Long-Term Service Agreement in Electricity Supply Chain with Renewable Energy Penetration

Abstract

We study a long-term service agreement (LTSA) between an OEM of a conventional power generator and a utility firm in the electricity supply chain. The OEM offers the LTSA to the utility firm which specifies the service fee and the maintenance interval. Given the LTSA, the utility firm dynamically chooses among different resources (conventional, renewable, or emergency) to meet energy demand. Different from traditional supply chain contracts, an LTSA contracts on a generator’s long-term production schedule (i.e., the usage time and the number of starts). We first characterize that the conventional generator’s optimal operating mode (i.e., on or off) follows a two-threshold policy, which shows a hysteresis phenomenon. Then the optimal production from different resources can be obtained by minimizing the utility firm’s cost of the current period. We prove that the OEM’s optimal LTSA design on the maintenance interval and service fee can be solved sequentially, and capture the OEM’s tradeoff between the service margin and the usage of conventional generator. Our numerical results show that the utility firm starts the conventional generator less often as the maintenance service fee of a start increases and the minimum conventional output decreases. We find that the OEM has incentives to reduce the minimum output to make the conventional generator more flexible, but such improvement may not benefit the utility firm since it allows the OEM to charge a higher service fee, which is less intuitive. While the overall available renewable output is important, renewable energy characteristics such as autocorrelation and variation do not appear to significantly influence the optimal LTSA design and the system performance, especially when the renewable penetration level is low. Finally, increasing renewable penetration leads to more frequent cycling of the conventional generator and less conventional output. With more renewable generation and less conventional and emergency generation, higher renewable penetration reduces the utility firm’s cost, the OEM’s profit, and the total emission.

Keywords: long-term service agreement (LTSA), power generation, renewable energy, equivalent operating hours (EOH), electricity supply chain