A No-Arbitrage Approach to Pricing of Flexible Electricity Contracts Considering Transmission Line Rentals

This study considers the impact of transmission line rentals on the pricing of Flexible Electricity Contracts, which allow flexible scheduling of electric energy, using a no-arbitrage approach. A Flexible Electricity Contract requires the buyer or seller to schedule the amount of energy to be supplied for each time interval. Given stochastic models for spot and line rental prices, this approach determines the optimal price of the Flexible Electricity Contract by determining the opportunities that can be advantageous to the buyer or seller, and setting the price of the contract such that there is no arbitrage. The stochastic spot prices are modeled using autoregressive models. On the other hand, stochastic line rental prices are modeled using simple linear regression, with the spot prices as the predictor variable. Based on the said stochastic models for the spot prices and line rental prices, the optimal contract price is determined using Monte Carlo simulation. Simulations are conducted using spot and line rental price information from the Philippine Wholesale Electricity Spot Market. Analysis performed in this study shows that considering transmission line rentals has a significant impact on the pricing of Flexible Electricity Contracts. Furthermore, this study also considers the impact of daily and hourly scheduling provisions on the contract prices.