Equilibrium wind hedge contract structure through Nash bargaining and stochastic programming

Harikrishnan Sreekumaran, Purdue University

Abstract

With the continued maturing of electricity markets, merchant wind project developers are increasingly looking to long-term hedge contracts to control their exposure to market risks as well as to secure project financing. Such contracts are usually negotiated with load serving entities looking to hedge against spot price volatility or financial firms who repackage the electricity through structured deals that create value. We model the negotiation process using the Nash bargaining framework. The equilibrium price and quantity come out as the optimal solutions of a stochastic program wherein the objective is to maximize the product of the utility differentials for the two parties, with and without the contract. We use conditional cash flow at risk, a coherent risk measure, to capture the risk attitudes of the two parties. After incorporating the risk measure into the utility functions, we solve the resulting stochastic program using sample average scheme in combination with a global optimization algorithm. We present numerical results as well as sensitivity analysis for the equilibrium contract structure with respect to volatility and correlation between a wind plant's outputs and spot electricity prices. We also study how the risk attitudes of the two parties affect the equilibrium structure.

Degree

M.S.I.E.

Advisors

Liu, Purdue University.

Subject Area

Alternative Energy|Industrial engineering|Energy|Operations research

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