Bilateral contracting in multi-agent energy markets: Forward contracts and risk management

Abstract

Electricity markets are systems for effecting the purchase and sale of electricity using supply and demand to set energy prices. Pool prices tend to change quickly and variations are usually highly unpredictable. Bilateral contracts allow market participants to set the terms and conditions of agreements independent of a market operator. This paper describes on-going work that uses the potential of agent-based technology to help addressing several important issues related to market models. Specifically, the paper is devoted to risk management in bilateral contracting of electricity. Two agents interact and trade according to the rules of an alternating offers protocol. The paper focuses on both risk attitude and risk asymmetry and how they can influence price negotiation. In particular, it describes the trading process, introduces strategies that model typical patterns of concessions, and presents several concession tactics. The article also presents a case study on forward bilateral contracting involving risk management: a producer agent and a retailer agent negotiate a three-rate tariff.