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Load-Following Forward Contracts

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Abstract:
Suppliers and large buyers of electricity often sign load-following forward contracts (LFFCs). A LFFC obligates an electricity supplier to deliver at a pre-specified unit price a fraction of the buyer's ultimate demand for electricity. We show that relative to more standard ("swap") forward contracts, LFFCs can reduce the variation in the wholesale price of electricity. However, LFFCs also can increase the expected wholesale price and thereby reduce expected consumer surplus and total surplus.

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Keywords: Load-following forward contracts, Swap contracts, Electricity sector

DOI: 10.5547/01956574.44.2.dbro

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Published in Volume 44, Number 3 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.

 

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