Modelling consumer's demand uncertainty in electricity forward contracts

In the electricity market environment, forward contracts can be used to hedge, or mitigate, against market risks. Forward contracts between utilities and consumers determine the terms such as the agreed quantum of electricity and its price, penalties for nondelivery and compensation for failure to accept contracted energy. While it is widely appreciated that uncertainties of future conditions have an important bearing on the terms of the contract, a theoretical framework for examining the uncertainty in consumer demand has not been developed. A theoretical model for considering the uncertainty of consumer demand in an optional electricity forward contract is introduced in this paper. An approach to determining the contract terms is presented from the consumer's point of view. Case studies show its reasonableness. The insights gained from these results will be useful in consumers contractual decision making.