Electricity supply chain coordination: Newsvendor model for optimal contract design

This paper delivers an electricity supply chain coordination framework through the newsvendor model to provide an optimal contract design with the aim of maximizing profits. Given retailers' attitude to-wards the risk associated with the demand uncertainty, the framework optimally considers overage and underage costs, and discount policy to define the contract share and prices. A novel simulation optimization approach has also been proposed to provide a global optimal solution for the model using the advantages of the linear transportation model. More analytically, the approach leads to some original and meaningful trade-offs among retailers' and generation companies' profits, markets share, overage and underage costs, and the all-unit discount given by retailers. By this means, an almost linear, positive relationship is found between the spot market share and the underage cost. On the contrary, retailers' sensitivity to overage cost is greater if the share of the spot market is low and the retailer is more risk-averse. In this way, the greater the overage cost, the higher the share of the spot market. And, the lower the overage and underage costs, the greater the retailers profit, and the lower the generation companies' profit due to the lower retailers' order quantity. The amount of the discount has a negligible effect on retailers' order quantity, while lowering prices. However, an increase in the amount of the discount has a negligible but negative effect on the spot market share. (C) 2020 Elsevier Ltd. All rights reserved.