Financial Bilateral Contract Negotiation in Wholesale Electric Power Markets Using Nash Bargaining Theory

Nanpeng Yu, Leigh Tesfatsion () and Chen-Ching Liu

Staff General Research Papers Archive from Iowa State University, Department of Economics

Abstract: Bilateral 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.

Keywords: Wholesale electric power markets; locational marginal price; financial bilateral contract; negotiation; Nash bargaining theory; risk aversion; conditional-value-at-risk (search for similar items in EconPapers)
JEL-codes: C6 C63 D4 D6 L1 L2 L94 Q4 (search for similar items in EconPapers)
Date: 2010-09-27
New Economics Papers: this item is included in nep-ene
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Published in IEEE Transactions on Power Systems, February 2012, vol. 27 no. 1, pp. 251-267

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Persistent link: https://EconPapers.repec.org/RePEc:isu:genres:32005

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