A Forward Electricity Contract Price Projection: A Market Equilibrium Approach

Abstract: This work presents a methodology for forward electricity contract price projection based on market equilibrium and social welfare optimization. In the methodology supply and demand for forward contracts are produced in such a way that each agent (generator/load/trader) optimizes a risk adjusted expected value of its revenue/cost. When uncertainties are represented by a discrete number of scenarios, a key result in the paper is that contract price corresponds to the dual variable of the equilibrium constraints in the linear programming problem associated to the optimization of total agents' welfare. Besides computing an equilibrium contract price for a given year, the methodology can also be used to compute the evolution of the probability distribution associated to a contract price with a future delivery period; this an import issue in quantifying forward contract risks. Examples of the methodology application are presented and discussed