Installing a microgrid, such as a cooperative of power generators and power consumers operating in a coordinated system, within a regulated electricity market, will not work any better than the type of regulated de-regulation that led to California having utility rates 50 percent higher than other states.

It can work, it just depends on how heavily things are regulated. Microgrids are touted as hybrid alternatives to smooth out kinks in existing electricity networks. Wealthy elites with electric cars, for example, believe they are using no fossil fuels, without factoring in that each charger is equivalent in load to a whole new house on the grid, with power draws from nuclear or coal or natural gas just the same.

"Two major challenges facing electricity systems today are the need to provide enhanced reliability and the difficulty of building new generation and distribution capacity to serve load centers," said Chiara Lo Prete, assistant professor of energy economics, Penn State. "Part of the energy community has argued that microgrids could address these issues. Microgrids are able to operate in island mode and may allow faster power restoration after a blackout. There are also fewer site limitations for microgrids, which may reduce the need for grid expansion."

The scholars examined several scenarios for adding a microgrid to a regulated network served by a vertically integrated utility. In this type of network, the utility company generates, transmits and distributes electricity. This differs from other networks in which these responsibilities are split among different parties. Roughly half of U.S. states today operate in networks served by vertically integrated utilities.

Because this market is regulated, the researchers analyzed the effect of adding a microgrid from the point of view of the energy regulator. The regulator acts to enhance the sum of payoffs, known as economic efficiency, for all market participants -- private investors, microgrid customers, utility companies and utility customers. Based on a snapshot of energy and capital costs today, the researchers modeled a variety of scenarios to investigate different contexts for installing a microgrid. They report in a recent issue of Applied Energy that microgrids may increase or decrease a network's economic efficiency depending upon cost assumptions.

For example, when microgrid capital costs were three times today's costs, adding a microgrid to a network reduced regulated electricity rates for both utility and microgrid customers. The economic efficiency would increase, but the private investor is less likely to invest due to the increased startup costs. If this were the case, an energy regulator would need to provide an incentive to the investor to build the microgrid, as that would enhance the network's economic efficiency.

Another scenario examined the effect of increased utility fixed costs -- for example due to higher transmission or distribution costs. Here, installing a microgrid increased utility customers' electricity payments. The private investor would make more money and microgrid customers would have a reduced total energy bill. The researchers calculated that, overall, the microgrid would decrease the economic efficiency of the network when utility fixed costs were higher.

Sorry, California, you don't have a utility problem, you have a political one.