The one-day-in-10-years criterion might have lost its usefulness in today’s energy markets. The criterion is highly conservative when used in calculating reserve margins for reliability. Can the...
Collaring the Risk of Real-Time Prices: A Merchant Strategy for Utilities
such as forming expectations for spot prices, present values of appropriate quantities, etc. Our purpose here is to illustrate the effects of price elasticity, a concept that generally is not incorporated in other approaches.
7 As discussed in endnote 6, contracts are likely to be developed under conditions where there is variability in the number of peak and off-peak hours, spot prices and levels of consumption. The general form of the equation of figure 2 to calculate the floor price under such conditions isS (Phs -Pc ) * Qc =S(Pf - Pls ) * Qf ,
where Qc and Qf are defined in the text. Trial and error may be used to find a value of Pf that solves the equation. The solutions of the examples use Microsoft Excel's Solver tool.
8 At $0.05 per kilowatt-hour, off-peak sales were 8,000 kilowatt-hours, profit per unit was $0.03, and off-peak profit was $240. At $0.04, off-peak sales increase to 8,400, but per unit profit drops to $0.02, and off-peak profit to $168, a decrease of $72.
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