Hedge Contract Characterization and Risk-Constrained Electricity Procurement

Effective risk management fosters active demand response (DR) and well-functioning electricity markets. Real-time pricing (RTP), as the most economically efficient retail tariff scheme, is a critical means of DR programs in electricity markets. RTP price risk can be shared among market participants rationally by integrating various RTP hedge contracts. The principle of no-arbitrage pricing is incorporated to formulate the pricing model of RTP hedge contracts. Subsequently based on stochastic electricity price model, RTP hedge contract prices are assessed with Monte Carlo simulation method. Furthermore, a risk-constrained electricity procurement model, in which risk is expressed using conditional value-at-risk (CVaR) methodology, is introduced. The model explicitly materializes the tradeoff between the expected cost and risk of the electricity procurement for customers. Optimal hedging strategies, including hedge contract choices and hedged load percentages, for different risk preference customers can be obtained by solving the model. Relevant results from a realistic case study are finally presented to illustrate the validity of the proposed model. The insights accrued from these results will be beneficial to LSE in pricing RTP hedge contracts reasonably and to customers in hedging against RTP price risk effectively.