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Interruptible Electricity Contracts from an Electricity Retailer's Point of View: Valuation and Optimal Interruption

Ross Baldick¹; Sergey Kolos²; Stathis Tompaidis³

¹ Department of Electrical and Computer Engineering, University of Texas at Austin, Austin, Texas 78712 · ² Institute for Computational Engineering and Sciences, University of Texas at Austin, Austin, Texas 78712 · ³ Department of Information, Risk and Operations Management, McCombs School of Business, University of Texas at Austin, Austin, Texas 78712

We consider interruptible electricity contracts issued by an electricity retailer that allow for interruptions to electric service in exchange for either an overall reduction in the price of electricity delivered or for financial compensation at the time of interruption. We provide a structural model to determine electricity prices based on stochastic models of supply and demand. We use stochastic dynamic programming to value interruptible contracts from the point of view of an electricity retailer, and describe the optimal interruption strategy. We also demonstrate that structural models can be used to value contracts in competitive markets. Our numerical results indicate that, in a deregulated market, interruptible contracts can help alleviate supply problems associated with spikes of price and demand and that competition between retailers results in lower value and less frequent interruption.

DOI

10.1287/opre.1060.0303

Volume

54 (4)

Pages

627-642

Language

en

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