Optimal backup and supplemental power contract strategies in electricity markets

We have recently experienced historic changes in the electric power industry of the United States and almost all over the world. Deregulation and market competition are being touted as the main wheels to drive these changes to the frontiers of efficiency and new services. An extremely important, and under-researched, area for both suppliers and consumers in the new power markets is backup power contracting. Backup power is important because an essential attribute of electric power is its steady continuous availability, i.e., its reliability. In the good old days of regulated, vertically integrated firms, the local distribution company had to face the full challenges of assuring reliability for all customers in the local distribution franchise area. Indeed, the newest wave of deregulation, so-called Distributed Generation (DG), calls for groups of retail customers, perhaps a shopping mall or a group of co-located businesses, to install their own generators. Distributed Generation and traditional areas of self-generation are expected to continue to grow substantially as deregulation continues worldwide. This is already clear for households, where power interruptions are viewed as major inconveniences. But for industrial customers, such inconveniences extend well beyond the irritation of failed air conditioning on a hot day; they imply potentially significant economic losses in the event of disruptions. Efficient levels of backup power are required to avoid such losses. Accordingly, this dissertation addresses the area of self-generation and necessary support services for such generation in terms of the supply and pricing of backup power, to be provided by local distribution companies to industrial self-generators and, perhaps, to groups of retail customers that may set up their own local generation units. Optimal self-generation investment and backup power contracting strategies for a self-generator are characterized. Thereafter, expected profit-maximizing pricing and capacity strategies for a backup supplier serving one or more self-generators are characterized when the backup supplier has both generation itself as well as backstop supply from an alternative bulk-power supplier, such as a spot market. Expected welfare-maximizing pricing and capacity will be employed as a benchmark study to discuss possible regulatory policies on backup power supply.