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Collaring the Risk of Real-Time Prices: A Merchant Strategy for Utilities

Fortnightly Magazine - October 15 1999

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 ,

1 h

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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