A local electricity distribution company (LDC) can satisfy some of its future electricity requirements through self-generation and volatile spot markets, and the remainder through fixed-price forward contracts that will reduce its exposure to the inherent risk of spot-price volatility. A theoretical framework is developed for determining the forward-contract purchase that minimizes the LDCs expected procurement cost, subject to a cost-exposure constraint. The answers to the questions of "What to buy?" and "How to buy?" are illustrated using an example of a hypothetical LDC that is based on a municipal utility in Florida. It is shown that the LDCs procurement decision is consistent with least-cost procurement subject to a cost-exposure constraint, and that an internet-based multi-round auction can produce competitive price quotes for its desired forward purchase. Copyright © 2003 Elsevier Science Ltd. All rights reserved.
CitationWoo, C.-K., Karimov, R. I., & Horowitz, I. (2004). Managing electricity procurement cost and risk by a local distribution company. Energy Policy, 32(5), 635-645. doi: 10.1016/S0301-4215(02)00317-8
- Electricity procurement
- Cost risk management
- Electricity market reform