Direct Sourcing from Renewable Energy under Cost Uncertainty: A Bargaining Approach

Abstract

Sourcing electricity from renewable energy suppliers becomes critical to improving renewable energy penetration. However, the common problem of bilateral bargaining between an electricity retailer and renewable energy supplier has rarely been studied in the literature. Considering the uncertainty of renewable generation cost, we introduce the incentive contract theory and signalling game to examine how the electricity procurement contract is designed in a Rubinstein bargaining framework. We derive the corresponding equilibrium outcomes depending on the renewable supplier’s generation cost uncertainty. The results show that if the possibility of a high generation cost is large, the retailer provides contracts for the renewable supplier of both high and low generation costs to achieve the simultaneous separating equilibrium; otherwise, he only proposes the contract for supplier with a low generation cost to achieve the sequential separating bargaining. Our work demonstrates that the proposed incentive contracts urge the renewable supplier to reveal the private information of generation cost and prevent the retailer’s profit deviation due to the adverse selection.