Cost and risk management for a local distribution company in purchasing electricity

AbstractIn the competitive electricity markets, the allocation of electricity among multi‐markets for purchasers is worth concerning. Based on the portfolio optimization theory in the field of financial risk, a novel optimal electricity‐procurement model for the local distribution company (LDC) is presented, which can synthetically consider the risk and expected purchase cost. For the purpose of risk assessment, the conditional value at risk (CVaR) is implemented. This model is applied to determine the electricity allocation and efficient frontiers for the LDC among three markets. Then it is compared with the mean‐variance model. Simulation results demonstrate that the proposed model can guarantee the LDC to bear the minimum CVaR risk within an acceptable expected procurement cost. It provides an effective way for the LDC to manage the cost and risk in electricity‐purchase decision. Copyright © 2009 John Wiley & Sons, Ltd.