Financial Bilateral Contract Negotiation in Wholesale Electric Power Markets Using Nash Bargaining Theory
AbstractBilateral contracts are important risk-hedging instruments constituting a major component in the portfolios held by many electric power market participants. However, bilateral contract negotiation is a complicated process because it involves risk management, strategic bargaining, and multi-market participation. This study analyzes a financial bilateral contract negotiation process between a generating company and a load-serving entity in a wholesale electric power market with congestion managed by locational marginal pricing. Nash bargaining theory is used to model a Pareto-efficient settlement point. The model predicts negotiation results under varied conditions and identifies circumstances in which the two parties might fail to reach an agreement. Both analysis and simulation are used to gain insight regarding how relative risk aversion and biased price estimates influence negotiated outcomes. These results should provide useful guidance to market participants in their bilateral contract negotiation processes.
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Bibliographic InfoPaper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 32005.
Date of creation: 27 Sep 2010
Date of revision:
Publication status: Published in IEEE Transactions on Power Systems, February 2012, vol. 27 no. 1, pp. 251-267
Contact details of provider:
Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
Phone: +1 515.294.6741
Fax: +1 515.294.0221
Web page: http://www.econ.iastate.edu
More information through EDIRC
Wholesale electric power markets; locational marginal price; financial bilateral contract; negotiation; Nash bargaining theory; risk aversion; conditional-value-at-risk;
Find related papers by JEL classification:
- C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
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- D6 - Microeconomics - - Welfare Economics
- L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
- L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
- L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
- Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy
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