Energy pricing and penalties with contract suppliers

Investor owned generation capacity construction is being encouraged all over the world. Such schemes require contracts between the investor and the host utility on the price of electricity, and include penalties for nondelivery and compensation for failure to accept contracted energy. A breach occurs if either the supplier fails to provide a previously agreed quantum of power or, conversely, the host declines to accept it. In order to make long term commercial arrangements of this nature viable, what penalties will be levied in the event of either category of breach, will have to be carefully stipulated. The studies described point out some important characteristics of energy pricing and penalties with contract suppliers. First, the OPF method and the decomposition method using the pricing mechanism can be used to analyze the optimal operating conditions of the host utility with suppliers and in this case, the shadow price of supplier seems to be the rational candidate to choose as the contract price. Secondly, it is acceptable from the host utility view-point that the calculation of penalty for nondelivery contracted energy be based on the Lagrangian multiplier of the upper limit. Thirdly, in evaluating the compensation for failure to accept contracted energy, the method of different power blocks at different rates is better than a single block pricing method