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| Author: | Oren, S.S. |
| Title: | Integrating real and financial options in demand-side electricity contracts |
| Journal: | Decision Support Systems
2001 : JAN, VOL. 30:3, p. 279-288 |
| Index terms: | CONTRACTS CUSTOMER RELATIONS ELECTRICITY INDUSTRY OPTIONS |
| Language: | eng |
| Abstract: | In a competitive electricity market traditional demand-side management (DSM) options offering customers curtailable service at reduced rates are replaced by voluntary customer responses to electricity spot prices. In this new environment, customers wishing to ensure a fixed electricity price while taking advantage of their flexibility to curtail loads can do so by purchasing a forward electricity contract bundled with a financial option that provides a hedge against price risk and reflects the "real options" available to the customer. This paper describes a particular financial instrument referred to as a "double-call" option and derives the value of that option under the assumption that forward electricity prices behave as a geometric Brownian motion process. |
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