Pricing flexible electricity contracts

Abstract

This paper is concerned with pricing of electricity contracts that allow flexible scheduling of the supply or demand of electric energy. The contracts are priced based on the principle of no-arbitrage. Variables of the contracts are used to determine arbitrage opportunities and the price of contracts. Pricing of flexible contracts involves a scheduling policy. By representing the spot price with an appropriate stochastic process, the scheduling policy can be found using stochastic dynamic programming. Simulation examples illustrate the tradeoffs between prices and scheduling flexibility.