Load-Following Forward Contracts

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. Keywords: Load-following forward contracts, Swap contracts, Electricity sector
1. INTRODUCTION Electricity is commonly purchased and sold in wholesale (spot) markets. The price of electricity can vary widely in such markets, depending on prevailing demand and supply conditions. Forward [...]