Abstract
The authors analyzed the pricing of 'flexible contracts' that allow electricity delivery flexibility over a period of time with a fixed total amount of electricity to be delivered. The fair price of a flexible contract is determined from a risk neutral market participant's viewpoint. The price of such a contract is evaluated with respect to the spot market. The authors have developed an algorithm based on the stochastic optimization approach. The no-arbitrage principle is used to determine the price for a bilateral contract so that a buyer can not re-sell to the spot market and a seller cannot buy from the spot market and gain a profit. The proposed algorithm calculates the price based on the optimality condition of the stochastic optimization formulation of the pricing problem.
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