Columbia University, Department of Statistics
We consider efficient pricing of the electricity derivatives in competitive markets. In our approach both the price and the customer's consumption are stochastic processes. With the consumption and price processes we formulate a money amount that the customer spends into electricity consumption. This money amount is the underlying asset of the fixed budget contracts. By using the fixed budget instruments the customer can budget his/her electricity consumption beforehand. Moreover, we derive an analytical solution for pricing these fixed budget contracts. The proposed method makes the pricing of deterministic standard load profiles extremely simple. Moreover, the proposed fixed budget instruments are an important addition to the contract portfolio of an energy retail company, since the ability to fill the customers needs is one of the keys to success in energy retail markets.
Keywords: Electricity pricing, stochastic consumption, competitive markets, tariff design