A multi-round negotiation model for bilateral contracting considering spot price risks in electricity market environment

Bilateral contracting represents an efficient approach for hedging the price risks in electricity spot markets. The existing research work on bilateral contracts has been concentrated on the effects of bilateral contracts on mitigating the electricity price risks and market power abuse, and less attention has been given to the forming mechanism of bilateral contracts. Given this background, a systematic multi-round bilateral negotiation framework, through which a generation company and a distribution one can reach a mutually beneficial and risk tolerable forward bilateral contract, is developed. Under this framework, the generation and distribution companies respond rationally to a stream of bilateral offers/counter-offers considering their respective benefits while accounting for the risks incurred by the price uncertainty in the spot electricity market. Each negotiating party can choose its own definition of the benefit and risk, and the expected utility is employed to describe the risk in this work. The concession factor is utilized to illustrate the negotiation strategy of the participants. The reservation expected utility and reservation expected profit are included in this framework so as to model the tolerable limits of the risk and the benefit. Finally, a numerical example is served for demonstrating the essential feature of the developed multi-round bilateral negotiating framework.