Abstract
Electricity markets (EMs) are a relatively new reality and also an evolving one, since both market rules and market players are constantly changing. Market participants can purchase and sell electrical energy through centralized markets and bilateral contracts. The revenue and cost certainty associated with bilateral contracts presents a number of benefits to producers and consumers, notably price stability and mitigation of market power. An agent-based modeling and simulation approach presents itself as a promising approach to model power markets. Accordingly, this chapter presents several key features of software agents able to negotiate bilateral contracts—both forward contracts and contracts for difference (CFDs). The chapter also presents a case study aiming at analyzing the role of CFDs as a financial tool to hedge against pool price volatility. The results of four different simulations involving CFDs and compensations are compared with a “no-compensation” base case involving a forward contract, allowing us to conclude that CFDs can be a useful financial tool for producers, especially when market prices drop to (or below) their marginal cost of production.
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Notes
- 1.
This framework may be readily adapted, refined and extended to account for other issues (e.g., duration and time of delivery).
- 2.
http://www.mercado.ren.pt/EN/Electr/MarketInfo/MarketResults/OMIE/Pages/Prices.aspx (accessed on February 2016).
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Acknowledgements
This work was performed under the project MAN-REM (FCOMP-01-0124-FEDER-020397), supported by both FEDER Funds through the program “COMPETE−Programa Operacional Temático Factores de Competividade” and National Funds through “FCT−Fundação para a Ciência e a Tecnologia”.
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Lopes, F., Algarvio, H., Santana, J. (2017). Agent-Based Simulation of Electricity Markets: Risk Management and Contracts for Difference. In: Alonso-Betanzos, A., et al. Agent-Based Modeling of Sustainable Behaviors. Understanding Complex Systems. Springer, Cham. https://doi.org/10.1007/978-3-319-46331-5_10
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