively reduce the load. The placement of DG, however, should be carried out with due consideration to its size and location. The placement should be optimal in order for the maximum benefit of DG implemented in the network. Improper placement in some situations can reduce benefits and even jeopardize the system operation. Numerous techniques are proposed so far to address the via- bility of DGs in power system. Capacity investment planning of distributed generation under competitive electricity market from the perspective of a distribution company is proposed in Ref. [2]. An approach for optimal design of grid connected DG systems in relation to its size and type to satisfy on-site reliability and environmental requirements is presented in Ref. [3]. Besides, several optimization tools, including artificial intelligence tech- niques, such as genetic algorithm (GA), tabu search, etc., are also proposed for achieving the optimal placement of DG. An optimization approach using GA for minimizing the cost of net- work investment and losses for a defined planning horizon is presented in Ref. [4]. GA has been used to obtain penetration level of DG for minimizing the total cost of operation includ- ing fixed and variable cost in Ref. [5]. The method for optimal placement of DG for minimizing real power losses in power dis- tribution system using GA is proposed in Ref. [6]. The gradient and second order methods to determine the optimal location for 0378-7796/$ – see front matter © 2006 Elsevier B.V. All rights reserved. doi:10.1016/j.epsr.2006.11.014