Designing risk hedging mechanism based on the utility function to help customers manage electricity price risks

• Published in: Electric power systems research 2020-08, Vol.185, p.106365, Article 106365
• Main Authors: Niromandfam, Amir, Yazdankhah, Ahmad Sadeghi, Kazemzadeh, Rasool
• Format: Article
• Language: English
• Subjects: Contracts; Customers; Electric utilities; Electricity consumption; Electricity generation; Hedging; Market prices; Real-time pricing; Risk hedging contract; Risk management; Time of use electricity pricing; Utility function; Utility functions; Volatility; Welfare function
• ISSN: 0378-7796; 1873-2046
• DOI: 10.1016/j.epsr.2020.106365

•Employing utility function to measure electricity customers preferences.•Designing a new electricity load model based on the customers risk aversion behavior.•Studying fixed-pricing and real-time pricing method from the risk hedging point of view.•Designing risk hedging mechanism to protect customers concerns due to electricity market risks. Real-time pricing (RTP) is the most cost-effective retail tariff which transfers electricity wholesale market volatility to the electricity customers. Complexity and risk regarding market price volatility make many of the customers reluctant to contribute in RTP. In order to help customers manage electricity cost risk, this paper proposes the electricity retailer provides risk hedging contracts to cover RTP risks. Each customer compares these contracts and signs the most suitable one by selecting his/her desirable deductible level. The deductible is the highest price of the market that the customer is willing to pay for the electricity energy. When the market price exceeds the predetermined deductible, the retailer has to pay the difference between the market price and the deductible. In this paper, utility function is utilized to identify the customers’ preferences and behavior against different risk hedging contracts. To survey the performance of the proposed risk hedging mechanisms, three different utility functions are employed to study the impacts of the risk hedging contracts on the customers’ demand and electricity market price.