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Efficient frontiers for electricity procurement by an LDC with multiple purchase options

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  • Woo, Chi-Keung
  • Horowitz, Ira
  • Olson, Arne
  • Horii, Brian
  • Baskette, Carmen

Abstract

In meeting its retail sales obligations, management of a local distribution company (LDC) must determine the extent to which it should rely on spot markets, forward contracts, and the increasingly popular long-term tolling agreements under which it pays a fee to reserve generator capacity. We address these issues by solving a mathematical programming model to derive the efficient frontier that summarizes the optimal tradeoffs available to the LDC between procurement risk and expected cost. To illustrate the approach, we estimate the expected procurement costs and associated variances that proxy for risk through a spot-price regression for the spot-purchase alternative and a variable-cost regression for the tolling-agreement alternative. The estimated regressions yield the estimates required to determine the efficient frontier. We develop several such frontiers under alternative assumptions as to the forward-contract price and the tolling agreement's capacity payment, and discuss the implications of our results for LDC management.

Suggested Citation

  • Woo, Chi-Keung & Horowitz, Ira & Olson, Arne & Horii, Brian & Baskette, Carmen, 2006. "Efficient frontiers for electricity procurement by an LDC with multiple purchase options," Omega, Elsevier, vol. 34(1), pages 70-80, January.
  • Handle: RePEc:eee:jomega:v:34:y:2006:i:1:p:70-80
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    References listed on IDEAS

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    Cited by:

    1. Zare, Kazem & Moghaddam, Mohsen Parsa & Sheikh El Eslami, Mohammad Kazem, 2010. "Electricity procurement for large consumers based on Information Gap Decision Theory," Energy Policy, Elsevier, vol. 38(1), pages 234-242, January.
    2. Woo, C.K. & Sreedharan, P. & Hargreaves, J. & Kahrl, F. & Wang, J. & Horowitz, I., 2014. "A review of electricity product differentiation," Applied Energy, Elsevier, vol. 114(C), pages 262-272.
    3. Taylor, James W. & Snyder, Ralph D., 2012. "Forecasting intraday time series with multiple seasonal cycles using parsimonious seasonal exponential smoothing," Omega, Elsevier, vol. 40(6), pages 748-757.
    4. Inderfurth, Karl & Kelle, Peter & Kleber, Rainer, 2013. "Dual sourcing using capacity reservation and spot market: Optimal procurement policy and heuristic parameter determination," European Journal of Operational Research, Elsevier, vol. 225(2), pages 298-309.
    5. Woo, C.K. & Zarnikau, J. & Moore, J. & Horowitz, I., 2011. "Wind generation and zonal-market price divergence: Evidence from Texas," Energy Policy, Elsevier, vol. 39(7), pages 3928-3938, July.
    6. Woo, Chi-Keung & Horowitz, Ira & Tishler, Asher, 2006. "A critical assessment of the Hong Kong Government's proposed post-2008 regulatory regime for local electricity utilities," Energy Policy, Elsevier, vol. 34(13), pages 1451-1456, September.
    7. repec:eee:energy:v:144:y:2018:i:c:p:887-902 is not listed on IDEAS
    8. Woo, C.K. & Horowitz, I. & Moore, J. & Pacheco, A., 2011. "The impact of wind generation on the electricity spot-market price level and variance: The Texas experience," Energy Policy, Elsevier, vol. 39(7), pages 3939-3944, July.
    9. Pousinho, H.M.I. & Mendes, V.M.F. & Catalão, J.P.S., 2011. "A risk-averse optimization model for trading wind energy in a market environment under uncertainty," Energy, Elsevier, vol. 36(8), pages 4935-4942.
    10. DeBenedictis, A. & Hoff, T.E. & Price, S. & Woo, C.K., 2010. "Statistically adjusted engineering (SAE) modeling of metered roof-top photovoltaic (PV) output: California evidence," Energy, Elsevier, vol. 35(10), pages 4178-4183.
    11. Arora, Siddharth & Taylor, James W., 2016. "Forecasting electricity smart meter data using conditional kernel density estimation," Omega, Elsevier, vol. 59(PA), pages 47-59.
    12. repec:eee:appene:v:204:y:2017:i:c:p:531-543 is not listed on IDEAS
    13. Ghadikolaei, Hadi Moghimi & Tajik, Elham & Aghaei, Jamshid & Charwand, Mansour, 2012. "Integrated day-ahead and hour-ahead operation model of discos in retail electricity markets considering DGs and CO2 emission penalty cost," Applied Energy, Elsevier, vol. 95(C), pages 174-185.
    14. Woo, C.K. & Moore, J. & Schneiderman, B. & Ho, T. & Olson, A. & Alagappan, L. & Chawla, K. & Toyama, N. & Zarnikau, J., 2016. "Merit-order effects of renewable energy and price divergence in California’s day-ahead and real-time electricity markets," Energy Policy, Elsevier, vol. 92(C), pages 299-312.
    15. Xu, Jinpeng & Feng, Gengzhong & Jiang, Wei & Wang, Shouyang, 2015. "Optimal procurement of long-term contracts in the presence of imperfect spot market," Omega, Elsevier, vol. 52(C), pages 42-52.
    16. Karl Inderfurth & Peter Kelle & Rainer Kleber, 2011. "Dual Sourcing Using Capacity Reservation and Spot Market: Optimal Procurement Policy and Heuristic Parameter Determination," FEMM Working Papers 110014, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
    17. Deng, Shi-Jie & Xu, Li, 2009. "Mean-risk efficient portfolio analysis of demand response and supply resources," Energy, Elsevier, vol. 34(10), pages 1523-1529.
    18. Tishler, Asher & Milstein, Irena & Woo, Chi-Keung, 2008. "Capacity commitment and price volatility in a competitive electricity market," Energy Economics, Elsevier, vol. 30(4), pages 1625-1647, July.
    19. Inderfurth, Karl & Kelle, Peter, 2011. "Capacity reservation under spot market price uncertainty," International Journal of Production Economics, Elsevier, vol. 133(1), pages 272-279, September.

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