Dynamic programming approach to the bilateral contract scheduling

Bilateral forward contracts are generally used in electricity markets to stabilise prices and hedge electricity shortage risks. A contract party is able to draw electricity from the contract and resell it to the day-ahead wholesale and retail markets. Contract parties schedule electricity deliveries over contract period to obtain the highest profit and estimate the acceptable contract price. Two types of contracts are introduced as a way to coordinate interests of the contract parties. The study formulates optimisation problems for contract scheduling. The stochastic dynamic programming technique is proposed as a numerical method for the problem solving. An algorithm based on preliminary construction of revenue functions is developed. A numerical example demonstrates the efficiency of the algorithm.