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

Author

Listed:
  • Yu, Nanpeng
  • Tesfatsion, Leigh
  • Liu, Chen-Ching

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.

Suggested Citation

  • Yu, Nanpeng & Tesfatsion, Leigh & Liu, Chen-Ching, 2010. "Financial Bilateral Contract Negotiation in Wholesale Electric Power Markets Using Nash Bargaining Theory," Staff General Research Papers Archive 32005, Iowa State University, Department of Economics.
    • Handle: RePEc:isu:genres:32005
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    More about this item

    Keywords

    Wholesale electric power markets; locational marginal price; financial bilateral contract; negotiation; Nash bargaining theory; risk aversion; conditional-value-at-risk;
    All these keywords.

    JEL classification:

    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • D6 - Microeconomics - - Welfare Economics
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy

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