Bilateral negotiation of energy contracts from the buyer perspective

Abstract

In this study is presented a decision support model considering the perspective of a buyer who needs evaluating a basic set of contractual conditions. The approach recognizes that a potential new contract under negotiation introduces two main risks: One is related to the insufficiency of load supply (ILS) to end users. Other risk is related with the volatility of the short term spot prices used as a reference for defining the contractual price. Both of these risks are estimated based on the Monte Carlo method and payment minimization. Important characteristics of bilateral contracts like, the necessary modulation to compensate seasonal load variations and the flexibility margins are considered in the model. In case the risks levels are not acceptable, the model makes possible to evaluate a review in the previous conditions in a responsive manner. Results show that with this tool, agents have important information about the negotiated offers being able to clearly define margins of negotiation. These margins are based on the relationships between levels of risk and contractual conditions. The proposed tool is easy to implement and gives a strong support in the decision making process during negotiation of bilateral energy contracts.