A prospect-theory evolutionary game model to analyse cooperation of long-term energy contracts

Long-term Energy Contracts (LECs) are formal agreements signed for several years by energy sellers and buyers at a guaranteed purchase price. However, unexpected events (e.g., pandemics, trade disputes and regional wars) are exacerbating Energy Market Price (EMP) volatility, resulting in psychological biases in gains and losses between energy sellers and buyers and disruptions to the execution of LECs. To ensure the effective execution of LECs, we propose a Prospect-Theory Evolutionary Game Model (PTEGM), which characterizes different risk preferences and loss aversions of energy sellers and buyers under EMP volatility through the prospect theory. After deriving EMP ranges of cooperation and non-cooperation (i.e., significant reference values for energy price terms in LECs) by replicator dynamic equations, the cooperation evolution of LECs can be investigated. Extensive numerical experiments are conducted to simulate the cooperation evolution of LECs under EMP volatility. Research results reveal nonlinear relationships between EMP volatility and cooperation and highlight that EMP volatility does not necessarily cause non-cooperation of LECs. EMP ranges of cooperation and non-cooperation can be measured as energy price terms in LECs to improve energy sustainability, because the enactment of energy price terms considering psychological factors can mitigate energy supply disruptions caused by EMP volatility.